Structural shifts in Property

We recently experienced a "once in a generation property boom” in 2020 and 2021 where the value of almost every property in Australia increased by 20% -30%.

The first significant boom I experienced in the 1970s was driven by:

High inflation but just as importantly…

In the 1970s, more women entered the workforce and banks started accepting their income for serviceability, giving the average household twice as much borrowing capacity.

In the1990swe had the deregulation of banks, and nonbank lenders such as Aussie Home Loans entered the market, with less restrictive lending policies.

This allowed people to borrow up to a 95% loan-to-value ratio and this increased availability of credit led to a significant property boom in the late 90s.

In the early 2000s, Australia enjoyed a mining boom that created significant wage increases, not just in Western Australia but around Australia, again giving people the capacity to borrow significantly more money and leading to another major property boom.

In the late 2000safter the Global Financial Crisis Australia experienced another mining boom that drove our economic growth.

At the same time, Australia became a preferred destination for significant foreign investment in residential real estate, as foreign investors saw our housing markets as relatively cheap and our economic and political environment as stable compared to other countries.

Once again, this structural change pushed up the value of the residential real estate as overseas investors often outbid locals for many properties.

That brings us to the latest substantial property boom in 2020 -21when we once again experienced a significant structural change as interest rates dropped to historic lows giving borrowers significantly increased borrowing capacity and this, together with a raft of government stimulus packages, came at a time of significant pent up demand and created that once-in-a-generation property boom and increased the total value of residential real estate around Australia by over $2 trillion.

But that’s long gone and I don’t think we’ll see a significant structural shift again for quite some time.

The next significant structural change is likely to occur when the Baby Boomer generation dies off and transfers around $6.2 trillion worth of wealth they hold in their residential properties to their families.

So that brings us back to the question of what, if anything, will drive future property price growth.

The rising tide that lifted all ships in the last boom has now gone, as has the period of rising household incomes and low-interest rates that we enjoyed over the last decade, meaning our property markets will be much more fragmented moving forward and capital growth will be dependent on local factors including demographics, gentrification, neighborhood and wages growth of the people in these locations.

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Jason Gwerder
Thursday, 24 August 2023

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