Analyst: Regulators or Economic Trends May Stop Housing Boom

Analysts warn that regulators may not intervene this year, despite worries about the pace of property price growth in the country. Without regulators’ intervention, most economists believe that property values will continue to increase through 2021, perhaps by 10 per cent or more.

But in the longer term, Australia’s multi-decade property boom could be approaching its end, and that prices could weaken through the decade when the current short-term price upsurge has concluded.

However, this could happen depending on the outlook for immigration, the continuance of the working-from-home trend, and the level of interest rates in the coming years.

Price growth to continue in the short-term

Australia’s major banks have been keeping track of the country’s property markets.

Per ANZ, Melbourne’s home values had finally turned around in 2020 and the pace of price increase was gradually getting close to those of other cities.

Property prices around the country have been getting significant support from the intensity of recovery in national employment, which has been far stronger than what was recorded after past downturns.

ANZ’s job advertisements were at a 12-year high and job creation was moving solidly, which indicated job losses from the JobKeeper scheme ending would only lead to a “temporary blip” in the unemployment stats.

Supported by historically low interest rates, solid employment growth, and high consumer confidence, the results of the federal HomeBuilder program had been excellent.

Demand for stand-alone homes was flourishing and building costs for homes were increasing fast around Australia (while building costs for units and apartments were declining).


However, there was a possibility that regulators would have to intervene at some point, similar to what occurred in New Zealand recently.

Regulators Not Likely to Intercede in 2021

According to the Commonwealth Bank, strongly increasing house prices had raised the possibility of regulators intervening to control lending activity at some point, but this will not happen this year.

The Reserve Bank and the Australian Prudential Regulation Authority (APRA) was focusing on financial stability and lending standards, instead of dwelling prices.

What this means is that they are prioritising on important metrics like the share of investor lending, interest-only lending and high loan-to-valuation ratios. At this time, none of these metrics were an issue. Based on present trends on these metrics, no macroprudential policies are expected to be issued in 2021.

Moreover, proposed amendments to responsible lending policies may result in a little less stringent lending in the near term.

How About in the Longer Term?

Meanwhile, AMP Capital has presented a more general outlook for Australia’s property prices.

Australia’s real property prices have increased an average of roughly 3 per cent annually over the past hundred years and three major long-term booms have occurred (see green in the graph below) as well as two significant long-term weak periods in that time.

The third (and present) long-term boom started in the mid-1990s and it boosted real property values from well below trend to well above trend.

The cyclical growth is expected to continue into 2022, with a price increase of another 15 per cent by the end of 2022.


However, the end could be fast approaching for some of the structural aspects (globalization, deregulation, etc.) that had propelled the long-term decrease in interest rates over the last 40 years, which had buoyed dwelling prices for a long time.

The decline in population growth over the past year led to a change from persistent undersupply in housing to oversupply, provided population growth continues to be on a decline.

However, the property market may continue to shock, for example, the implementation of one final low-interest rates (with the RBA approving negative interest rates), and a faster than expected recovery of the population when borders reopen.

Nevertheless, there are strong reasons to assume that the factors that have boosted the average Australian capital city property prices to well above trend and above price-to-income ratios reported in comparable countries for the past 20 years may be at, or near to, its end.

Don’t you wish you had a crystal ball?