Gearing up to invest as post-Covid economy opens

The buoyant spring property market continues to draw eager homebuyers and investors chasing yields and capital growth. But before over-exuberance encourages them to sign up for a heavier debt burden than they can sustain long-term, especially at a time of subdued wages growth, they should consider current economic conditions. In its six-monthly Financial Stability Review released on Friday, the Reserve Bank warned of a possible housing bust as rapid borrowing runs ahead of moderate income rises in the wake of the pandemic applying a handbrake to economic activity.

This week’s move by the Australian Prudential Regulation Authority to stress-test new loans at an interest rate at least three percentage points above the current minuscule loan rate is a moderate, sensible measure to protect investors and gently cool a property market that has been rising faster than at any time since 1989. If credit growth does not slow, further measures are likely, the RBA predicts. National housing values rose 20.3 per cent in the year to September.

Buyers with pre-approvals for loans will be able to bid at auctions this weekend or make an offer on Monday without needing to factor in the changes. Most will consider themselves fortunate that the banks will grandfather existing agreements. But they also need to understand the realities of negative equity if property values fall, which can be a possibility. As the RBA warned: “Unsustainable debt trends could emerge in an environment of rapidly rising property prices and extrapolative expectations, with new borrowers stretching their financial capacity and a greater chance of disorderly future price corrections.”

In Australia, fortunately, falls in value, especially for good property, are invariably short-term. Interest rates will rise at some point. The parents of many of today’s buyers remember paying off home loans at 17 per cent interest rates. But RBA governor Philip Lowe has made it clear that the current cash rate is unlikely to rise before 2024, when inflation could be sustainably within the 2 per cent to 3 per cent range.

Reading the property market can be tricky, even for experienced investors. As the RBA said: “It is difficult to determine if housing prices are overvalued in real time, and current signals from timely data are mixed.” While urging investors to be prudent, its outlook was not bearish. “User-cost models, which compare the relative costs of owning versus renting a property (and so take into account a range of factors including the decline in interest rates), suggest housing prices remain broadly in line with fundamentals,” it noted.

Taking time to seek out good value at an affordable price, as always, should be key as investors look for opportunities as the economy reopens and lockdowns and borders are lifted post-pandemic. Financial stress persists for some borrowers, particularly those whose incomes have not recovered to pre-pandemic levels and who are struggling to make loan repayments. But it is a measure of the nation’s economic strength that borrowers’ income had recovered to exceed pre-pandemic levels before the latest lockdowns because of the Delta variant of Covid-19, except for some workers in the hardest-hit sectors such as tourism, hospitality and retail.

With rapid progress in vaccination rates and projected reopening of the economy in sight, incomes are expected to bounce back from lockdowns. Savings of about $230bn accumulated during the pandemic also will stand the economy in good stead.