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- Back in May this year I wrote:
- A perfect storm for property.
- Clearly our housing markets were not immune to the Coronavirus economic fallout…
- Of course there isn’t one property market.
- What will happen to property markets in the long term?
- So is now a good time to buy property?
- But is it really the right time to buy a property?
Is now a good time to buy property?
Should I hold off and wait for property values to fall further?
What’s ahead for our economy and the property markets as Australia falls into recession?
These are the type of questions I’m regularly answering for our clients at Metropole and for the many journalists who have asked for my opinion.
And what I used to tell them that our economy started the year with a little cold that progressed to the flu and by mid year looked more like we got a dose of economic pneumonia.
Just look where we a few months ago…
Most of us were working from home, we became good at social distancing, many businesses have closed (temporarily), the property markets were placed in hibernation with severe restrictions on inspections and auctions, the stock market had crashed and as we were heading into a recession consumer and business confidence tanked.
But we overcame our pneumonia and we’re on the road to recovery so I now explain that there is currently a window of opportunity before the markets rebound strongly next year.
Back in May this year I wrote:
While I don’t want to make light of COVID-19, but based on my perspective having been involved in the property market for over 45 years, I believe the impact of this on our property market will ultimately be temporary.
Now, this view may be a little different to what others who are forecasting that property values will drop anywhere from 10 percent to 30 percent; but remember …this too shall pass.
What we are currently experiencing is like a terrorist attack which will deliver a short sharp blow to our economy rather than experiencing a long drawn out war.
What will happen to our property markets will depend upon how long we are in lockdown, how soon our economy picks up, the level of unemployment and importantly the level of consumer confidence coming out of our recession, which will be a good barometer of all the above factors.
Fortunately our Federal government learned a lot about handling monetary and fiscal policy during economic downturns resulting in the slashing of interest rates, spending Billion of dollars to build a bridge to get us through this challenging times and supporting mortgage holders, landlords, tenants and small businesses and will doubt spend a lot more to kickstart the economy.
Well, it looks like my musings were correct.
Sure unemployment rose and unfortunately some businesses closed and some will tragically not reopen, but the economy is likely to rebound in the 4th quarter of this year at which time we are likely to be experiencing a perfect storm for property.
A perfect storm for property.
While there is likely to still be weakness in certain sectors of our property market moving forward, it looks like there is now a window of opportunity for strategic investors and cashed up home buyers to get in the market as there is a “perfect storm” brewing for a period of strong property price growth in the second half of 2021 with a confluence of the following: –
- Federal Government initiatives, spending and infrastructure projects
- State Government spending and infrastructure initiatives
- Historically low interest rates making borrowing as cheap as it has ever been, thus making 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 in March next year could allow many people to borrow $70-$100,000 more than they could before.
- Consumer confidence will return as we work our way out of the recession and lives become more normal after CoVid19
- There will be an imbalance with the demand outstripping supply of properties in the short term since it usually takes a number of months before people feel confident enough to place their properties on the market for sale. They usually wait to see evidence that the market has bottomed, including higher prices, rising auction clearance rates and positive property news in the media.
- A return of international demand for Australian property
- A return of immigration and students to Australia is also possible later next year
But the impact on property values has been minimal so far.
As you can see from the table below provided by Corelogic, median prices in every capital city other than Perth a higher than they were 12 months ago.
Of course there isn’t one property market.
The overall figures in the table above don’t show the pain being felt in certain segments of the property market.
- “Investment grade” properties and A grade (above average) homes are holding their values well more buyers than sellers and prices are rising in some capital cities
- B grade (average) homes have fallen in value a little in some locations –
- C grade (less than perfect) are the hardest hit as there has been a flight to quality.
While this has initially occurred on low levels of transactions, other than in Melbourne which has finally been let out of lockdown, transaction numbers have been steadily increasing.
The worst affected residential market segments have been:
- Apartments in high-rise towers – in fact this is these properties are likely to be out of favour for quite some time.
