A perfect storm is brewing for property

What’s ahead for our property markets?

Recession 2020Well, it’s hard to make predictions, especially about the future.

And it’s even harder to predict the endpoint of a moving target.

Yet there is a palpable change in property sentiment happening and a number of “Game Changers” have altered my view on what’s ahead for property in 2021 and 2022.

Earlier this year there were a number of dire predictions suggesting property values would plummet.

But now, most of the pessimists have changed their minds and backtracked on their forecasts.

Australia survived the coronavirus better than many countries and, despite a recession, rising unemployment, and Melbourne’s severe prolonged lockdowns, the property markets have remained resilient.

Why didn’t the property markets fall off that cliff?

While many property pessimists predicted the worst for our housing markets, back in March, I suggested that

  • “A grade” properties wouldn’t drop much in value during this pandemic – maybe 5%. I was correct.
  • “B grade” properties – not investment-grade properties – would drop around 5-10%, and that was pretty right also.
  • “C grade” properties wouldn’t be moving at all. And, right now, we’re seeing a fallout in off-the-plan market and inner city apartment market.

Clearly only certain segments of the housing market suffered.

You see…interest rates are at historic lows making it easier for most Australians to keep up their mortgage payments, and those homeowners and investors who were struggling financially due to COVID-19 have been given a lifeline and have been able to defer their loan repayments.

The fact that more than 800,000 people have deferred repayments during the Coronavirus pandemic led to concerns about an “economic cliff” in September when the original loan deferral period was meant to end.

Well that didn’t happen as the majority of borrowers were already repaying their debts while others were given an extension to loan holiday.

But don’t worry about the banks withdrawing their support any time soon.

Think about it… the banks don’t want to take over your home as mortgagee in possession.

They’re keen to help their customers through these challenging times.

It’s obviously not in anyone’s interest to see a large number of mortgagee sales and house prices tumbling.

Fact is…there are too many vested interests in our property markets to allow them to collapse.

Our banking sector is underpinned by residential real estate loans, so the banks are not going to pull out the rug from under their customers.

At the same time the government understands the importance of consumer confidence in hauling us out of this recession and into recovery.

They also recognise that a recovery in our real estate markets will be enormously helpful as the wealth effect of rising house prices increases confidence and consumer spending.

At the same time, there is pent-up demand from both home buyers and sellers, who are just waiting for someone to ring a bell and tell them it’s all over; which means as confidence gradually returns our property market will rebound.

This will be helped by historically low interest rates and the various government stimulus packages aimed to revive our economy.

We’re setting ourselves up for a perfect storm in property

While I was always positive that our property markets were going to pick up, recently three major factors have underpinned the property markets and will contribute to a perfect storm that will have property markets performing strongly in 2021 and 2022.

canberra-politics-ACT-australia-government-leaderThe first was the announcement of sweeping changes to remove overly restrictive lending rules.

This will give more people access to easier credit, enabling them to borrow more and get into the market.

The other big gamechanger was the budget. It’s been calibrated to create jobs and promote consumer confidence, which will encourage buying and investing.

Then more recently the RBA stated it will further lower interest rates and do everything it can to support jobs, businesses and our economic recovery.

Sure there are economic headwinds that will affect us and there will be a few challenges in the first quarter of 2021 as a number of small businesses close down.

But there will be a “perfect storm” leading to a period of strong property price growth in the second half of 2021 and into 2022 with a confluence of the following:-

  • Federal Government spending, initiatives and infrastructure projects
  • State Government spending and infrastructure initiatives
  • Historically low interest rates making borrowing as cheap as it has ever been and therefore holding investments or taking out a home loan very affordable
  • The security that interest rates will remain low for a number of years will encourage people to borrow
  • Easing of credit approval criteria could allow many people to borrow considerably more than they could before.
  • A return of international demand for Australian property
  • A return of immigration and students to Australia is also possible

A window of opportunity

Thinking strategically, this means that there will be a window of opportunity between now and the second half of 2021 for savvy investors to really amplify their wealth position.

OpportunityNo one is going to ring a bell when the market bottoms, but in certain segments of Australia’s capital city property markets we are already passed the bottom and property values are slowly but steadily increasing.

However, the average homeowner or investor won’t hop back into the market until there is more certainty.

They are waiting to hear that property values have increased, auction clearance rates are higher and the Australian economy is back on its feet.

This means those who take action and secure their next home or investment property now will be purchasing in an uncertain market where they’re more likely to have the upper hand in terms of price negotiations.

They will also be competing against fewer other buyers, which is the ideal position to be in.

Why does this window close in the middle of next year?

Well, by then, a whole group of new buyers will be entering the property market, buoyed by a strengthening economy, growing employment and renewed confidence in the way Australia is heading.

Sell BuyThis will serve to increase competition for property which will potentially drive up prices and most importantly, absorb quality stock, making it harder for you to secure a solid investment.

This is likely to happen for two main reasons:

1. Confidence. By then, the economic picture will be clearer, the recession will have turned the corner and overall consumer confidence will begin to return as we claw our way back from this financially devastating pandemic.

2. Competition. Finance will be more freely available as a result of the changes I mentioned above, and those buyers who were previously restricted from borrowing (due to them not meeting the banks’ criteria, and/or temporarily losing or dropping their income during the pandemic) will be back in the market.

