House prices are likely to keep rising regardless of any potential negative shocks the economy endures due to COVID lockdowns, economists say, as rock bottom interest rates continue to drive buyers to spend up big on property. According to AMP Capital chief economist, Shane Oliver, property prices that have already soared in the pandemic could rise another 15 per cent or so if borrowing stays cheap between now and 2024, suggesting growth of another 4 per cent this year, a further 7 per cent in 2022, and 5 per cent the year after as an example, before the interest rate rise.
Just under three months ago, the big banks were estimating that interest rates and mortgage repayments could rise sooner than expected and independent of the Reserve Bank’s forecast. Most lenders were increasing the rates for longer fixed-term loans, and it was expected they would be increased further still. This resulted in warnings from mortgage brokers, cautioning buyers against taking on massive debts incase of any subsequent rate rises.
However, the ongoing lockdowns in Australia’s two largest capital cities means cheap lending and the capacity to borrow lots of money will remain awhile yet, and has been reaffirmed by the Reserve Bank in it’s latest meeting.
Commonwealth Bank head of Australian economics Gareth Aird said as long as interest rates remained this low, property prices would keep rising, despite the large negative shock the economy is going through. “What’s happening because of COVID is interest rates are at rock bottom. That feeds buying,” he said. “There’s still that dynamic of low interest rates supporting people’s confidence to transact and that influences people’s decision on how much they borrow,” he said. “Also, the FOMO thing is still at work, and that further pushes up prices itself.”
The expectation remains that working from home will be a normal thing, and if you spend more time at home, you are likely to therefore want some extra room or a nicer place. Mr Aird said that, while it seemed counterintuitive, it was likely prices would only stop rising – or even fall – once the economy recovered. This is based on the interest rate cycle, which has enabled people to borrow more in it’s current state, but Mr Aird believes we are at the end of this process now, saying “In a kind of strange twist of fate, we could find it’s the strength of the economy that is behind home prices falling.” His comments come after strong bidding at auctions last weekend, with Sydney recording a buoyant preliminary clearance rate of 83.7 per cent and agents attributing the buyer demand to low interest rates and the high likelihood of low rates for a couple of years yet.