‘Unprecedented’ has been arguably overused in 2020, but it’s difficult not to use it in a year when our economy has been impacted by a global crisis, the likes of which we’ve never seen before. So, just how has the Australian Property Market responded to this unprecedented challenge?
Property Values Remain Resilient During Pandemic
At the beginning of the COVID-19 pandemic (Pandemic), there was considerable commentary around property values declining anywhere between 10-30%. However, property values have fallen only 1.7% during this same time period and in October there was an increase of 0.40% with November trending towards a similar positive result. Having said that, although housing values remain 5.4% below their 2017 peak in Melbourne, and in Sydney 4.80% below, not all capital cities have fared as well, with values in Perth and Darwin remaining 20% below their 2014 peaks.
How Do You Reconcile Property Values and Economic Downturn?
Low cost debt: the cost of borrowing money has never been so low, and this brings with it optimism and confidence to invest. Previous RBA research suggests a distinct correlation between property value increases and the reduction in official cash rates. What is perhaps more surprising, is the historical correlation between increased property values in an economy with growing unemployment. This phenomenon is more likely a by-product of the government’s fiscal and monetary policy initiatives to stimulate jobs.
Loan payment deferrals: Australian household debt to income is around 185%, which means there is a high degree of elasticity between job losses and a household’s ability to service debt. Loan deferrals have provided a significant buffer between mortgage arrears and loan foreclosures and, arguably contributed to the reduced stock during the Pandemic which in turn kept prices from tumbling too much, and artificially propped up values. Australian Prudential Regulation Authority (APRA) data on loan deferrals show housing loans deferred has come down from 11% to 7% in September. Lenders have confirmed a sharp reduction in October and November.
Segmented job losses: The hardest hit areas for job losses came from the food, accommodation, arts and recreation sectors. Employees in these sectors are more likely to be renters than homeowners and are therefore likely to be unencumbered by mortgage debt. However, a loss of job will impact their ability to pay rent which, in turn, impacts a property owner and property values. In the Melbourne CBD and fringe areas, we have seen increased rental vacancies and decreased rents mostly driven by the absence of foreign students, but also those renters from food, accommodation, arts and recreation employment sectors. We are expecting these jobs to come back relatively quickly as restrictions are lifted, which will mean new tenants and the rental market slowly returning to pre-Pandemic levels.
What Does This All Mean?
Our view is:
- The property market has weathered the Pandemic better than forecasted, with Melbourne and Sydney already showing strong recovery back to pre-Pandemic levels.
- Property values will continue to gradually claw back value given historically low interest rates and employment coming back in those hardest hit sectors.
- Loan deferrals may not result in a massive surplus of stock coming on to the market in 2021.
- We all understand the significant impact migration and international students have on the property market, but despite their absence during 2020 and, most likely for much of 2021, our property market still appears strong and resilient and therefore remains an attractive underlying asset for investment.
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