How will the recession really affect our property markets?

If you are like most people Australians chances are you would be reading headlines like: “Property market in a freefall”, “The death of the property investing”, etc etc.

RecessionIt all started since Coronavirus entered into the public’s lexicon and now with all the talk of recession.

I wouldn’t blame you if you were starting to lose confidence in the Australian property markets.

However just like for most things, when it comes to property statistics it’s important to look past the mainstream media generalizations and peek below the bonnet.

After all, if you have been a regular reader here at PropertyUpdate, one important lesson you would have learned is that there is no one singular Australian property market.

It is made up of thousands of smaller geographical submarkets, each made up of their own local idiosyncrasies and characteristics.

And not surprisingly what our team at Metropole is seeing on the ground locally through our buyer’s agents’ eyes and what we’re finding through our analysis of the most updated data, is that, as always, not all markets are equal.

Some markets are absorbing the impact of Covid-19 and holding their values pretty well, whereas there are others that are more susceptible to the economic effects of this virus.

The 3 markets that are immediately impacted by Coronavirus right now are:

  1. The outer-lying suburban fringes predominantly made up of newer settlements
  2. High-rise apartments pockets in CBD and surrounds
  3. High-end luxury market above the $3M price bracket

1. Outer-lying suburban fringes

Consistent with the finding of mortgage stress by Digital Finance Analytics, outer-lying suburban fringes are in the immediate firing line of Covid19 simply because there is a lack of diversity across household mortgage profiles and household income profiles, accentuated by lack of scarcity of land and properties supply (think of house & land packages).

When looking for investment grade locations and assessing household mortgage profiles, we look for a balanced mix of the more entrenched households who have lived in the particular suburb for, say, the past 20 years and the newcomer households who just bought and moved into the suburb.

This mix is important because the established households tend to have either their Principal Place of Residence (PPOR) fully paid-off or have very low Loan-to-Value ratio simply because of their length of tenure.

This established households segment plays a crucial role in the stability of the property prices which do not exist in the outer-lying suburban fringes which are predominantly made up of new households who just moved into the area who clearly tend to have higher LVR.

For example, in Brighton in Victoria the 2016 Census data shows that 43.6% of all households own their properties outright.

Contrast this with outer suburban Pakenham (one of the suburbs in Victoria with a high occurrence of mortgage stress as identified by the DFA research) where only 18.7% of the households own the properties outright.

Similarly in Sydney’s established Rose Bay 30.1% of residents own their homes outright while only 10.2% of those living in The Ponds (one of the suburbs in NSW with a high occurrence of mortgage stress) have no home mortgage.

Looking forward, if the financial situation of the households in these outer suburban markets does not improve significantly, we are likely to see a higher occurrence of distressed sales as eventually they won’t be able to escape from the clutches of mortgage stress.

2: High-rise apartment markets

This segment of the market is generally in the CBD or surrounding suburbs and are mostly investor-owned and therefore rented.

Real Estate Agent Giving Keys To Apartment Owner, Buying Selling Property Business. Close Up Of Male Hand Taking House Key From Realtor. Mortgage For Purchasing Flat, Getting Access To Own HomeFor example, 62.4% of properties in Zetland in Sydney are rented (and therefore owned by investors).

It’s much the same in Waterloo NSW (70.8%), Docklands Vic (62.5%), Southbank Vic (63.6%), Newstead Qld (60.1%), and South Brisbane Qld (67.5%).

This segment of the market is in the immediate firing line of Covid-19 due to the closure of borders and the resulting rise in vacancies due to the lack of interstate & overseas migrants and international students, who typically rent the types of properties that make up this market.

As majority of investors who own these dwellings are negatively geared, drastic and sudden rise in vacancies severely impact their cashflow.

If the vacancies in this segment are not quickly absorbed, it is likely we will see a higher occurrence of distressed sales as investors will be forced to sell as they can no longer afford the cost of holding on to these properties.

3: High-end luxury market

This market is impacted also affected by the Corona Virus induced recession.

Higher value property markets tend to be more reactive to changes in the economic environment.

They tend to lead the downturns but also the upturns.

The higher income households in these locations tend to be more sensitive to the business cycle, stock dividends and the vagaries of the business cycle.

But there’s more…

Now I’m not suggesting these are the only market segments that will suffer.

House PriceOne of the things we’ve learned about Covid-19 is no one is immune.

We have already seen a soft decline in monthly prices nationally across the board.

But the lesson here is that in uncertain times like this, it is more important than ever to stick to fundamentals and bullet-proof the long-term prospects of your investments.

And one of the most important fundamentals is to buy properties with strong owner-occupier appeal in locations that are predominantly populated by owner occupiers with diversified mortgage and income profiles.

This is supported concretely by what our local buyer’s agents are seeing on the ground, because the team at Metropole only buys properties with strong owner-occupier appeal, in the right suburbs of Sydney, Melbourne and Brisbane.

You can’t help but be reminded of this quote by Warren Buffett: “If Fed Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn’t change one thing I do”.

Quoting Robert Hagstrom in The Warren Buffet Way: “Both Buffett and Charlie Munger confess that they spend no time contemplating unemployment figures, interest rates, or currency exchanges. Both Buffet and Munger are more interested in focusing on business fundamentals, management and prices”.

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

Flat Design For Team Work Concept

If you’re wondering what will happen to property in 2020–2021 you are not alone.

You can trust the team at Metropole to provide you with direction, guidance and results.

In challenging times like we are currently experiencing you need an advisor who takes a holistic approach to your wealth creation and that’s what you exactly what you get from the multi award winning team at Metropole.

If you’re looking at buying your next home or investment property here’s 4 ways we can help you:

  1. Strategic property advice. – Allow us to build a Strategic Property Plan for you and your family.  Planning is bringing the future into the present so you can do something about it now!  This will give you direction, results and more certainty. Click here to learn more
  2. Buyer’s agency – As Australia’s most trusted buyers’ agents we’ve been involved in over $3Billion worth of transactions creating wealth for our clients and we can do the same for you. Our on the ground teams in Melbourne, Sydney and Brisbane bring you years of experience and perspective – that’s something money just can’t buy. We’ll help you find your next home or an investment grade property.  Click here to learn how we can help you.
  3. Wealth Advisory – We can provide you with strategic tailored financial planning and wealth advice. Click here to learn more about we can help you.
  4. Property Management – Our stress free property management services help you maximise your property returns. Click here to find out why our clients enjoy a vacancy rate considerably below the market average, our tenants stay an average of 3 years and our properties lease 10 days faster than the market average.
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Robert Chandra

About

Robert Chandra is a Property Strategist at Metropole and has an intrinsic understanding of property markets backed by many years of real estate experience. This coupled with several degrees gives him a holistic perspective with which he can diagnose clients’ circumstances and goals and formulate strategies to bridge the gap.


'How will the recession really affect our property markets?' have 2 comments

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    August 30, 2020 MICHAEL CORRELL

    Various commentators have been predicting another R/E crash after the GFC for many years, but their warnings of an over-heated market have been largely dismissed. COVID-19 is merely the black swan trigger for the current decline and perhaps not so much the immediate cause, although the economic and migration numbers don’t help in the wake of lock-downs, particularly perhaps in Melbourne.

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