How will Covid-19 affect property prices in Australia?
“What will be the short, medium and longer-term effects that Coronavirus will have on the Australian Property Market?“
May we start off by explaining what fundamentals are required in any property market, to ensure that the property market is viable?
- Demand for property
- Supply of property
- Employment Rate
- Credit Availability
- Borrowing Capacity
So what has changed since Covid-19?
Taking the above factors into consideration there remains an increase in the demand for the supply of new dwellings on the back of a significant and planned population growth. There is a requirement for around 180,000 new dwellings per annum to be built, to meet an annual population growth rate of around 360,000 new residents.
Employment rate is projected to rise from just over 5%, now revised to around 8-10% on the back of government funding of JobKeeper and JobSeeker. The upside is that this means 90% employment is still a significant number. We have also witnessed many new jobs being created in other industries which have emerged to support the downside of Coronavirus. And both government and the health services industry continue to create new jobs, where all of the above could maintain unemployment at a revised 8.5%-12%. An incredible achievement in dire times and very healthy for the economy in the medium term.
Covid-19 impact on the Australian Economy
GDP last quarter to end 2019 was only 0.5% growth, and on the back of the impacts of COVID economists expect a fall in the June 2020 quarter, perhaps also in the December quarter, and not as negative going into June 20 and September 20. Meaning a recovery towards end quarter 2020 as was prior COVID, is probable. The government will have to do what it takes to get back to a full economic recovery as will our citizens.
Varying reports coming from economists include recession figures of around -3% falls over the next two quarters, this figure will reduce in the last quarter and a predicted rebound to 5.8% during 2021. Meaning over the short term sure there will be some pain due to our Economy deliberately being put on hold, and being a robust growth economy it will rebound pretty quickly post Covid especially on the back of how soon retail and tourism gets back to its new normal.
Industry analysts do not envision property corrections of any significance during this period especially on the back of a dwindling supply enhanced by an increasing demand.
At this time there is no indication of any market falls or falls of any significance. On the opposite, with private sales occurring properties are not on the market for long before being snapped up and land developers/or other property developers are not discounting their prices because the demand remains strong and buyers know that waiting will only cost them more on the back of historically low interest rates (predicted to remain low for several years) and on the back of a very strong demand and a low supply.
Having taken the measures the Australian Government took to flatten the curve and minimise deaths, this strategy is working which could result in Australians returning to work sooner than anticipated. Meaning the economy could get back on track sooner. This is speculation based on current infection trends which may or may not change.
There is the potential for vacancy rates to increase over the short term, but this is projected to be a very low increase, which will not impact the overall rental market. Minimising rental yield impact on the wider rental market. Of course, this is a generalisation as Australia has many property markets which will all react somewhat differently to it’s neighboring property market. Industry leaders predict that tenants will not be moving around in the short term on the back of wanting to remain Covid-19 free.
Some tenants have and will be asking for rental reductions and as the owner you are entitled to ensure that any claim made is substantiated in writing by your tenant and it is recommended that your property manager handle any claim on your behalf, negotiating with the tenants that this is not a discount but a ‘loan’.
In the medium term, on the back of very strong demand, logic prevails that rental yields in investment grade areas will hold their ground and may in fact increase if dwelling owners have to sell and become tenants.
Tenant selection right now is more important than ever in protecting your asset
Property is a Long Term play
When investing in property your commitment to yourself is over a 7 – 10 year period to mitigate risk but more importantly maximise the power of Compounding Growth and Returns on Investment.
When looking to buy to live in, consider your costs going in and exiting, to upgrade to your next property. Going in you will have stamp duties and any cosmetic or physical upgrades incurred and exiting the property you will have sales commissions and marketing fees and new fees on purchasing your next property.
If you are purchasing just to get onto the property ladder, perhaps consider becoming a Rentvestor until you are ready to purchase the home that will suit a longer-term hold for you and by then a growing family.
