“Forget ditching the avocado on toast. We’re never getting a house.”
Have you thought this lately? You’re not alone.
The COVID-19 house price boom has sent what were already exorbitant house prices onto another planet. Now, it is not only unaffordable for young Aussies to purchase freestanding houses in the cities; these price hikes have spread to the once-affordable regional towns. Just like COVID-19, no one saw this coming, and the ripple effects are still ongoing two years on into the ‘panini’ (as the kids say). So why have house prices risen during COVID-19, and what can we do about it?
Predictions were way off base
Economists were predicting unemployment to go through the roof as a result of the pandemic. There were forecasts of a 30% collapse in house values and a glut of mortgage defaults due to the pandemic-related job loss. First-home buyers were rubbing their calloused hands together. “Finally we can break into the market,” they thought, as boomers anxiously sweated on whether the tenants of their three fully paid-off investment properties would still be able to make rent.
We all know now, that’s not what happened – in fact, the opposite has occurred. Despite an initial panic within the economy with various lockdowns across Australia, there was no substantial price drop. (At least, not one that was long enough to be considered any form of house price correction). The government acted quickly to ensure that was not to be. The wave of economic stimulus in the form of the Jobkeeper payment ensured that people were not rendered unemployed, some people were even getting paid more than what they usually did working.
Aussies took advantage of government support
The super drawdown was another economic band-aid. Only this time the government wasn’t footing the bill, it was your future self. A Robin Hood style of payday. Rob from your future self who is hopefully rich to help your present-day self who is poor. The super withdrawal was accessible even to those who did not meet the eligibility. Hopefully, the ATO let those ones slide. Not to mention the consequences to your future retirement balance due to withdrawing super when the market was at rock bottom prices. However, for a young person, the temptation was too much to resist. A couple trying to get into the housing market were now able to withdraw 40K in total (20k each) during the two rounds of super withdrawal. This created a plethora of people struggling to access a house deposit to finally be in a position to get on the property ladder.
We embraced living & working flexibly
Then international travel stopped. Not slowed or dialed back but stopped dead in its tracks. There were no more international students arriving to pick up casual jobs or backpackers to pick the fruit leaving many businesses short on staff. Work was easily available, Aussie’s could have their pick of jobs in certain industries. The travel ban also stopped all the Aussies from spreading their wings and spending their money on our beloved overseas trips. So what is a cashed-up, locked down, working from home Aussie to do in these uncertain times? Move to the country or a cheaper city and buy a house, that’s what, and that is exactly what they did.
The glut of mortgage defaults never came. To top it all off, the banks allowed a six-month freeze on mortgage payments as well. Instead, all of these contributing factors resulted in a boom in house prices that we thought were already at their peak.
The work from home movement that has emerged as a result of covid has been one of the driving forces behind the price increase in regional towns. Pre pandemic it was extremely rare for a company to offer full-time work-from-home options, but not anymore. Companies are realising the benefit of work-from-home. They no longer need to pay the huge overheads of running a physical office space and working from home is usually going to keep the staff happy and performing. At least, that has been my experience with working from home during various lockdowns. Working from home and the idea that you can earn city wages but live in a regional town with regional house prices is not going anywhere. In fact, in the next five – ten years, my bet is that working from home for office-based roles is more common than not.
Coastal houses for city prices – an example
I will use my house as an example. My house (now rental property) is based in a regional hub in NSW. It is located about 20 minutes from the beach but the town in itself is nothing special. In 2019 I bought that house for $320K and at the time I thought that was very expensive. I moaned about how I was ‘buying at the peak of the market’ and that I will be lucky to see it increase $50k in value in the next 10 years. How wrong I was. That same house 2.5 years later could now probably sell for $550K but potentially even as high as $600K with the way the market is currently. It is nothing special either! We are talking about an old-style, three bedroom & one unrenovated bathroom home.
The cities have gotten even worse for affordability especially outside of Sydney and Melbourne. The other cities were always substantially more affordable in being able to buy a freestanding house in the outer suburbs, but not anymore. As I live in Brisbane now, I can tell you how inflated the prices are. Houses in suburbs that were known as absolute no-go zones are selling for $650K. If you want a nice suburb you will spend between $750K-1 million for a decent house. A large mortgage has now not just become the norm, but a necessity if you want to own a home. Interestingly the unit prices have not risen in anywhere near the same way that houses have. This is quite normal though as units tend not to have the same demand or capital growth of houses. If a unit in Brisbane ever reaches Sydney or Melbourne prices I am completely done with property, that is for sure.
What do economists predict will happen in 2022?
As interest rates are tipped to rise over the next two years and the high levels of mortgage debt Australia currently holds it will be very interesting to see what happens. On a large loan of between $500K-800K, it will not take much of a rate increase to really stretch budget limits. The increasing values also increase things like insurance premiums; the price of building materials and tradespeople is through the roof (and that is if you can even get them). Even groceries have had a noticeable increase no matter how strict with budgeting you are. Inflation is currently high.
I don’t think we will ever see a huge crash because it is not in the government or the bank’s best interest. They will ensure that any rate rises are slow and incremental but it will definitely be a pain point for a lot of people who bought in the market in the past few years at their maximum borrowing capacity. With the first interest rate rise tipped to be in August of this year, we will see soon enough.
What can young people, especially young women, do with the housing market right now?
If only we had a crystal ball then we would know the answer to this question. Should you wait to buy in the hopes that the rising rates result in a price drop. Or should you buy now and get in while you still can. Other avenues like rentvesting could be an option or renting and investing the surplus as a long-term plan to have enough passive income to always cover rent. There are so many variables to each person’s situation and lifestyle. There is no correct answer or surefire way to know what the future holds. As long as you are in a position if you do buy now, that you can afford for repayments to increase in the next few years, without sending you to the wall.
