COVID-19 – 12 months on: Impacts on Australian housing

This is the final in a series of four blogs on the impact of COVID-19 on the Australian population and residential housing market.

Boom not bust

For a long time, it was thought that growth in the Australian economy and the housing market was underpinned by overseas migration-driven, population growth. Then the COVID-19 pandemic hit in early 2020 and soon after the borders were effectively closed to migration. With many temporary migrants in Australia returning to their home countries, overseas migration became negative from the June quarter of 2020 until 2022.

Resilience and growth in the housing market, despite lockdowns & low population growth

Given the population has been in a virtual standstill for almost two years, it seems incredible that the economy has remained so resilient and house prices have retained their strength. Indeed, the amount of residential building activity has been sustained throughout the pandemic, despite the disruptions that have occurred due to lockdowns (most notably in New South Wales and Victoria). See below.

Population growth and Building Approvals, Australia, 2002-2022*

_{* 2022 dwelling approvals data based on 7 months of data}

_{Source: ABS, Building Approvals, Australia (Cat. No. 8731.0); ABS, National, state and territory population (Cat. No. 3101.0).}

The chart also indicates the periodical disconnect between population and housing growth since 2002. In the period leading up to the GFC, population growth increased massively on the back of increased overseas migration gain, but dwelling growth was flat or lower, due to increased overseas migration gain. In the mid-teens, residential dwelling construction increased significantly without a noteworthy change to population growth.

The seemingly relentless rise of apartments as a share of new dwelling construction has also turned around. Beginning in 2010, houses reduced from about 70% of all dwelling construction to about 50%, but the share has increased to more than 60% since the onset of COVID-19. This is been noted in much of our recent consulting work, with significant and unexpected amounts of greenfield development on the edge of Metropolitan areas and regional centres alike.

So, what do we know:

Population growth has slowed to its lowest rates in more than two decades in all States and territories.
Dwelling construction has continued at relatively strong rates, despite the pandemic.
Policy settings have encouraged more dwelling growth in greenfield areas
Demand for apartments has plateaued or fallen in most areas, especially around universities, with limited student demand

Given the growth rate in house prices has actually increased during the pandemic compared to the previous five to ten years, the disconnect between demographic demand and the ‘housing market’ seems to be quite profound. Although dwellings have grown at a faster rate than population since 2012, it has not dampened property prices. See chart below.

Growth Index, Residential Property Prices, Dwellings and Population, Australia, 2012-2021

_{Source: ABS, Residential Property Price Indexes: Eight Capital Cities (Cat. No. 6416.0; ABS, National, state and territory population (Cat. No. 3101.0).}

It seems the area of the market that has had the greatest challenges over the past two years has been in rental stock and in areas where there are more transient populations, such as the inner city and around universities.

Why hasn’t the housing market corrected itself?

Demographic drivers

Long-term pent up domestic demand from the previous decade.
Demographic demand being created in the Australian population – a lower average household size drives greater demand. In 2011, household sizes increased dramatically when overseas migration was high and dwelling supply was greatly constrained after the Global Financial Crisis.
It is most likely that the vacancy rate has increased, especially in areas with high rental stock, although recent research points to vacancy rates falling since the latter part of 2020. See here.

Economic drivers

Low interest rates – most owners can service debt, even if they are landlords unable to find a tenant.
Since 2021, low unemployment rates and a buoyant job market.
Owners of rental properties holding onto homes – things will recover when life returns to ‘normal’.
Lack of properties being sold / coming on to the market.

Policy drivers

Government incentives to stimulate the economy, including the Commonwealth HomeBuilder scheme and various State schemes. This is likely to have accelerated first homebuyers’ decision to buy a new property in greenfield areas, with the offer of free cash pushing up prices.
Some lenders did offering mortgage support/relief during the peak of the crisis, when uncertainty and unemployment was at its greatest in 2020 and 2021.

Where to from here?

As life appears to be normalising in 2022, overseas migration will likely again increase. The flow of overseas and permanent migration has already begun, with the borders officially ‘re-opened‘ on February 21. The incentives for greenfield growth are being wound back, which will likely change the balance of greenfield and higher density apartment construction across the nation. However, the pull of the central city as the driver of employment growth and economic activity is being challenged with more of the labour force working from home. Much will depend on the bounce back of tertiary education exports to provide the impetus for young renters in the nation’s cities.

With the likely increases to the cost of living, higher inflation and interest rates rises in 2022, the impact of higher mortgage payments will likely start to show on household budgets. This in turn is likely to reduce the buoyancy of the market and prices should moderate.

It will be fascinating to see how these trends change in the next couple of years. Many of the demographic shifts will be revealed with the results of the 2021 Australian Census available from June 2022 onwards.