Virus ‘turbocharging’ city house price spike

Covid will leave Sydney buyers having to shell out an extra $125,000 to purchase a property, KPMG modelling says.

A house for sale in Frenchs Forest on Sydneys Northern Beaches. Picture: NCA NewsWire / Damian Shaw

Covid-19 has “turbocharged” house prices and will leave Sydney buyers having to shell out an extra $125,000 to purchase a property, new KPMG modelling says.

The analysis shows home­buyers across the country now face a “Covid premium” for their houses as part of a global phenomenon driven by a dramatic fall in borrowing rates during the pandemic as central banks moved to boost economic activity.

The KPMG modelling estimates Brisbane property buyers will be paying 10 per cent more for homes by the end of 2023 thanks to the pandemic — $660,000 versus $600,000 had the health crisis not occurred.

The Covid premium in Sydney is similar in percentage terms, but equates to a larger dollar value thanks to the city’s already inflated property prices: $1.24m against $1.12m in the counterfactual where there had been no virus.

For comparison, the median Sydney house price in late 2019 was $986,000, according to the Australian Bureau of Statistics.

 

In Brisbane, it was $550,000.

Melbourne buyers, thanks to the city’s extended lockdown in 2020 and the flood of residents fleeing to other cities – including Brisbane – will face a 4 per cent or $35,000 Covid price premium by the close of 2023.

This is an estimated $940,000 cost versus $905,000 had the pandemic not occurred.

The KPMG modelling estimates Darwin home values would have dropped by 3 per cent by the end of 2023 had there been no pandemic.

Instead, prices will be 7 per cent higher at just over $500,000. KPMG chief economist Brendan Rynne said by the end of 2019, the fundamental long-term drivers of demand and supply – population versus available dwellings – had already created the conditions for climbing prices.

“House prices were ready to jump prior to Covid, particularly in Sydney, where ­prices were below their long-run trend,” Dr Rynne said.

But the Reserve Bank’s massive easing of monetary policy settings – including slashing the cash rate target from 0.75 per cent leading into the health crisis to 0.1 per cent, and pumping nearly $190bn of ­virtually free money into the banks – had “turbocharged house prices over and above what they would have been were it not for Covid”.

The sharp fall in borrowing costs – particularly in fixed mortgage rates, which in some cases fell below 2 per cent – “swamped” the negative effect of stagnant population growth as the economic recovery gathered steam, Dr Rynne said.

The KPMG model also incorporated a number of other short-run influences on property values, including price momentum (FOMO phenomenon), how ­prices in one market influence ­another (for example, Sydney house price growth tends to spill over to Melbourne and Brisbane, and Melbourne to Adelaide and Hobart), and the share of dwelling being bought by investors.

Government policies, such as the commonwealth’s HomeBuilder grant and state-based first-home buyer incentives, had also played their part.

The model incorporated how far away property prices were from the estimated long-run “equilibrium” price, as suggested by supply and demand fundamentals.

Dr Rynne said as the sugar hit of cheaper borrowing costs waned, the fundamentals of supply and demand would reassert themselves and see prices flatten out from next year. “The short-term effects start to moderate in the medium term as the fundamental factors of lower population growth start to bite and have a moderating effect on house prices,” he said.

Australia’s population is now anticipated to be lower by about one million people by the end of this decade compared to the pre-pandemic forecasts – a fact that will weigh on property values.

Dr Rynne said there was no house price bubble, and he believed the extra lift in asset prices – in housing and the sharemarket – had helped the economic recovery by making households feel wealthier, more confident, and therefore more willing to spend.

There were also valid concerns that Covid had turbocharged a lack of affordability, particularly for those hoping to break into the market, he said.