In last week’s post I applied a little hindsight to a comparison of property market conditions in 2008 versus 2021.
In a BRW article published in October 2008 the content headline was summed up as: Safe As Houses. Can Real Estate Save The Economy?
Now 13 years later there were a key number of comparisons with today’s market that is discussed including the role of market confidence, levels of migration, housing supply, the health of the sharemarket and the role of interest rates.
This week I’ll continue my comparison with hindsight concentrated around affordability, financial stability and shifting demographics and lifestyles.
As it was in 2008 and remains so in 2021 housing affordability is always a topical discussion for everyone involved in the housing market. It’s a topic that worries governments and I suspect keeps many would be buyers awake at night.
House prices in 2008 were described as ‘severely unaffordable’. This was partly reinforced by the fact that in the early 1990’s the mean house price was about double, but in 2008 the ratio had increased to four-fold. Because of the GFC there were rumblings that house prices might fall (and fall a lot) and that interest rates would also fall, and these factors might just help housing affordability. That’s always assuming you have secure employment.
However, in 2021 while interest rates have actually fallen a lot, affordability has not improved. These days it’s often more about the ability to save a healthy deposit. It’s been estimated that in Sydney with a good income, it would take about 11 years to achieve a 20% deposit on a typical home.
While across Greater Sydney a median priced house is 8.5 times higher than the city’s median household income, while nationally the ratio is 6.5 and rising, well above 2008 levels.
While as a quick footnote it was predicted by one ‘expert’ that house prices would fall by two-fifths over the next decade in the face of a declining economy and a depression all compounded by reckless lending. Thankfully that didn’t happen.
Another topic from 2008 and one that remains in the spotlight is the question of financial stability and responsible lending. In the USA, where the impacts of poor lending were wreaking havoc across the economy and the housing market, the lack of financial stability was telling.
Locally, the end of so called ‘easy money’ and ‘reckless money’ was predicted to generate a big increase in housing loan default rates. Bank profits were also a concern and if house prices fell by 15-20% and default rates lifted, as some were predicting, to reach 10%,then combined that would be a big deal for the banks.
By late 2020 home loan default rates stood below 2% however, financial stability is always an important factor for property markets. Today bank profits are again under scrutiny. Banks over the past 12-months have been facing lower profits partly as they have made big provisions for potential bad loans. However, they are not forecasting any sort of large scale defaults in the housing market. They say they are being exceptionally cautious. The big test will be as the local economy slowly moves into a recovery phase and the Federal Government continues winding back its stimulus payments.
While there’s some risk the stimulus payments might be wound back prematurely and a risk COVID-19 could flare up again there are positive signs that the economy will mend added by the arrival of a vaccine, continued low interest rates and a healthy balance of payments.
In 2008 there were also a number of concerns around other areas of the property market. They were mainly focused on how baby boomers and retirees might react to a declining housing market. One possible result being that older people might hold onto their homes, usually in the inner areas, and so delay development and hinder population growth and that this could delay a shift to retirement living.
There was also a lot of faith in the positive impact on demand for housing from international students which could flow onto stronger investor demand. This combined with strong migration was seen as leading to a predicted boom in the apartment market which would be further boosted by smaller families becoming more common. One final point was a prediction that regional areas might also boom as all sorts of ‘changers’ entered the market with demand also fuelled by the impact of technology.
Amongst these final trends we can easily see related changes that are very apparent in 2021. The impact of a huge drop in the number of international students has been obvious not only in capital cities but also in regional centres aligned to major student populations. Much the same can be said for a big fall in migrant arrivals. However, there’s some prospect that both of these will recover quickly as the impacts of COVID-19 start to fade.
Apartment markets and demand did see a boom in development and although that trend has passed I believe that future demand will continue and that we will see a greater variety of quality and location-driven projects. We have also seen a big jump in the demand for regional housing, however this has mainly been driven by the WFH trend on the back of more advanced technology and less driven by prices and demand from retirement trends.
2008 V 2021 A quick summary
In 2008 housing prices were predicted to fall but demand from high levels of migration was seen as a way to possibly avoid this. Today migration is very much back in the spotlight.
House prices were seen as ‘historically high’ in 2008 with future cuts in interest rates helping to reduce the impact of high prices. The dynamic however, did not play out and today the relationship between very low rates and high prices is yet to work its way through the market. While the impact of baby boomers and a generation of smaller families was expected to shape markets post 2008, that has been the case but not in such simplistic terms.
While a fully blown credit-crunch did not fully develop and so reduce prices, the financial problems unearthed by the Banking Royal Commission did disrupt the market, however, concerns over supply and construction alongside planning and infrastructure delays remain a concern in 2021 as they did in 2008.
However, perhaps the biggest contrast between 2008 and today is the fact that property markets and process did not suffer big falls in the 10 years after the GFC and today there’s a new generation of concerns impacting the market as we emerge from new trends that have been accelerated by COVID-19. The fate of these very big pandemic trends will have to wait until perhaps it’s time to look back with the aid of hindsight in 2031.