House prices: It’s all about supply and demand

October 26th 2020
The housing sector has, so far, been remarkably resilient in the wake of the recession and the COVID-19 pandemic. This appears to be linked to the mortgage repayment holidays, low-interest rates and JobKeeper.  Unless the economy can snap-back quickly in 2021, a resumption of the house price weakness could be just around the corner. What will this mean for you, your business and investment strategy?

Melbourne house prices are the exception for all the obvious reasons where prices are down about 5 per cent from the high point in April. Prices in the other capital cities and in the regions have been broadly flat in the past month and there are signs that they are edging up in a number of places.

It seems certain that low-interest rates will remain a key positive for the next year, perhaps longer.

Broader supply and demand issues remain a negative, as will the ending of the mortgage holiday in the next few months.

Immigration is at a multi-generation low and even in the post-COVID-19 world, is likely to remain below the levels of recent decades.  People coming to Australia to live, who buy or rent a dwelling will be fewer than ever before.

This critical long run support for housing will not be there, at least for a few years.

Economics 101 say when demand is weak, prices come under downward pressure.

Builders are responding to the slump in demand with house building approvals falling sharply. With population growth slashed, there is simply no need to build as many dwellings. This will take a while to work through the economy as apartment blocks and houses commenced before COVID-19 hit will still be completed.

This will be a problem for the construction sector, although there will be some offset from any additional government inspired infrastructure investment.

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