Property prices boosted by housing policies: RBA

By Jon Bragg

May 26 2022
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The central bank has outlined the “pervasive” impact that policy has on property.

Reserve Bank (RBA) assistant governor Luci Ellis has reviewed the state of Australia’s property market as the country enters the endemic stage of the COVID-19 virus.

In an address to the Urban Development Institute of Australia on Tuesday, Ms Ellis drew attention to the significant impact policies such as the government’s HomeBuilder grant have had on the market.

“Whether it's time-limited subsidies bunching demand and boosting prices, or the interplay between low yields globally and rental yields locally, policy can have pervasive effects on housing outcomes,” she said.

Policy is particularly impactful over the short term, Ms Ellis explained, with the boost to demand driven by HomeBuilder and other temporary measures set to dissipate moving forward.

“As interest rates increase, the boost to demand from the current low interest rates will also wane. And the shifts in demand stemming from the pandemic will have worked their way through,” she added.

According to recent data, since the outset of the pandemic, the average household size has fallen and the proportion of Australians living in shared housing has remained low, resulting in increased demand.

“This helps explain why rental vacancy rates quickly returned to low levels even though the international border was closed and population growth declined to be close to zero,” Ms Ellis noted.

“Roughly speaking, the decline in population growth meant that there were up to 200,000 households that didn't arrive in Australia over the past two years, who would have done so if population growth had stayed where it was before the pandemic. But the decline in the average size of households that were already here broadly offset this.”

Shifting preferences and the rise of working from home have translated into an increased desire for more space while the importance of location has somewhat decreased.

“The relative premium paid to be closer to the city centre - both in rents and purchase prices - narrowed during the pandemic,” said Ms Ellis.

“Housing prices increased over the two years to April this year across almost all neighbourhoods in the major cities. However, in general, price increases were stronger in the outer suburbs than in inner-urban regions. The premium for being close to the centre remains, but it is much smaller now and is closer to the premium for being in a middle-ring suburb.”

However, Ms Elllis said that it is currently unclear whether these trends will persist over the longer term.

“The desire for more space further from the office might wane over time as the memories of lockdown start to fade,” she suggested.

“Not everyone who sought a ‘tree change’ in the regions will find that to be the right choice in the long term. More importantly, many of the shifts of population between locations were less a change in people's decisions than a simple interruption of the normal flows.

On the outlook for residential construction, Ms Ellis said that the temporary surge in building approvals for detached homes and renovations linked to HomeBuilder and other time-limited subsidies was expected to begin to fade.

But in the meantime, the construction industry appears to be operating at capacity, according to the RBA.

“Our expectation is that construction of new homes will remain solid for the next couple of years. The housing stock will therefore continue to expand as a result,” Ms Ellis said.

“We expect it will expand at rates similar to the first decade of this century, but not as much as during the boom in apartment building in the second half of the 2010s. This is likely to still be enough to keep the housing stock growing faster than the population.”

Australia is set for another new housing policy following Anthony Albanese’s victory in the federal election. During the pre-election campaign, Labor pitched a Help to Buy scheme in a bid to assist more Aussies into the market.

However, CoreLogic research director Tim Lawless has warned that the shared-equity scheme is not without its risks.

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