08.31.2022 Tax & Finance

How The Economy Impacts Property Prices

How The Economy Impacts Property Prices

Economic uncertainty is causing some people to rethink buying or selling.

But should it? We explore how the broader economy really affects the property market.

There’s a sense of uncertainty about the economy at the moment. The cost of living and interest rates are rising faster than wages. Labour shortages and war overseas are disrupting global supply chains, and inflation is on the march. So what does this mean for property prices?

How does the property market fare during recessions and booms?

Over the past 30 years, Australia’s economy has shown incredible resilience. In fact, Australia’s economy has not experienced a recession since 1990/1991 – other than briefly during the height of the COVID-19 pandemic.

Leading up to that recession of the early 1990s, the economy was charging (despite the 1987 stock market fall), and Sydney property prices were soaring. Between 1985 and 1990, the median Sydney home value rose almost 120%, according to one analysis. Then, when the ‘recession we had to have’ struck, prices began to slide. The median Sydney home value lost -6.2% between 1990 and 1991 before beginning a slow recovery.

In the late 1990s, prices took off again, lifting another 115% between 1996 and 2003. Interestingly, this was also a period of relatively rapid economic growth, with GDP rising as quickly as 4.9% in 1999.

The economy vs Sydney property prices: a comparison

Since 2010, Australia’s economic growth tends to have been more subdued – although there have been some stand-out years. In 2012, GDP rose 3.9%; but over the same 12 months, Sydney property prices rose by 6.1% – below the 20-year average of 7.4%.

Instead, Sydney recorded its strongest period of sustained growth in 2013 (+14.5%), 2014 (+14%), 2015 (+15%) and 2016 (+15.5%), at the same time as GDP growth ranged between a much more modest 2.2% and 2.7%.

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And, in 2021, when Australia’s GDP rose by 3,4%, Sydney’s median property price grew 25.5% – leaving the broader economy in the shade.

The real drivers of the property market

Right now, despite rising prices and the general feeling of uncertainty, more or less every single economic indicator is looking favourable. GDP growth remains high, unemployment is at close to record lows, and our balance of trade (or the amount we sell overseas compared to what we import) is at a record high. However, property prices are in decline.

So what else is driving property prices here in Sydney?

  • The availability of credit. How much people can borrow – and whether they can borrow at all – is one of the most important factors in determining property prices. Much of the recent boom was fuelled by record low interest rates. Even when interest rates are high, banks’ lending practices can play a part in determining property prices. Sydney’s falling prices between 2017 and 2019 were partly attributed to the banks tightening their lending criteria.
  • Population growth. When people migrate to Sydney, they need somewhere to live. This can put pressure on both rents and property prices. Although prices rose sharply when borders were closed during the pandemic, we saw a lot of expats returning to Sydney and buying a home.
  • Supply. When there are fewer properties for sale, there’s greater competition for them – and over the past few years, Sydney’s property market has been suffering from a shortage of stock. This puts pressure on house prices.
  • Budgeting. People can only spend money when they have it. When you have to devote your cash to other things – and right now, costs are rising in so many other areas – you have less money to spend on your mortgage.
  • Market sentiment. Perhaps more important than what the economy is doing is what people think lies ahead. When people are optimistic, they’re likely to spend. When they’re pessimistic – as many are now – they tend to keep their wallets closed.

So, while the broader economy may contribute to house price growth or falls, it’s not the only factor at play.

Want more?

If you’d like to find out more about the state of the property market in Sydney’s Eastern suburbs, get in touch with our team today.