Why a surge in house prices could slow Australia's lockdown recovery

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A surge in Australian house prices could jeopardise the recovery from lockdowns as borrowers cut back on spending.

During the past year, Sydney’s median house price soared by 26 per cent to a record $1.293 million.

Record-low interest rates pushed real estate values to record highs in both capital cities and country towns, as professionals able to work from home moved for more space.

National property prices climbed by 18.4 per cent in the year to August, the fastest annual pace since July 1989, CoreLogic data showed.  

Reserve Bank of Australia assistant governor Michele Bullock said consumers paying off more debt would be less likely to spend after a financial upheaval.

‘There is quite a bit of international and domestic evidence that suggests that households that have high levels of debt are more likely to curb consumption in response to shocks in income or wealth,’ she said on Wednesday.

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House prices keep surging

SYDNEY: Up 1.9 per cent to $1,293,450 and 26 per cent annually

MELBOURNE: Up 1.4 per cent to $954,496 and 15.6 per cent annually

BRISBANE: Up 2.1 per cent to $691,214 and 20.2 per cent annually

ADELAIDE: Up 2.1 per cent to $568,110 and 19.8 per cent annually

HOBART: Up 2.2 per cent to $684,737 and 23.9 per cent annually

DARWIN: Down 0.8 per cent to $572,102 and 21.2 per cent annually

CANBERRA: Up 2.4 per cent to $933,960 and 25.7 per cent annually

Source: CoreLogic Home Value Index monthly changes for August 2021., both monthly and annually. Perth figures were not available

‘A large number of highly indebted households reacting in such a way to an economic downturn or decline in housing prices could amplify the economic shock. 

‘A boom in the housing market, accompanied by an increase in housing debt could therefore make the economy more susceptible to downturns.’

The RBA promised to keep interest rates on hold at a record-low 0.1 per cent until 2024, as it prioritises economic recovery from lockdowns over trying to stop the housing market from overheating.

But Ms Bullock said lending policies needed to address surging debt levels.

‘They should be targeted at the risks arising from highly indebted borrowers,’ she said.

The Australian Prudential Regulation Authority, the banking regulator, in 2017 cracked down on interest-only loans as investors pushed up property prices, but in 2021 owner-occupiers make up a bigger proportion of borrowers. 

While the major banks are offering mortgage rates of two per cent, the prospect of rate rises in 2024 means many borrowers would be careful with their spending in 2021 as lockdowns created uncertainty. 

Stay-at-home orders in Australia’s biggest cities are affecting the labour market, new data from the federal government’s National Skills Commission revealed on Wednesday.

In NSW, where Sydney has been in lockdown since June 26, job vacancies in July and August plunged by 19.1 per cent, as 14,683 fewer jobs were advertised.

This was even worse than Melbourne’s second wave of July and August last year, which saw job ads fall by 14.5 per cent, as vacancy levels fell by 4,417. 

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In July and August, NSW lost 210,000 jobs as hours worked last month fell by 6.5 per cent, separate Australian Bureau of Statistics data showed.

CommSec senior economist Ryan Felsman said it was clear lockdowns were making employers more reluctant to hire.

‘The extended lockdown in NSW is having a massive impact on the labour market,’ he said. 

Ms Bullock said borrowers who lost working hours were more likely to cut back on spending, which in turn would hamper job creation and economic activity.

‘If households are constrained, in the sense that they don’t have a great deal of income left after meeting debt servicing requirements and the basics of their lifestyle, they are more likely to reduce consumption,’ she said.

‘This will amplify the initial impact of the economic shock.’

The Paris-based OECD is expecting lockdowns in Sydney, Melbourne and Canberra to weigh down Australia’s economic growth.

It is now forecasting a 4 per cent expansion pace in 2021, down 1.1 percentage points compared with its May prediction published before the lockdowns.  

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