Because property is a long-term hold, following media hype will more often than not preclude you from entering the property market. And by the time industry statistics have been released, you are already around 6 months into the next cycle, meaning that the market news you are getting is old news already and thus not pertinent to the market you are wanting to buy into
Perhaps you are hoping that in the shorter term, you may be able to purchase at a discount, especially where an owner has to sell. The question is “would you invest or buy that property in a normal market?” and if not, even at a discount, cheap will be expensive to you. Let the buyer beware.
Postal codes in locations that have a lower socio-economic demographic could experience a small downward correction in the short term with a recovery before 12 months. Properties in the category where less purchasers can afford to buy will be more affected by a slight pricing correction in the short term, over areas where the majority of the population can afford to purchase. Again over 12 months or less after a correction analyst project values going back towards today’s values with a propensity to follow pre-Covid growth cycle.
Why will values primarily hold?
Reflect on the economic principals of Supply and Demand, and therein lies your answer.
Sellers have either withdrawn their properties off the market or selling off market under private treaty, yet demand remains extraordinarily strong and property is selling quickly. When you have a short supply underpinned by a strong demand, property maintains its value.
Those hoping for a major correction are the same people who are always waiting to ‘wait and see’ what will happen and will predict doom and gloom but never take action, even if presented with that ‘bargain’ of a purchase. And of course, the media love these scenarios portraying disastrous catastrophic scenarios which they never get right either.
On the back of a very high demand where we currently require around 180,000 new dwellings per annum, exacerbated by a very low supply, it is exactly these conditions which present the opportunity for growth in many postal codes around Australia, especially post COVID-19.
During the past 10 property cycles, property subsequent to a major event grew in value, within a short time, after each event. History has a way of repeating itself, especially when equity markets are so volatile, funds rush into bricks and mortar on the back of the security property offers. Why would it be any different now?
Astute investors and purchasers understand that a long-term perspective outsmarts the short-term reactive thinking, based on the very market fundamentals that drive the Australian property markets in the longer term.
Without a doubt, consumer confidence has been smashed. Tourism, hospitality, entertainment and retail have taken a hammering. But when you analyse the unemployment figure, over 90% are still employed or will have employment protection and receive some form of government assistance.
The Australian Economy will as a result of COVID-19 recede, how much negative growth that might be is unpredictable and how long will it take to recover back to pre-Covid growth will be based on how much the economy recedes.
It is in times like this where investors step up and take advantage whilst others are fearful. If you are soundly employed, have access to a deposit/cash and can get a loan, now remains the time to buy or invest, property analysts say.
Our economy is far from insolvent or dead, we primarily have a sound demographic, supply is low, demand for property is high and growing, money is as cheap as ever (projected to remain low for 3 years), banks want to lend and government investment into infrastructure projects underway will continue unabated; meaning further new jobs will be coming to market.
Aside from a major Virus, aside from a potential 12% or so job loss and the Australian economy shrinking for a year or 3 … investors have as good an opportunity to secure a quality investment grade property in a growth location and continue to grow wealth.
Migration, immigration, supply/building, interest rates affect property house prices – Interest rates play a vital role in the mix and generate house price growth where local factors determine the rate of growth. Cheap money drives higher house prices
Interest rates could be low for years to come, salary increases will remain low and taking inflation into account property markets in capital cities could average a 5% pa return. We know that interest rate movements generate price cycles, with long term low rates projected, property price cycles will flatten out demonstrating sustained 5% growth
Migration and Immigration
Migration is a key to housing demand, more people means higher demand for more homes. The Australian migration strategy is here to stay. Keep in mind this is a planned population growth to sustain government strategy around the Australian economy and for jobs growth created through government investment into infrastructure.
Has Covid-19 fundamentally changed the property Market?
No, Australians have to live somewhere and have strong aspirations for home ownership and property investment.
Home ownership offers security in bricks and mortar and money tends to shift from volatile investment vehicles into bricks and mortar, more so during times of uncertainty to take advantage of mitigating risk by investing in property.
Underlying drivers and fundamentals remain strong in Australia and confidence will be regained in a noticeably short space of time post Covid.
Be careful as to who you listen to and what you are reading in the media, they create headlines and provide misinformation to fill advertising space. Why listen to unfounded fear and misinformation at your own detriment?
