Have you wondered how the Covid-19 pandemic affected our property markets?
Well, for one, preferences for different locations and property types have changed extremely quickly, and the housing market is still adjusting.
These changes go beyond the once in a generation property boom we experienced which were largely driven by lower interest rates and various stimulus packages at a time of significant pent up demand.
Paul Ryan, Economist at REA shared his insights into a number of other property adjustments brought on by the pandemic:
1. People chose to live with fewer people
One of the sharpest adjustments in the property market happened early in the pandemic when people moved into smaller households.
Amid lockdowns and remote work and study, more people decided they needed their own space.
In fact, one-and-two-person households became more common in 2021 than was the case in 2016 – at the expense of larger households.
Mr Paul Ryan, Economist at REA explained:
"In particular, share houses saw a big drop in popularity during Covid.
With university learning going remote, and many retail and hospitality businesses shut, shared living was much less appealing.
Nationally, the average household size fell from about 2.59 people to 2.55 people.
This may not seem like much, but it added significantly to total housing demand.
It meant we needed about 150,000 more properties to house the population than we would otherwise.
That’s equivalent to almost a year of residential dwelling construction – just to accommodate a sudden preference for smaller household sizes.
Although early in the pandemic, this increase in housing demand was balanced by decreases from closed borders.
But now immigration is increasing strongly, meaning total housing demand is very strong, evidenced by very quick rental price growth all across the country."
2. Regional areas (and smaller capitals) rose in prominence
Regional areas all across the country have increased in value as remote work capability and a desire for lifestyle changes prompted some people to move out of cities.
But this ‘regional renaissance’ also benefited smaller capitals with lower home prices, namely Brisbane and Adelaide.
The pandemic had big positive effects across regional Victoria, New South Wales, southeast Queensland, and Tasmania.
They have been the biggest winners of post-pandemic lifestyle changes.
3. People want bigger homes – and are willing to pay for them
The other key change among homebuyers has been the lust for larger homes.
With remote work rising and people spending more time at home, buyers went looking for more rooms for home offices, as well as larger yards and utility spaces.
This has been clearly evident in selling prices.
Mr Ryan commented:
"The amount people are willing to pay for large homes relative to smaller ones has blown out.
The amount it costs for a four-bedroom house relative to a one-bedroom unit is 20% higher than before the pandemic.
Bigger homes have done the best, but larger apartments have also outperformed smaller ones.
The cost premiums for larger homes have come down a little from pandemic peaks, but are still well above the pre-pandemic levels. "
We're now seeing this trend reversing with decreased affordability causing more people to trade space for place – in our willing to live in apartments or townhouses in the right location - in general these are 20 minutes neighbourhoods
4. There hasn’t been a revaluation of commuting distance
On the face of it, the outperformance of the peripheries of cities, such as southwest Sydney and north-west Melbourne, suggests remote work has reduced the tyranny of distance.
Mr Ryan explained:
"This would mean people are willing to pay more for homes further from the centre of cities as the cost of being further out is lower, since many now don’t commute every day.
However, after accounting for the large revaluation of larger homes, the discount for living further from CBDs is little-changed.
All of the outperformance of the peripheral parts of our larger cities has therefore been driven by the desire for larger homes – since these regions have more large homes.
Large homes close to the city centre have also increased in value.
So far, people aren’t willing to pay more for homes further from the city, despite a reduced need to commute."
5. More renters transitioned to owning their home
The pandemic period has been good for first-home buyers.
This was due to a combination of lower interest rates, which tend to benefit first-time purchasers because they borrow higher proportions of their properties, and government incentives.
Mr Ryan further explained:
"The last period we saw the same level of first-home buyer activity was in 2009 after the Global Financial Crisis – also a period where we saw interest rate reductions and government incentives.
While many were able to bring forward buying to get into the market, this has reduced the number of rental properties because many of those dwellings were sold off by investors.
Of course, there is also less rental demand, as new owners are no longer renters.
But the remaining renters will likely be those that will struggle the most with the big increases in housing demand from changes to household sizes and the resumption of immigration this year.
This surge in demand without a change in supply means rental price increases, which have been very strong and look set to continue.
And that's likely to have a bigger effect on the finances of current renters."
Are these changes here to stay?
Whether or not these trends will reverse isn't entirely clear, however, it appears to be likely.
Mr Ryan said:
"Higher interest rates are likely to mean first-home buyers will find 2023 more difficult than over the past two years.
This, combined with ongoing strong rent price growth, is likely to slowly revert the pandemic shift to smaller household sizes.
To some extent, households were able to spread out following the reduction in housing demand throughout the pandemic, but will now have to group back together.
The persistence of preference shifts towards regions and larger homes is harder to predict.
But given we have seen little reversal in these trends yet – regional areas continue to outperform capitals, and the premiums for large homes are little-changed – they appear to be long-term changes in the housing market."
Source of charts and commentary: REA Insights.
