- Posted By Koala Invest
There has been a shift in housing preferences in Australia post-COVID-19.
Miraculous. That's how Commonwealth Bank's boss described Australia's economic recovery last week.
But it was a strange word to choose.
"Miraculous" can suggest a miracle has occurred, which implies the hand of God has been involved.
If we start thinking that way, we'll forget how the economy actually recovered.
It could also make it harder to know what to do about house prices, which are surging for very human reasons.
Fiscal policy worked
Australia's economy is growing so strongly at the moment because of massive amounts of government spending (fiscal policy) and exceptionally low interest rates (monetary policy).
Our Commonwealth, state and territory governments spent hundreds of billions of dollars to support the economy through the pandemic, and we're seeing the results.
In July, in the middle of the lockdowns, the national unemployment rate hit 7.5 per cent.
But the latest figures show the unemployment rate has already fallen back to 5.6 per cent.
As we speak, more people are employed than ever before.
Before the coronavirus pandemic, the previous peak was 13,008,700 people in paid employment.
Last month, there were 13,077,600 people in paid employment.
This has occurred while international borders have been closed, so the rate of population growth has pulled back sharply.
The participation rate is now sitting at a record high of 66.3 per cent.
That means the size of the labour force, as a proportion of the working-age population, has never been larger.
Business conditions are at a record high. Consumer confidence is at an 11-year high.
All of these things are linked to massive government spending (both here and abroad) and health measures that prevented the virus getting out of control last year.
It's not a miraculous outcome but it's welcome.
Many issues remain
However, we can't say it's mission accomplished.
There are still 778,100 people officially unemployed.
Universities, small businesses, the arts sector and parts of the tourism sector have a long way to go before they can say they've fully recovered.
The mistakes the federal government has made with the vaccine rollout could disrupt the recovery and cost the economy dearly.
But at the moment, job vacancies are high and employers are reporting difficulties finding workers with suitable skills.
And property prices are surging, which is creating its own set of problems.
It means housing is again at the forefront of Australia's economic growth after COVID-19.
But how sustainable is the rebound? Will policymakers intervene to slow property prices down?
Property prices an issue, again
Last week, the chief executives of Australia's big four banks appeared before a parliamentary committee in Canberra.
They all spoke about the property market.
Perhaps unsurprisingly, none of them thought it was necessary at the moment for regulators to slow the rate of property price growth.
Rising property prices are good for business.
They said the current surge in property prices was different from the last cycle because some of the biggest gains in prices were occurring in regional areas and places where prices were subdued in the last cycle, so the price growth was more evenly distributed across the country.
But they said they were watching how different markets around the country were developing.
Here are some of their current views on broad dynamics in the property market:
Matt Comyn, Commonwealth Bank chief executive
CBA thinks property prices will grow by 10 per cent this year.
Mr Comyn said owner-occupiers and first home buyers were accounting for a much larger share of the demand this time around.
Roughly 75 per cent of the demand was coming from owner-occupiers (and 15 per cent of that belonged to first home buyers). The remaining 25 per cent belonged to investors.
"That's quite different to what we've seen previously," Mr Comyn said.
"These factors are positive, not the least because it means more Australians are buying their first home, but also because they point to greater stability in the market."
Mr Comyn said about 20 per cent of first home buyers were relying on guarantors to secure their loans with CBA, and "about half of those would be guarantees provided by parents" or family members.
Peter King, Westpac chief executive
Westpac thinks property prices will increase by 10 per cent this year and next year.
Mr King said it would be unnecessary for regulators to try to slow down the house price boom at the moment because conditions in the market were not as risky as previous cycles.
"There is not a lot of turnover in the market and stock is very tight so houses are being well bid," he said.
He said it would be beneficial if governments helped to increase the supply of housing stock by making it easier for people to live in areas outside major metropolitan regions by improving infrastructure in those regions.
Ross McEwan, NAB chief executive
Mr McEwan said house prices may increase "in excess of 10 per cent" this year.
He said NAB was seeing the highest rates of first home buyers entering the market that it had seen in a long time.
"If you cast your mind back to 2016 and 2017, it was about 4 per cent of the market was first home buyers," he told the committee.
"At the moment, on our book, it's about 16 per cent."
He said there had been a large shift in peoples' preferences post-COVID-19, with more people looking for homes on the outskirts of major metro regions — a direct result of businesses allowing employees to spend more time working from home.
Andrew Leigh, Labor's Shadow Assistant Minister for Treasury, asked Mr McEwan if NAB was seeing an increase in the number of first home buyers relying on guarantors to secure a home loan.
Mr McEwan said NAB's approach to guarantors was different from other banks.
He said only 1 per cent of its mortgages were supported by guarantors.
Shayne Elliot, ANZ chief executive
Last month, ANZ's economics team said house prices could grow 17 per cent this year, as first home buyers and investors responded to historically low interest rates and government programs designed to support the property sector.
Mr Elliot said about 11 per cent of the first home buyers on ANZ's books were backed by guarantors, but that was lower than a few years ago.
"In 2017, it was 19 per cent of first home buyers had a guarantee and today it's 11 per cent," he said.
Watch this space
None of the bank bosses expressed concern about property price growth at the moment.
However, Mr Comyn said if regulators did step in at some stage, they should consider using measures that won't make it harder for first home buyers to enter the market.
He said restrictions could be targeted towards investors, for example, while leaving new entrants to the market alone.
"No measure that we can take is perfect, whether that be [to cap] investor interest only, whether that be to cap higher loan-to-value ratios, or to restrict the maximum that people can borrow as a function of their income," he said.
"Typically those measures tend to impact first home buyers who are younger, typically, and borrowing higher proportions of their incomes with fewer savings to be able to provide a larger deposit.
"We could look for ways to sort of bifurcate or target those measures to have as few unintended consequences as possible."