What Will COVID-19 Do to House Prices and Property Financing?

How could COVID-19 affect house prices?

Our view is that the current downturn will be a lot shorter than some previous recessions, as it is productivity driven, rather than financially driven, which was the case for the 2007 GFC.

The unemployment rate will have an impact on certain areas of the property market. However, not all will be affected, and there will be opportunities within these markets with new property financing options.

The national residential market is very much segmented, and it is important to note that some markets will do better than others.

Our internal strategy is to make sure clients are managing their cash flow and cash buffers effectively.

Which property markets could be most exposed?

Investors with properties on the short-term accommodation market, such as Airbnb, will see much higher vacancies. If they cannot convert these to longer lease terms, we will start to see significant price reductions.

Australia continues to have a housing shortage issue, and with construction and development slowing, this will create an undersupplied market along the East Coast of Australia over the next 24 months.

Our national vacancy rate for residential property is currently sitting at just above 2%.

Developers who were already finding it challenging to get funding pre-COVID-19 may see some of the restrictions ease, particularly where property development finance Australia options become more flexible in response to changing market conditions.

How are governments and banks responding?

We are seeing many positives, with State and Federal Governments taking a more unified approach, and banks willing to work with property investors, business owners and clients who have been affected by COVID-19.

Clients and small-to-medium business owners are freezing their loan repayments for deferral periods of 3–6 months, or are seeking more attractive business loan terms.

Credit has never been cheaper, so it is a good time to have a conversation with your broker or bank to see what is available to you. Mortgage interest is 20%–40% cheaper for a homeowner than it was 18 months ago.

It will be interesting to see what happens when freezing or deferral periods come to an end. Banks have been a lot more prudent with their lending standards as a result of the recent Royal Commission.

What is happening in major Australian property markets?

In Melbourne, we haven’t seen serious price reductions or evidence of panic selling in Bayside or the Eastern suburbs sub-$2m. We see value in opportunities over $3m in Brighton and the Eastern Suburbs. Inner North stock at sub-$1.5m is selling, but at the lower end of the range.

Stock numbers have reduced nationally, and we are seeing an increase in days on market for inferior or compromised stock. Off-market transactions are becoming more popular, and we have been active in this space.

We are seeing evidence of heavier discounting in Sydney. In Brisbane, owner-occupier activity has slowed for stock above $1m; however, we are seeing increased activity in quality, established investment housing priced at sub-$1m.

Canberra is heavily backed by the government industry, and we therefore expect it to remain stable.

Adelaide has been very consistent given the recent infrastructure announcements.

Hobart may see some price reductions due to a decrease in tourism, and Perth appears to be performing well due to mining.

What industries are most affected by COVID-19?

Each particular capital city is different. However, hospitality, tourism, retail, entertainment and export education, especially here in Melbourne, are the main industries affected by COVID-19.

There may be further restrictions placed on individuals and business owners trying to access loans if they work in hospitality, tourism or retail.

Healthcare, education and government-based roles are stable and increasing. Mining in WA is currently improving.

Are tenants pushing back on rent payments?

We currently manage in excess of 1,000 residential and commercial properties across Australia.

The introduction of the JobKeeper allowance will enable many residential tenants to get through this difficult period. Our property managers are looking at facilitating a fair outcome between the tenant and landlord.

Last week, we had 80 requests for rent relief from tenants across the portfolio. However, this is down to less than 20 following the release of government payments.

We expect retail to struggle, and therefore higher vacancies will occur over the coming months. Investors with commercial properties will need to adjust their rents and be willing to negotiate lease terms.

What rent relief packages are available for landlords and tenants?

State Governments are contributing with NSW announcing a $440 million rent relief package through land tax waivers for landlords, to be split between commercial and residential sectors.

The QLD Government has announced a $400 million land tax relief package, which includes a 25% land tax waiver and deferred payments of 3 months for next year.

The Victorian Government has announced a $500 million rent relief package to landlords and tenants, including $420 million for land tax reductions for landlords and $80 million for tenants in rental stress.

Should investors be buying, holding or selling?

This depends on your circumstances. Every client is different, and it is therefore important to set a strategy suited to your individual requirements.

Our view is not to sell in this market. We are advising clients who have the capacity to upgrade their home, or Principal Place of Residence, to do so in these markets, especially in Melbourne and Sydney. However, these clients do need to be commercially minded about the two transactions.

Eased affordability across the country will provide better opportunities to buy on a national level:

• Adelaide = 33% – lowest since 2003
• Brisbane = 29% – lowest since 2003
• Melbourne = 38% – lowest since 2004
• Sydney = 44% – lowest since 2002, except 2009 at 41%
• Perth = 23% – lowest since 2001
• Ballarat = 20% – lowest since 2002
• Bendigo = 19% – lowest since 2001

PPA’s Gross Affordability Index is a measure of the average mortgage repayments versus the average income.

The Affordability Index is calculated using the median price and average wage before tax, and assumes a 20% deposit, the current variable interest rate and principal and interest repayments over a 30-year loan term.

The futures market forecast for a 25bp fall has been factored into the forecasted 2020 Affordability Index and assumes no price movement and 3% wage growth.

Why does property financing matter during uncertain markets?

Property financing becomes especially important in uncertain markets because borrowing capacity, repayment buffers and access to credit can all influence whether an investor is able to buy, hold or upgrade.

Our internal investment model is partly to buy only good quality, established houses that are supported by strong data and good long-term fundamentals. By following this model, our clients have the ability to ride through these periods.

Ballarat and Bendigo are showing great value currently.

For investors reviewing property finance options, the key is not only whether debt is available, but whether the loan structure remains manageable if income, rent, vacancy or interest rates change.

Are there residential or commercial investment opportunities?

We are seeing that Perth, which has been down for nearly 11 years, is starting to show value in both the residential higher-value suburbs and commercial office buildings around the city fringe.

The Affordability Index has never been more attractive, and we expect an increased demand for iron ore in WA, which is needed to stimulate the Chinese economy. This will see an increase in property values in Perth in the medium term.

Good upgrading opportunities will start to show in Melbourne and Sydney as affordability constraints start to ease for $2m+ properties in certain pockets. We expect yields to increase in Melbourne and Sydney over the next 12 months.

Regional towns remain excellent value as people start to acclimatise to new working conditions as a result of COVID-19. This may drive owner-occupiers to make lifestyle purchases in areas such as Bendigo, Ballarat and Geelong in the medium term.

For commercial investors, commercial property finance should be assessed carefully against lease quality, tenant risk, vacancy assumptions and the investor’s wider cash flow position.

What should investors do before making a decision?

For further information, please contact:

Phillip Almeida
Director
Performance Property Advisory
phillip@performanceproperty.com.au