Over the past 18 months, the property market has soared across the country. You could take a dart and throw it at a map of Australia, and you would likely find increased price growth in that area. From houses to apartments, there aren’t many areas if at all that have gone backward since the start of Covid in early 2020. But what are the driving forces behind this property boom?
Supply plays an integral role within the supply vs demand equation. It refers to the number of properties on the market at a given time. Over the past couple of years, we have seen extremely low levels of supply in many areas. Low stock levels (supply) lead to increased pressure on price. This is because the demand for properties out weights the supply and thus, we see price growth. Low stock levels have played an integral role in price growth over the past couple of years. As more stock comes to market with the easing of restrictions, we could expect to see slower price growth if other variables remain constant.
The impacts of Covid led to numerous lockdowns across the country. This has been detrimental to many businesses and individuals who have been impacted by the lockdown. However, with the numerous government benefits offered and the inability to spend many people have increased their savings rate. With this, it has allowed more buyers to enter the market with greater capital to spend. In doing so, we have seen an increase in demand across numerous markets which has again placed pressure on price.
Quantitative easing or QE is the introduction of new money into the economy by the central bank (Reserve bank of Australia). The implementation of this policy is used in order to stimulate the economy. Covid has led to a stagnant or holt on the economy due to the numerous lockdowns. Without government intervention, it would have been very likely to see a recession given the lack of economic activity taking place during a lockdown. In order to stimulate the economy through this time the government has utilised QE significantly. In doing so there has become a larger supply of money. A by-product of this approach is that we tend to see asset price inflation. This can be rationalised by the fact more money leads to greater higher purchase prices of goods and services. Largely this money tends to find itself in financial assets which increase asset prices.
With record low-interest rates, it has allowed property buyers to own and hold more property with minimal holding costs. Low-interest rate environments encourage people to lend more and purchase more property. In doing so, it is another method to stimulate the economy and ensure people continue to spend. The repercussions of this are that property prices continue to rise with lower holding costs.
Lending restrictions can play a significant impact on property prices. When lending restrictions are eased it allows buyers to lend more. In doing so, it enables buyers to spend more on property. This leads to the property price growth as buyers are able to purchase at higher prices. The same can be said for when lending is tightened. Tightening of restrictions limits borrowing capacity and subsequently negatively impacts the prices of property. Since the start of Covid, we have seen relatively eased lending restrictions, this has also contributed to property price growth. Moving forward, if lending restrictions are tightened it is likely we could see suppressed property prices or a decline.
There are numerous variables that have led to the property boom we have seen in recent times. Each of these components in isolation could lead to price growth. However, the impact of all of these components at the same time is likely the rationale behind the current property boom. It is likely if the current market conditions remain the same that we will continue to see price growth in the short term.