- Off the plan apartments and poor quality investments stock (as opposed to investment-grade) apartments, particularly those close to universities.
- Outer suburban new housing estates house and land packages, where young families are likely to have overextended themselves financially and with many people will be out of work for a while
- Properties in the blue-collar areas.
Of course, as an asset class, bricks and mortar has always performed exceptionally well during previous economic shocks.
This time round, with the banks giving mortgage deferments or holidays, it is unlikely that we will have a large number of forced or mortgagee sales that could undermine market confidence.
I recognise that a logical argument, that is based on the laws of supply and demand, suggests that with unemployment rising and with fewer people able to purchase a property there will be less demand meaning property values will fall.
Sure, property values may fall a little in the next few months, but that won’t reflect their “intrinsic value” but will really be more of a reflection of the market lockdown.
And sooner rather than later we’ll come to a point where property transactions and prices will reflect the fundamentals of the Australian economy, as opposed to the current structural changes taking place.
On the flip side of the coin, suppressed transaction activity means we expect to see a build-up of latent demand and the markets will rebound in the latter part of this year.
The data suggests there’s a very weak relationship between average house price growth for subsequent 3-year period (green line) and unemployment (blue line.)
Many commentators are trying to compare the current markets predict how the current markets are going to perform based on how our property markets performed during previous economic downturns such as the Global Financial Crisis in 2008 or the recession of the early 1990’s.
However, unlike previous downturns that were essentially financially lead, this downturn is a medical problem that morphed in an economic issue because of a short-term shutdown of our economy which has led to a supply side downturn (even though we’d like to, we can’t go out and buy goods as their supply is limited because the shops are closed) rather than a lack of demand driven downturn.
This time round things are very different from a recession preceded by economic excess and speculation.
Because of this and based on the predicted pace of the post-recession recovery, I would expect the pandemic to have a more limited and shorter-lived impact on house prices than either the early-1990s recession or the Global Financial Crisis.
What will happen to property markets in the long term?
As I explained earlier, I see a perfect storm ahead for residential real estate, but as I also explained that is not one property market so it’s important to look more granularly.
Some sectors of our economy and housing markets will be affected more than others.
The largest and most direct industry shocks from the coronavirus are expected in:-
- Tourism, local restrictions will ease up before and overseas travel restrictions may take some time to lift;
- Hospitality, where social distancing leads to a decline in café, bar and restaurant patronage;
- Education, due to fewer foreign students being able to travel;
- Retail, which will be dragged down by low consumer confidence levels; and,
- Recreation, theatres, cinemas and art galleries have closed down.
However, I’m comfortable with the underlying long term fundamentals supporting our property markets in the medium to long term.
Let’s look at a couple of them…
- Population growth
Australia’s population was growing by around 360,000 people per annum, meaning we needed to build around 170 to 180,000 new dwellings each year to accommodate all the new households.
Since 60% of our growth is dependent on immigration, in the short-term population growth will fall, but they should increase again as soon as overseas immigrants will be allowed to come to our shores.
- Declining housing supply
The oversupply of dwellings in many Australian locations is now dwindling and there are very few new large projects on the drawing board.
Considering how long it takes to build new estates or large apartment complexes, we’re going to experience an undersupply of well-located properties in our capital cities in the next year or two.
- Interest rates are low and will go down further
The prevailing low interest rate environment is making it easier to own a home, either as an owner occupier or investor.
In fact, it’s never been cheaper for investors to own a property with the “net outlay” – the out-of-pocket expenses – being the lowest they’ve been for decades considering how cheap finance is today.
- Smaller households are becoming the norm
Sure many people live in multigenerational household, but pretty soon Millennials will make up one third of the property market and their households tend, in general, to be smaller as are the households of the booming 65+ year old demographic.
More one and two people households means that, moving forward, we will need more dwellings for the same number of people.
- More renters
Soon 40% of our population will be renters, partly because of affordability issues but also because of lifestyle choices.
