Ultra-low interest rates and government support to the housing market during COVID has seen property prices rise well above what would have occurred in the absence of the pandemic, analysis by KPMG Economics has shown.

A report The Impact of COVID on Australia’s Residential Property Market assesses what has taken place over the past 18 months when compared to a no-COVID scenario. It finds that, country-wide, house prices are now between 4-12 percent higher and units up to 13 percent higher than they would have been in the normal course of events – when pandemic policy responses such as pushing the cash rate down to 0.1 percent, introducing the HomeBuilder program and starting Quantitative Easing would not have happened.

But the paper says that soaring price growth will temper over the next two years, as mortgage rates rise and the fundamentals of the housing market begin to reassert themselves.

Dr Brendan Rynne, KPMG Chief Economist, said: “Going into 2020, property prices in Australia capital cities were due for a cyclical upswing. Initially, the uncertainty caused by the pandemic and consequent economic downturn saw a 3 percent fall in prices in the June 2020 quarter. But once market participants became confident that the pandemic would not result in a free-fall of home values, a combination of monetary and fiscal policies quickly began to push things the other way.”

“The material decline in mortgage interest rates; extra savings from not spending on holidays and leisure; and generous income support from government and housing market support specifically, has seen property prices rise dramatically in the past 6 to 9 months, past the point to where they would have risen under a no-COVID scenario.”

“It appears these short-term positive factors have swamped the longer term-negative factors associated with the housing market such as lower population due to the fall in migration. But over the next 2-3 years the lower population growth and rising mortgage rates will moderate the current price surges.”

“Supply too plays a role. Our analysis of dwelling approvals in the big cities shows that in Melbourne and Sydney there are 25,000 and 20,000 respectively fewer houses and units available than would have been the case in a no-COVID scenario.”

In KPMG’s analysis, the differences in the prices in capital cities, over the four years Dec 2019-Dec 2023 in COVID and no-COVID scenarios are led by Sydney with a predicted 25 percent rise now, compared with what would have been a 13 percent rise. Brisbane is next with a 19 percent rise compared with a no-COVID 8 percent increase. 

Dr Brendan Rynne said: “The biggest single factor driving the high price growth has been ultra-accommodative monetary policy. This played a key role in staving off recession early in the pandemic, but the domestic economy has rebounded strongly, with unemployment returning to pre-COVID levels, and asset price inflation is still accelerating. So the challenge now is how to steer the economy through this stabilising period without it becoming unbalanced.

“Of increasing concern is the balance between investment activity in the residential property sector and investment activity in the business assets that will potentially stimulate productivity and generate higher returns in the future. If this continues there is a risk the nation’s portfolio of economic assets could become distorted, which will negatively impact living standards in the future”. 

For further information

Ian Welch
KPMG Communications
0400 818 891