When international borders closed to slow the spread of COVID-19 in March 2020, it was widely expected that house prices would fall sharply due to a sudden decrease in demand.

However, recently released ABS data has demonstrated that house prices increased by 15.6 per cent in Melbourne and 20 per cent in regional Victoria over the year to August 2021.

In the same period, unit prices in Melbourne and regional Victoria saw an increase of 7.3 per cent and 22.3 per cent respectively. 

Prices are now expected to continue to increase into next year.

Rental price changes saw a decline of just 0.8 per cent over the year to June 2021.  

Master Builders Victoria CEO Rebecca Casson said the economic data confirms that one of the main drivers for house prices is interest rates.

“The Reserve Bank of Australia (RBA) has lowered the cash rate to a record low of 0.10 per cent since the end of last year and is expected to remain low until 2024,” Ms Casson said.

“In doing so, the RBA hopes to boost cash flows across businesses and households to reduce economic and financial disruptions resulting from the pandemic.

“However, low interest rates result in high asset prices and higher levels of financial risk-taking.”

When comparing Victorian lending figures in the three months to August 2021 with the same period in 2020, homeowners and housing investors loans increased by an average of 24.5 per cent for construction and purchases of new residential dwellings.

The average loan size across these sectors was $510,231 during the three months to July 2021.

Ms Casson said increased spending, paired with the successful Homebuilder grant and other state programs, has continued to support the building and construction industry – and therefore the broader community - amidst the lockdowns. 

Restrictions on travelling and preferences for larger living spaces has allowed more Australian households to spend on purchasing or improving their home.

“While higher levels of spending may be great for our industry and the economy, increased borrowing to fulfill this makes our financial security more volatile especially if overall wage growth is slow,” she said.

“This has sparked discussions by regulators to step into the market as high levels of house debt poses a financial risk – especially if we were to experience another economic shock.”

On Wednesday, Australian Prudential Regulation Authority (APRA) announced that mortgage borrowers would now face more hurdles when applying for new mortgages.

Mortgage applicants will now need to have the financial capacity to handle a 3 per cent increase in their interest rates.

“For most new individual borrowers, this will mean that the size of the mortgage loan they can take out will be smaller than before. And a few may no longer qualify for a mortgage placing pressure on an already strained rental market,” Ms Casson said.

“While this may relieve the burden of high debt to income levels across Australian households, it will also mean that the amount of money being spent in the housing market may decrease slightly moving forward.

“Our state’s housing sector is set to remain strong as the forward work schedule is elevated compared to previous years.

“However, changes from APRA will mean that the pipeline of new home building activity will start to cool after the sugar hit of the Homebuilder scheme came to an end earlier this year.”