What will COVID-19 do to 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.

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 cashflow and cash buffers effectively.

Investors with properties on the short-term accommodation market such as Airbnb, will see much higher vacancies and if they cannot convert these to longer lease terms, we will start to see significant price reductions. This will certainly be the case in NSW where Airbnb has now been banned.

Australia continues to have a housing shortage issue and with the 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 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.

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.

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 of ‘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 the 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 you seeing most affected?
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.

Have you seen a lot of push back from tenants not paying their rent due to rising unemployment?
We currently manage in excess of 1,000 residential and commercial properties across Australia. The introduction of the Job Keeper 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.

In addition, 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 $400m land tax relief package which includes a 25% land tax waiver of deferred payments of 3 months for next year.

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

Should I 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 (PPOR) to do so in these markets, especially in Melbourne and Sydney, although 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 (AI) is a measure of the average mortgage repayments versus the average income. The AI is calculated using the median price, average wage (before tax), assumes a 20% deposit, the current variable interest rate and Principle & Interest repayments over a 30-year loan term. The futures market forecast for a 25bp fall has been factored into the forecasted 2020 AI and assumes no price movement and 3% wage growth.

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.

Are you seeing any opportunities from a residential or commercial investment perspective?
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 $2m+ 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 climatize 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 Victoria) in the medium term.

For further information, please contact:

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

Whilst#nbsp;things in the property market are always#nbsp;changing & we are still learning every day I have come to appreciate that there are 7 things that#nbsp;don’t change when it comes to building a#nbsp;successful portfolio.

Goal

Most people we see have a goal to buy property, where that should never be the goal – the goal should be to make money; followed by two more questions. How much money?#nbsp;And by which date? I see#nbsp;people all the time who have 5 or more properties – with zero equity and in some cases negative equity. Only then do most truly understand that what they really wanted to do was make money.#nbsp;Trying to impress this upon new investors is always a#nbsp;challenge. You#nbsp;can’t develop a#nbsp;strategy without a goal, the goal determines the strategy.

Strategy

When most people think of investing in property, they think residential. They#nbsp;buy in their local#nbsp;market where they can see it, which seems#nbsp;rational. But as an investment, if you#nbsp;applied that same rationale to stocks you would only buy shares in companies that were based in a 5 km ring of your home. Not so rational if the goal is to make X amount of dollars within X time frame. The strategy’s purpose is to find the pathway to your goal which carries the#nbsp;least amount of risk, encompassing#nbsp;your income, your timeframe, market#nbsp;conditions & effective property investment strategies at that time.#nbsp;Through this planning process you may work out you need to adjust your timeframe or end goal, because to get there you may have to take on too much risk.#nbsp;It’s normal to go back and forth and for goals to change#nbsp;slightly over time as life changes outside of property. The cornerstone of the strategy#nbsp;however is#nbsp;risk management, to always protect the downside first – this#nbsp;permeates from the macro strategy right down to the due#nbsp;diligence on physical assets.

Cash buffers

This is the central piece of the risk management strategy and#nbsp;provides#nbsp;the#nbsp;essential#nbsp;‘sleep at night’ factor. With debt comes risk, and we need to manage this debt with the greatest respect.#nbsp;A cash buffer provides you time to work through any issues such as a drop in household income, loss of employment, sickness, rising interest rates, long vacancy or a combination of these things happening at once.#nbsp;#nbsp;COVID-19 is an excellent#nbsp;example#nbsp;of where#nbsp;multiple#nbsp;things can go#nbsp;wrong at once.#nbsp;On average we have had a major financial shock every 10 years, so we need to be#nbsp;prepared#nbsp;for this,#nbsp;it should never come as a#nbsp;surprise.#nbsp;A cash buffer enables you to have the least amount of stress during these times and most importantly enables you to#nbsp;avoid#nbsp;being in a#nbsp;forced#nbsp;sale situation, which is the worst place you can be as an investor.#nbsp;As a general rule we#nbsp;recommend#nbsp;a#nbsp;minimum cash buffer of 4-6 months, but in harder economic times or the#nbsp;closer#nbsp;you are to retirement we will recommend you to increase your cash buffer.

Personal Income

Investing in property will#nbsp;eventually provide#nbsp;passive income, but between then and now you need to provide a portion of your income and savings to the property portfolio. Like all things in life, you reap what you sow. And 20 years of sowing is in most cases#nbsp;what it takes to replace your income. Ensuring that your household is#nbsp;consistently bringing in income and that income is rising over the years, is one of the keys to growing a successful portfolio. Banks are#nbsp;currently#nbsp;lending at roughly 6 – 7 times household income, so if you’re on an annual salary of $80,000, your total#nbsp;borrowing#nbsp;capacity will cap out around $500,000. This would be enough to buy 1 property in a#nbsp;regional town. If your#nbsp;household brings in $400,000, not only will you be able to borrow over $2.5m, you should also have the ability to save aggressively & pay down debt aggressively. So focusing on your#nbsp;household income growth is essential.

Value

I get so#nbsp;frustrated when you read property books and experts talk about buying below market value.#nbsp;In my experience, to have#nbsp;this as the strategy is fool’s gold.#nbsp;Primarily because buying under market value is one of the hardest things to do if you have a#nbsp;quality asset in a market that is starting to rise, which is exactly what and when you should be buying. When we talk about value we look first at where this suburb is likely to be in the short to#nbsp;medium#nbsp;term. This is done by#nbsp;reviewing the key fundamentals: Demand Vs Supply, Affordability & Confidence to#nbsp;see if the current prices show “ value” given the dynamics of the key fundamentals. Secondly, our focus is not buying under market value, but trying to buy under replacement cost. When you buy under#nbsp;replacement#nbsp;cost, your downside risk is limited and the market is generally in an undersupply as developers#nbsp;don’t develop when they can’t make a profit.

Quality

There are 3 elements to quality, the suburb, the location within that suburb, and the property’s physical#nbsp;attributes.#nbsp;Without#nbsp;oversimplifying this point,#nbsp;#nbsp;the primary reason why quality is essential is#nbsp;because quality property can be rented or sold in below average or poor market conditions.#nbsp;Thus#nbsp;providing liquidity and cash flow in all#nbsp;market#nbsp;conditions. The secondary reason is in hot markets you frequently see#nbsp;premiums being paid on quality property well above true#nbsp;market value.

Patience

This process will take time.#nbsp;Any market can go up, down or sideways in the short term. However over the long term all markets must move to the fundamentals. So bet long term and bet with the fundamentals. When you find a market that shows value sometimes that market can increase 75% 5 years after you enter, and other times it will take 10 years.#nbsp;Moving forward it is#nbsp;likely that growth#nbsp;will be slower#nbsp;and these cycles might be longer than what we have previously experienced. If you’re not prepared for this you have to question#nbsp;whether#nbsp;investing in property is right for you. The number one issue we have#nbsp;experienced with our clients not achieving success is them not being in their property assets long enough. Unfortunately the market does not care about#nbsp;your#nbsp;timeframes, no#nbsp;individual can control it, we can’t speed it up. So you need to have faith in the strategy and give it time.

Be clear about what you want from investing in property, have a strategy, find value, buy quality, constantly work on your income and with time you will succeed.

Yours#nbsp;Sincerely,

David McMillan

Director Performance Property#nbsp;