The share of household income being used to pay interest on debt has fallen to the lowest level in 35 years, freeing up tens of billions of dollars a year to be spent in other ways.
Interest paid by Australian households has dropped to 5.5% of disposable income, the lowest since the mid-1980s, analysis by AMP Capital shows. That compares to 9% in mid-2019 and 13% in 2008.
The decline has been driven by lower official interest rates, which were reduced to an unprecedented low of 0.1% in November.
AMP Capital chief economist Shane Oliver estimates the fall in interest payments as a share of disposable income is injecting an extra $9 billion into the household sector each quarter compared with two years ago. “That in turn has supported consumer confidence and spending,” he says.
Many borrowers have used savings from lower interest payments to reduce debt. The Reserve Bank says “substantial payments” were made into mortgage offset and redraw accounts between March and December last year. This amounted to about $40 billion.
Big increases in house prices have been forecast, with the regions set to outperform and the luxury end expected to be the star in the major cities. REA’s Property Outlook Report 2021 says Australians have never been wealthier, which is reflected in the “rise and rise” of the luxury property market. “This unique trend of house price growth during a recession did not occur during the GFC or the early 1990s recession,” the report says. “Towards the end of 2020, views per listing on realestate.com.au for homes over $10m increased 150%.”
The report says investors are returning to the market, with a focus on regional Australia, which will again outperform the rest of the country. While views per listing on rose 16% in capital cities during the second half of 2020, the increase in regional Australia was 44%.
Westpac economists have lifted their forecast for dwelling prices and are now expecting 10% gains in both 2021 and 2022. Westpac chief economist Bill Evans expects the market will flatten in 2023.
Housing markets are forecast to take off in 2021 after a year plagued by the pandemic recession that saw Australians squirrel away $110 billion in savings.
With the economy now out of a recession and auction clearance rates steadily rising, Australians’ strong appetite for bricks and mortar is strong – and some of the money households saved during the lockdown phases is likely to go into the housing market.
CBA head of economics Gareth Aird says improving consumer sentiment and cashed-up households are fuelling price growth. “A few forces are all pointing to higher house prices,” he says. “Some of the forward-looking indicators like lending have increased quite quickly in the past four months.”
New home loan commitments reached record highs in October, according to ABS data. Mortgage Choice Dee Why principal James Algar says consumer sentiment has picked up with more and more people preparing to enter the market next year.
A shortage of rental homes, multiple applications per property and rising rents are proof that Australia is undersupplied, with predictions the country could soon see the “biggest rent increases in living memory”.
Propertyology head of research Simon Pressley says property markets have largely survived the pandemic unscathed despite a fall in migration, with only Sydney and Melbourne recording a surplus of stock and falling rents. Many locations have vacancy rates below 1%.
“Australia does not have enough housing supply,” Pressley says. “We’re predicting the next couple of years will produce the biggest increase in rents Australia has seen.”
It’s good news for investors, who for many years have seen little or no increase in value on their investment. Equally, it is good news for sellers who will likely benefit from the increase in buyer demand. Pressley says most of Australia had an under-supply of housing prior to Covid-19 and it remains under-supplied.”
Recent reports have shown Australians are relocating to the sunshine state in droves, with the amount of people moving to Brisbane and the Gold Coast skyrocketing since July. According to online removalist platform, Muval, inquiries to move to the Sunshine Coast and Gold Coast increased by 96 per cent in the same time frame. Furthermore, majority of inquiries came from those aged between 25 and 34 years1.
Families are renting or buying properties sight unseen in an effort to enjoy the lifestyle change that moving to QLD brings. The ABS reported a net loss of 14,000 Sydney residents and 10,000 Melbourne residents to the Sunshine Coast in particular in the first half of the year2.
The Logan and Ipswich regions are also seeing growth, as families search for affordability and space. Record low interest rates, the rise of remote working and government incentives has meant that suburbs such as Park Ridge in Logan have seen a 78 per cent increase in demand3.
Australians have amassed $115 billion in total savings as a buffer against the pandemic recession, in a sign that economic recovery is unlikely to be derailed by any future reduction in government income support.
APRA figures show household deposits surged to $1.09 trillion by the end of September – an increase of $115 billion in 12 months and a $99.5 billion increase on deposit levels in February, before the pandemic took hold.
NAB director of market economics Tapas Strickland says that, just as the tens of billions in emergency support helped soften the virus recession, the savings amassed recently will help households navigate any drop-off in income payments over coming months.
There is mounting optimism the economy is recovering after a 7% contraction in the June Quarter. RBA deputy governor Guy Debelle said last week he expected the economy to have grown in the September Quarter, which technically would end of the pandemic recession.
Surveys show that, outside Victoria, consumer confidence has staged a dramatic recovery to sit at pre-pandemic levels.
The many strong property markets around Australia have been uplifted primarily by owner-occupiers, including first-home buyers – but the latest loans data suggests that investors are starting to join the buying trend. The number of property investor loan commitments has returned to pre-pandemic levels, according to figures from the Australian Bureau of Statistics. The ABS Lending Indicators for September indicates that more than $5 billion of new investor loan commitments were recorded that month – a similar value to February 2020 before the onset of the pandemic impact.
The number of investor loan commitments also increased 5% in September, after recording a monthly rise of 9% in August, according to the ABS.
Real estate professionals across Australia report rising activity from investors who are increasingly aware of strong markets, with rising prices and very low vacancy rates, particularly in regional Australia and the smaller capital cities.
The latest price data from Domain shows strong uplift in house prices right across Australia. Every capital city had growth in their median house prices in the September Quarter – except Melbourne where there was no change.
In the September Quarter, house prices grew by 2.8% or more in four of the capital cities: Adelaide, Hobart, Darwin and Canberra. Hobart rose 6.9% and Darwin by 6.6%.
In annual terms, all capital cities have house prices higher than a year ago. The national average is a rise of about 5% but individual cities have done much better: Hobart has risen 16% and Canberra is up 10%. Sydney, Adelaide and Darwin have all risen 7%.
This reflects the month-by-month data from CoreLogic since the start of the pandemic. Canberra has produced price growth in each of the past seven months and Adelaide has had growth in six of the seven months. Perth, Brisbane and Darwin recorded some down months, but bounced back in August and September.
Most regional markets have had sustained growth throughout the pandemic period, with Regional Tasmania up in every one of the past seven months, while Queensland and NSW delivered uplift in six of the seven.
Nationally, residential sales are outpacing new property listings, vendor discounts are falling and it’s taking less time to sell a property, shows the latest CoreLogic data.
The median vendor discount eased across capital cities and regional areas in the three months to September, falling from 4% to 3.3% over the year. Also, it now takes an average of only 40 days to sell a property compared to 46 days a year ago, the data shows.
“The year-on-year comparison is highly relevant as a year ago the marketplace was emerging from a two-year downturn,” says Tim Lawless, CoreLogic’s head of research. “It does show that, as we emerge from the COVID-related lockdowns, the market seems to be a little bit stronger than that.”
In the four weeks to September 27, new listings rose 9% while total listings declined, leaving the ratio of home buyers to new listings weighted towards demand rather than a supply build-up, says Lawless.
This suggests that now is the right time to buy.