The pandemic has changed the way many people live and work, and regional markets have been a major beneficiary.

Flexible working arrangements and greater affordability saw households flock to the regions in record numbers during COVID-19, according to recent population data by the Australian Bureau of Statistics, while new data by realestate.com.au found price growth in regional areas doubled that of the capital cities over the past year.

But it appears the move to regional Australia may be stalling as the vaccine roll out accelerates and more workers return to the office.

Growth in capital city prices has been greater than those in regional areas for the past two months.

The new REA Insights Home Price Index Report found price growth in the capital cities has been stronger than that of regional markets for the past two months.

“It will be interesting to see as vaccines rollout and things return to normal, whether price growth in capital cities consistently outpaces that of regional areas of the country,” said Cameron Kusher, REA Group Director of Economic Research and author of the report.

“Undoubtedly the lure of regional Australia with its lower property prices and desirable lifestyle remains strong. We may see those people intending to move regionally reconsider as they realise all the things that kept them in the big city in the first place as cities reopen,” he added.

Beachside suburbs on the NSW Central Coast ranked high in the price growth charts in 2020.

It comes as GDP data confirmed Australia is well on the way to recovering from the pandemic, with the economy expanding another 3.1% in the December quarter, building on the strong growth recorded in the September quarter as easing restrictions allowed households to get out and spend.

The result was largely driven by the reopening of Victoria, where household spending rose 10.4% compared to a 2.3% increase for the rest of Australia.

It means the economy is now just 1.1% smaller than it was a year ago before the pandemic hit – even after recording the worst economic downturn since the Great Depression.

Also adding to the growth was a lift in dwelling investment, as an improved economic outlook, the inability to spend on overseas travel and government grants like HomeBuilder prompted people to spend on new homes and renovations.

Regulators watching lending standards

According to the REA Insights Home Price Index Report national dwelling prices rose by 0.4% in February, taking them 1.8% higher over the past three months and 5.9% higher than they were in February 2020.

“The housing market has been experiencing growth in property prices since the middle of 2020,” said Mr Kusher.

“From here, it is expected that we will continue to see prices increase over the coming months.”

As more people return to the property market, demand for home loans have reached new records. Recent ABS data showed new home loan commitments rose 10.5% in January to an all-time high, with strong demand for both owner-occupier and investor loans.

New home loan commitments hit a record high in January.

Financial regulators say they are closely monitoring the situation.

The Council of Financial Regulators, which is chaired by the RBA and includes the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the federal Treasury recently issued a statement saying it’s prepared to clamp down on lending if conditions deteriorate.

“The Council places a high emphasis on lending standards remaining sound, particularly in an environment of rising housing prices and low interest rates,” the statement said.

“It will continue to closely monitor developments and consider possible responses should lending standards deteriorate and financial risks increase.”

Regulators clamped down on the banks during the last housing boom by introducing caps to interest-only and investor loans after buyers began taking on too much debt to secure a property.

What it means for lending

For now, regulators say lending standards are ‘generally’ being maintained. But ANZ economist Felicity Emmett predicts they may have to step in later this year, with house prices forecast to surge.

“A soft touch approach from the regulator is likely in the first instance, followed by harder limits, most likely targeted at high debt-to-income loans,” said Ms Emmett.

Economists at the Commonwealth Bank are less concerned, saying even as house prices rise and more loans are issued, household debt isn’t expected to increase at the same pace.

“Growth in the stock of housing debt is slowly starting to lift because new housing‑related lending has picked up significantly.  But so far the acceleration has been very modest,” said CBA economist, Gareth Aird.

“That is because households that carry debt are still very much focused on repaying it.  And lower interest rates have led to an increase in the rate of debt repayment. As a result we do not think that housing credit will rise fast enough in 2021 to see macro‑prudential policies return.”

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