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While some industries continue to be adversely affected, Australia is in the midst of an economic recovery. Australia’s handling of the virus has generally been better than most other countries. This has provided a favourable position for the economy to benefit from considerable government support and low interest rates. The housing market has been a key beneficiary recently, as it is particularly sensitive to lower interest rates and improving consumer confidence. It has also been boosted by first home buyer grants.
Auction clearance rates have recently reached elevated levels and this has coincided with very strong growth in house prices across Australian capital cities. According to CoreLogic, Australian capital-city dwelling prices rose by 2.0% during February, which was the strongest monthly gain since 2003. The increase in prices was relatively broad-based, with Sydney (+2.5%) and Melbourne (+2.1%) experiencing strong gains. Price gains for houses (+2.3%) were stronger than those for apartments (+1.1%).
While gains in house prices have been broad based, building approvals in the apartment market have continued to fall over recent months. The chart below shows that while building approvals for houses have reached extremely high levels recently, approvals for other residential buildings (which is largely apartments) has continued to fall. Drivers of this divergence includes factors such as: overbuilding in the apartment market in prior years; less appetite to live in apartments; and the potential for materially lower immigration levels as a result of COVID-19.
Chart 1: Australian Building Approvals (thousands)
Source: ABS, Goldman Sachs Global Investment Research
The recovery in house prices is not surprising given the policy measures that are in place. In particular, first home buyer grants have provided a material boost to that part of the market. More generally, the Reserve Bank of Australia’s (RBA’s) policy settings have helped lower the cost of borrowing. The RBA is targeting a record low cash rate of 0.1% and is continuing to “print money”, with the aim of maintaining low interest rates. The RBA has also provided guidance that it is not expecting to raise rates for a few years. It does not typically provide guidance for such an extended period. Its aim is to reduce the risk that the recovery is derailed by rising interest rates. While this aim is understandable, keeping rates very low for an extended period increases the risk that some households will not be able to afford mortgage payments when interest rates eventually rise.
Looking ahead, our central case for the next 12 months or so is that the deployment of vaccines in Australia and overseas will progressively allow economies to operate closer to their full potential. This is expected to allow current stimulatory policies to be wound back. We anticipate that 2021 will be a much better year than 2020, while acknowledging some downside risks remain.