We’re in for a 2-tier property market

Now don’t get me wrong. Not all property markets will rebound strongly next year.

Neighbourhood SuburbProperties located in the inner and middle ring suburbs, particularly in gentrifying locations, will outperform cheaper properties in the outer suburbs.

The reason being, Covid19 has adversely affected low income earners to a greater extent than middle and high income earners who are likely to recover their income back to pre-pandemic levels more quickly, while many have not been hit at all.

High-rise apartment towers in our CBD’s which were already suffering from the adverse publicity of structural problems prior to Covid19, will now become the slums of the future as they are shunned by home owners and investors.

And like after every downturn, there will be a flight to quality properties and an increased emphasis on liveability.

As their priorities change, some buyers will be willing to pay a little more for properties with “pandemic appeal” and a little more space and security, but it won’t be just the property itself that will need to meet these newly evolved needs – a “liveable” location will play a big part too.

To many, liveability will mean a combination of:

  1. Proximity – to things like parks, shops, amenities and good schools
  2. Mobility – access to good public transport (even though this may be less important moving forward) or a good road system
  3. Access to jobs

The bottom line is that for those with a secure job and who have their finances under control, now could be the best opportunity in a decade to set themselves up for the opportunities that will present themselves as our property market head into a perfect storm with a confluence of growth drives in 2021-22.


NOW READ: What type of property will be popular post Coronavirus?


Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on

Metropole

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au


'A perfect storm is brewing for property' have 6 comments

    Avatar

    November 14, 2020 Bruce

    hi Michael,
    I thought the property market had ‘not’ dropped as you have said on a few occasions, so why now you say they have? tell me if I’m wrong,
    and this is why i predict a downturn in real estate and the economy next year roughly June,
    no job keeper,
    no job seeker,
    no international students till/ (there’s damage done to the economy),
    those getting higher seeker payments, this will drop,
    the companies having payments will cease, predicted 500k business’s will close next year, ABC story.
    the landlords will not be able to keep their residences after the 6 month tenant get out of paying clause, so they can’t be evicted (this is happening on a large scale) they just don’t pay. the mum and dad investors will sell at a reduced quick price.
    the moratorium on interest payments will stop,
    The 10 or 20k, people have pulled out of their super, will evaporate and been used up,
    therefore the reno’s and building will slow,
    the 330k of international visitors have been stopped till?
    there are many other reasons, adding to the domino effect that the economy and real estate prices will plummet,
    not to mention Trump is out and the stock market and business confidence in the US will drop,
    There is ‘now’ an over supply of buyers and not as many sellers so here on the gold coast and other regions the values are actually up, SO, the investors will realise to sell, so the market will be flooded with houses, price drop, investors will bail because if the tenant issues and temporary high higher prices.
    I have literally NO doubt we are in for a massive downturn,
    please prove me wrong,
    all I’ve ever seen is real estate agents, managers and promoters talk it up to increase sales.
    lets see how this prediction is in June 2021,
    you keep talking it up, I hope you’re right, but I’m betting my investment (on sale asap), its going to ‘plummet’,
    always like your info, stories and comments too,
    great stuff,
    cheers Bruce

    Reply

      Michael Yardney

      November 14, 2020 Michael Yardney

      Bruce – I can’t “prove you wrong” By the way…it’s not a competition of who’s wrong and who’s right – I’m giving you my views. Let’s revisit the discussion with next year. I’ll be here

      Reply

    Avatar

    November 13, 2020 Nick Brown

    Hi Micheal,

    Thanks for a very insightful article.
    It’s interesting that you mentioned about “gentrifying locations” which “will outperform cheaper properties in the outer suburbs”. Would you mind explaining this thought a little bit more, as I can see you also mentioned above about the importance of liveability? For example, I am interested in Melbourne property market and when I think of “gentrifying locations”, I think of Sunshine, Footscray, Dandenong maybe, but these locations at the same time don’t necessarily have the best liveability score compared to other suburbs. I think I saw your comment on another the post for example, that Sunshine is not even on your investment radar.

    Thanks and Regards,
    Nick

    Reply

      Michael Yardney

      November 13, 2020 Michael Yardney

      You are right Nick. You see…I look for a combination of factors, but you will find more about gentrification here https://propertyupdate.com.au/the-six-stages-of-suburb-gentrification/
      Are you interested as an investor or owner occupier?

      Reply

    Avatar

    October 26, 2020 Phil

    Hello Michael
    Just have a question about capital gains as I’m thinking about upgrading my currently property.
    I lived my property for about 2 1/4 years before renting it out and moving to WA.

    I moved back to Victoria about 4 years ago and have rented since. The guy renting my property has been there about 7 1/2 years now. I haven’t owned any other property

    Can I (legally) make this my primary residence and knock 6 years off the 7 1/2 years he’s been there and effectively pay tax for 1 1/2 years? The value of the property has not gone up on the last 18 months (Melbourne) but I never had it valued.

    Regards
    Phil

    Reply

      Michael Yardney

      October 26, 2020 Michael Yardney

      While I can understand your concern about paying capital gains tax, the fact that you have not lived in the premises, and you would’ve been showing rental income therefore proving it is not your primary place of residence, means you can’t really make it exempt from CGT

      Reply


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