Why hasn't the housing market crashed?

The COVID-19 pandemic has been devastating to many segments of the economy – but not housing. Why?

Why hasn't the housing market crashed?

The COVID-19 pandemic has been devastating to many areas of the economy – and the consensus at the outset was that the national decline in property values would reach at least 10%, or even as much as a third in some scenarios. But that doom-and-gloom property hasn’t come to pass. Why?

The Australian Bureau of Statistics’ payroll data suggests that wages dropped 4.3% between March and October. In the same period, payroll jobs decreased 3%. But between March and October, Australian home values fell just 1.7%, according to a report by CoreLogic. October actually posted a 0.4% increase in values, and the trend over November suggests further acceleration in growth.

So how has the property downturn been so mild in the midst of Australia’s largest economic slowdown since the 1930s? CoreLogic’s report listed factors that may be driving the stability in housing.

Low-cost debt

“The cost of borrowing money is probably one of the most important factors influencing property values,” Eliza Owen, CoreLogic head of research for Australia, wrote in the report. “Over 2020, the RBA have reduced the official cash rate target (which influences lending rates) by 65 basis points, to 0.1%.”

That reduced cash rate has lowered bank funding costs, driving record-low mortgage rates, Owen said. She said it was actually not uncommon for housing markets to increase in value during negative economic shocks or periods of rising unemployment.

“This is because the monetary response to rising unemployment and falling consumption, is often to lower the price of debt,” Owen wrote. “Those that still have a secure income during these shocks may be more inclined to borrow and buy as a result.”

Read more: Is a property crash coming?

Mortgage repayment deferrals

Large-scale mortgage debt and ongoing arrears can lead to forced sales – which in turn can lead to higher supply, lower values and higher rates of negative equity, according to CoreLogic. Owen wrote that mortgage repayment deferrals have, at least temporarily, put a stop to this “vicious cycle.”

“Those that did not want to sell amid economic uncertainty due to an inability to repay their mortgage, did not have to,” Owen wrote. “This may have contributed to very low levels of stock throughout 2020, which only reduced further amid stage two restrictions from March. The low level of stock on market likely helped to insulate dwelling values during this time.”

The COVID-19 downturn is different

The intentional slowdown of “social consumption” has led to severe job loss in hospitality, tourism and the arts, according to CoreLogic. However, those working in these sectors are less likely to have mortgage debt.

“The decline of employment in these sectors likely contributed to severe pockets of rental income decline, but the investor servicing debt may be able to hold on to the asset while it is temporarily vacant,” Owen wrote.