The government isn’t providing accommodation for these people. That’s up to you and me as property investors.
- First home buyers are back
First home buyers are back with a vengeance, in part thanks to the government’s new scheme to encourage them, but also because of cheap finance and rising property values.
As opposed to established homebuyer who have a “trade in” that is increasing in value, if first home buyers wait to get into the market they’re finding the market moving faster than they can save, so they’re hopping on board the property train as quickly as they can.
- The underlying fundamentals are strong
They’re not going to sell up their homes – they’d rather eat dog food than give up their homes.
And Australia’s banking system is strong, stable and sound.
Even though a few home buyers have overcommitted themselves financially, there should be no real concern about household debt because, in general, it is in the hands of those who can afford it.
There is currently a very low rate of mortgage default of mortgage to increase.
As the community starts to become more concerned about the economic impact of the corona virus, it is likely that there will be a flight to quality assets, and bricks and mortar have always stood the test of time.
In other words, the share market volatility will make some investors look to real estate as an alternative secure investment vehicle underpinned by 7 million homeowners in Australia.
In fact, it the only investment market not dominated by investors.
So is now a good time to buy property?
With property prices and competition falling away, the short answer is yes — if you’re one of the lucky ones who remains financially secure.
One of the major lessons I have learned from previous downturns is the importance of taking a long-term perspective which always outsmarts short-term reactive thinking.
And for mine, it’s always property fundamentals that really matter and drive our markets in the long term.
Things like demographics, supply and demand, affordability, availability finance, and local economic trends.
Of course, we all know the old saying, being fearful when others are greedy and be greedy when others are fearful….
But it’s normal human nature to find it difficult to buy your new home or invest when everyone else is running around thinking the world is coming to an end.
However, now that I have invested through 8 property cycles, I have found that it is exactly these conditions the present the best opportunity.
That means now is the time to get prepared to take advantage of the opportunities that the market will offer.
After each global disruption, there has been an increase in property prices, and there is no reason to suggest this will be any different because, as I mentioned above, the fundamentals are still strong.
In my opinion for those who have a secure job and their finances organised, this is a great time to buy a home or investment property at a price that you were unlikely to be able to get a couple of weeks ago when the property markets in big capital cities were booming and there were more buyers around than sellers.
It is likely that human nature will cause many would-be buyers to sit on the sidelines for a little while until things become more clear, which means that sellers will be more amenable to accepting offers rather than holding out for a top price.
Remember don’t make long-term decisions like buying a home or an investment property based on the last 30 minutes of news.
There is no doubt there will be opportunities in the market for those who are willing to go against the crowd and when they look back in a year’s time and definitely in 5 or 10 years’ time, they will remember the unprecedented events of 2020 as a great buying opportunity for property.
But is it really the right time to buy a property?
You know those people who are always waiting for the optimal time to buy a property?
They either wait and wait until everyone else starts buying or they wait and wait and ultimately do nothing at all.
The thing is each of those strategies is as silly as each other.
You might think that is a little odd because surely buying something is better than buying nothing at all, but you’d be wrong.
Why is that?
Well…buying when everyone else is, when all your friends tell you it’s the right time or when the media tells you its time, often means you’re driven by FOMO (fear of missing out) which sometimes means the property you buy is over-priced or possibly inferior.
On the other hand, buying nothing at all doesn’t improve your financial situation either, and the people suffering from analysis paralysis generally struggle to ever take the next step to, you know, actually buy something.
So, while these two examples might seem a little extreme, they do in fact reflect a huge cohort of Australians keen to stake their claim in the real estate market.
In contrast savvy property investors understand that the best time to buy is when they can afford to do so, regardless of the market conditions.
Now that may seem counterintuitive to my point about people buying at the peak of the market who generally overpay.
However, smart investors recognise that there are a number of capital city markets around the country experiencing different market conditions at the same time, so they opt to buy in the right property markets – not necessarily in their backyards.
Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on
If you’re wondering what will happen to property in 2020–2021 you are not alone.
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