Become more circumspect in who you listen to, the Australian property market is especially important to all of us and is highly resilient. Look at the fundamentals which supported the property market prior to Covid and the exact same fundamentals that continue to underpin and support our residential property market now and going forwards. By design, Australia is planned to grow, and you have an opportunity to grow with it.
It is projected that any recession, on the back of COVID fallout, will be short lived as it is not a business cycle recession, it is a deliberate stopping of our economy. Not based on any imbalance of our strong economy, meaning the potential to get back to where we were, is stronger and this will have minimal impact on most Australian property markets.
Capital City Markets pre Covid-19
Melbourne +3.2% growth, Sydney +4.4% and still where they were in 2017 and had still not reached its previous peak point, but had the propensity to outgrow previous highs based on significant interest rate cuts and demand for property. This was a natural re-balancing to previous levels
With Adelaide +0.5% and Brisbane +2.0% growth
Bank Lending and APPRA
Owner Occupiers regenerated our housing markets in 2019 (National ABS Feb 2020) with $13.14bn lend and to investors $5.30bn over same period. First home buyers borrowed $4.1bn
Money has since gotten cheaper and banks are keen to lend to those that qualify to borrow
Government being proactive on supporting tenants who are loosing their jobs, Australian rental market remains tight but without Covid impacting effects we are unsure of rental movement
Vacancy rates are predicted to remain low on the back of high demand and also tenants not wanting to move until they have certainty of their jobs and that medically it is safe to move into another rental
Supply versus Demand
Australia is moving into an undersupply environment in our capital city markets will less building approvals. Home building is down and Unit building is moving into a higher undersupply environment based on wrong predictions causing a mismatch of supply on the back of a rising demand
Undersupply is the cause capital growth and increase in rental yield
A strong population growth continues to create a demand for around 180,000 new dwellings per annum
Sydney has an almost balanced supply of 6.82 but has a downward trend of supply towards an under supply
Melbourne has an undersupply of -15.17
Brisbane has an undersupply of -11.03
Trend for all markets heading to an undersupply
COVID shock has placed the Economy and Housing Markets on hold, the sooner we get back to work and to normal the sooner property markets will revive
Keep in mind our property markets were regenerating during 2019 into 2020 already showing strong green shoots
Prices may ease due to a higher unemployment predicted to reach 10% but this means that 90% are employed and can afford to buy turning a potential buyers market back into a sellers market
- It is the view of property analysts that the Australian Economy pre-Covid was in a healthy position and was put on hold by Covid
- Property Values in Capital Cities and Growth Corridors prior to Covid were increasing
- Once the Australian Economy reemerges, the current flattening of property values will turn into growth curves on the back of pre-Covid market fundamentals. This is expected to occur around 6-12 months after most people return to regular employment status
- Interest rates at historical lows, money is exceptionally cheap, interest rates could be cut further and remain low for the next 2 – 3 years
- Australian supply of dwellings continues to decline with less new approvals occurring
- Australian Population continues to grow by design, requiring 180,000 new dwellings per annum
- Demand for property continues to grow on the back of population growth
- From current COVID-19 trends at this time the curve has been flattened, managing major instances such as this so efficiently will attract another wave of international immigration into Australia
- Unemployment projected to reach around 12%, very manageable for the economy
- A higher percentage of Australians are renting (close to 40%) and this percentage will continue to grow, incredible opportunity for investors
- Vacancy rates in most capital cities remain under 2%. This may increase slightly but will soon revert back to current lows, especially in Capital Cities and emerging growth locations where the government is heavily investing in infrastructure
- Baby Boomers are downsizing putting pressure on the First Home Buyers’ Market
- First Home Buyers’ Market is growing on the back of very cheap finance
- Market fundamentals underpinning the Australian Property Market remain very strong with homeowners withdrawing selling their properties and holding onto them adversely affects supply on the back of a growing demand
- There remains a very low default rate, and mortgage holders can request 6 month payment holidays in order to hold onto their properties in their challenging times
- In times of stock market volatility, more money flows into bricks and mortar which historically prove to stand the test of time