Earlier this year, the Commonwealth Banks economist predicted falls in property values of up to 30% if the COVID pandemic were to take hold. This hasn’t happened in Australia, or even in the US, where the COVID situation is diabolical.
Official unemployment was also predicted to be above 10% (currently it’s 7%) but this could rise once Jobkeeper disappears.
It was a brave person to buy a property in June (my daughter did and she had some sleepless nights). However, Melbourne house prices have barely moved with property values less than 5% off their highs and rising, and auction clearance rates around 75%.
What is supporting property prices and will it last?
Interest rates are at biblical lows. In the last recession in the 1990’s, interest rates were pushing 19%! However, homeowners can now borrow for around 2% and investors under 3%. This is encouraging people to borrow and buy property, thus supporting the market.
Agents complain of shortage of residential property. Until recently, vendors have been holding off putting their property on the market resulting in far fewer properties for sale than the corresponding period last year. . Thus, buyers are chasing fewer properties. We are seeing a FOMO affect at auctions – especially for the more affordable properties - where there are often 6 - 10 potential bidders at an auction.
Governments support property. First homeowners get stamp duty relief – 50% on new home purchasers and 25% on existing homes up to $1,000,000. This is good news for sellers as well as buyers, as the stamp duty savings will slowly be factored into higher property prices. The $25,000 grant for home extensions has proved popular – try getting a builder within the next six months or even just someone to draft plans for an extension!
Jobkeeper saves the day. The Reserve Bank predicted that Jobkeeper has saved 700,000 Australian jobs. Although this Scheme is being scaled back, there doesn’t seem to be a significant increase in the unemployment numbers, which suggests that it is serving its intended purpose. It will of course be interesting to see what happens once Jobkeeper disappears altogether after next March. Don’t be surprised to see a significant increase in business failures by the middle of next year.
Banks support borrowers. Unlike in prior recessions, banks have provided loan repayment moratoriums to customers suffering financial hardship. Although interest on loans still accrue, the number of borrowers taking advantage of this have fallen from a high of 436,000 loans in June to 145,000 in November. This has meant that there are no distressed sellers on the market so far. Again, this may change once the moratorium is over.
The RBA pushes rates down down down! At the expense of savers, the Reserve Bank has now lowered the official cash rate down to 0.1%, and they predict low rates for the foreseeable future. Although this was probably an attempt to keep our currency low, it runs the risk of fueling a property boom as real estate is one of the few places left to invest where a return is assured.
Who is buying property? It seems like just about everyone – first homeowners, investors, up-sizers & down-sizers, tree changers even developers. For those people with secure jobs (and there are plenty), buying a property now makes sense, especially with the low cost of borrowing. Often, it’s cheaper to pay interest than to pay rent. Prices in Victorian country towns have performed well with people exiting Melbourne. It doesn’t take many people to move to a country town to have a big impact on prices. Horsham prices were up 25% this year! With regional property considerably cheaper than city property, people are embracing the joys of country life while retaining their city job working from home.
What could possibly go wrong? The big unknown for the Melbourne residential market is the impact of a population decline. Australia wide, its estimated that net migration will decline from 154,000 people in 2019-20 to minus 72,000 by June next year. The sharp drop in migrants, particularly international students, will drive the population decline, especially in Melbourne and Sydney. With new stock coming on to the market we could see lower rents and subdued prices in the medium term. We still have a negative view on CBD apartment prices, especially in the medium term. Anecdotally, we hear that rents for those apartments are being reduced by up to 40% and vacancy rates are now over 10% (up from 2.5% in June last year). These factors must have an impact on apartment values at some stage.
Given the lack of overseas students, no overseas tourists, and continuing supply of new properties on to the market, this is one area where the experts may just be right.
All of us at Tower wish you and your families a happy and safe Xmas break and look forward to a more ‘normal’ 2021.
Robert Allanadale, Director