by Bianca Dabu | April 09, 2020
The world came to a halt in March following the imposition of city-wide lockdowns to combat the spread of COVID-19. How will the Melbourne property market be impacted by the ongoing health crisis moving forward?
Melbourne and Sydney housing markets experienced a remarkably strong rebound from June 2019 to February 2020 following the most recent downturn, with Melbourne dwelling values even reaching a record high by February.
However, the onset of the COVID-19 crisis ultimately affected the current economic climate.
PRDnationwide noted that the Reserve Bank of Australia, once positive in their projection and held the cash rate stable in February 2020, cut the cash rate in March 2020.
Further, the tourism and education industries were affected by tourists cancelling holidays due to travel restrictions and educational institutions experiencing a reduction in enrolments and having to adjust to a new system of learning following the implementation of city-wide lockdowns, which prevents students from coming to class.
Unique listings have also declined, and so do vacancy rates, according to PRDnationwide.
Still, they remain adamant that investors interested in capital cities shouldn’t be too concerned about the coronavirus outbreak, noting that present data does not show any severe effect on long-term market viability.
“There is a healthier vacancy rate in both Sydney and Melbourne. Despite the decline in unique listings in the short-term rental market, which may suggest the property has been added to the long-term market instead, there does not appear to be any severe effects on the long-term market,” it said.
CoreLogic’s head of research Eliza Owen agreed that the current economic downturn is likely to be temporary. Moving forward, the economy may return to a state where property transaction and prices reflect the fundamentals of the Australian economy rather than the current structural changes.
Similarly, Propertyology’s head of research Simon Pressley believes that the property market will eventually return back to usual.
“It largely looks like how Australia was positioned before this started. To picture that, think back to the middle of last year with the end of 2019, early 2020, with large parts of Australia running at double-digit price growth,” Mr Pressley said.
“There are fundamentals – credit is cheap, it is available, housing supply is tight, building approvals are low. When we come out the other side, those things will still be there with a $213 billion-dollar stimulus.”
Since June 2019, residential property prices have been rising steadily, particularly across Australia’s capital cities, with Sydney and Melbourne experiencing the sharpest gains.
Following a strong start to the year, the property market is now feeling the impacts of weak economic growth, government policy and falling consumer confidence, according to the latest CoreLogic House Hedonic Home Value Index.
Still, despite the period of disruption, CoreLogic’s head of research Tim Lawless said that the property market still rests on strong foundations.
In March, housing values rose across every capital city apart from Hobart (which declined -0.2 per cent). Over the quarter, every capital city recorded a rise in housing values.
Sydney had the highest growth over the quarter with values up 3.9 per cent, followed by Melbourne at 2.9 per cent and Canberra at 1.7 per cent.
The lowest quarterly gain was in Darwin and Adelaide, each increasing 0.6 per cent; a similar story occurred across the regional areas of each state with values higher over the month and quarter.
According to Mr Lawless: “The housing market won’t be immune to a drop in sentiment and weaker economy, but the extent of the impact on dwelling values remains highly uncertain.”
“Capital growth trends will be contingent on how long it takes to contain the virus and whether additional constraints on business or personal activity are introduced… Arguably, the longer it takes to contain the virus and bring economic operations back to normal, the higher the downside risk to housing values.”
CoreLogic also said that low interest rates and mortgage repayment relief measures could “insulate” residential property prices from a looming “plunge” in housing market activity.
“Considering the temporary nature of this crisis, along with unprecedented levels of government stimulus, leniency from lenders for distressed borrowers and record-low interest rates, housing values are likely to be more insulated than sales activity,” Mr Lawless highlighted.
Supply and demand
In terms of supply and demand, the Australian property market, in general, has successfully avoided the impact of coronavirus, displaying high volumes of sales and strong clearance rates, according to latest data from CoreLogic.
Preliminary auction clearance rates were 70.6 per cent for the week concluding Sunday, 15 March, as 2,220 homes were taken to auction for the combined capital cities.
In Melbourne, a preliminary auction clearance rate of 70.1 per cent was recorded across 1,173 auctions this week, while last week there were 418 auctions returning a final clearance rate of 66.1 per cent.
There were 749 auctions held in Sydney this week, returning a preliminary clearance rate of 74.6 per cent. In comparison, there were 830 auctions held over the previous week and the final auction clearance rate was 75.2 per cent.
Brisbane held 102 auctions, with a preliminary clearance rate of 51.7 per cent, while Adelaide had 99 auctions with 68.4 being sold. In the country’s west, Perth had 28 auctions with 57.1 per cent being sold, while the nation’s capital had a preliminary clearance rate of 69.4 per cent.
Finally, Hobart continued to see lower volumes again leading to a high clearance rate of 83.3 per cent.
AMP Capital chief economist Shane Oliver said that Australia’s economy might be headed towards recession, with a negative GDP growth forecast for at least the March and June quarters amid uncertainty brought by the global economic fallout.
However, Mr Oliver said a supply and demand imbalance in the housing market would help offset a coronavirus-induced decline in property prices.
As the supply of dwellings fail to keep pace with the population surge for the most part of the last decade, the property market remains chronically undersupplied, thus driving up prices, particularly across capital cities.
After producing the largest population increase in 2016, Victoria’s population growth eased gradually to 135,000 in 2019, Mr Pressley noted. Overseas migration represents 63 per cent of this, with internal migration still remaining strong, albeit falling as Sydneysiders move south for cheaper house prices.
Strong migration numbers are helping Melbourne grow by 10.7 per cent, according to CoreLogic.
Further, Mr Oliver said that household balance sheets have proven to be fairly resilient to economic shocks of the past, claiming that concern over mortgage stress has been “overstated”.
“Despite some seeing negative equity into mid-last year and a significant proportion of borrowers switching from interest only to principal and interest loans over the last few years, there has been no surge in forced sales and non-performing loans” according to him.
“While Australia saw a deterioration in lending standards with the last boom, it was nothing like [what] other countries saw prior to the GFC. Much of the increase in debt has gone to older, wealthier Australians, who are better able to service their loans.”
Ultimately, over the longer term, the economic conditions are expected to rebound from the pandemic-related slowdown in the second half of 2020, Mr Lawless highlighted.
Low interest rate setting, improving economic conditions, a rise in sentiment and a release of “pent-up demand” from buyers and sellers should “provide a more meaningful level of stimulus to the housing sector”.
Amid the ongoing health crisis, the Real Estate Institute of Queensland (REIQ) strongly challenges the inference that landlords can burden the costs in the same way billion-dollar institutions and governments can.
According to the REIQ, the Prime Minister is asking over 2 million Australians to cover an average of $9,516 each in unpaid rent over the next six months.
With the average property investor earning less than $80,000 pa, this represents over 30 per cent of their annual take-home pay during those six months. In fact, with the average employed renter earning $77,761 pa, they are in the same income bracket as the average property investor and are both equally at risk of losing their job as a result of the COVID-19 crisis.
It’s not enough to just defer a landlord’s mortgage obligations as the banks have done with small business loans, according to REIQ CEO Antonia Mercorella.
“The rise in property prices we’ve seen in the last few years [has] not been matched by wage increases, so by removing mum-and-dad investors’ rental income for any period must correspond with the subsequent waiver of their mortgage obligations for that same period for any protective measures to be sustainable,” she said.
“We welcome measures that support the safety and stability of housing for all Australians and urge the government to consider the downstream effects of any direct action they take with regard to tenancies. Any relief in hardship conditions should also include protections for landlords.”
Real Estate Institute of Australia president Adrian Kelly called for postponement of mortgage repayments as the big four banks, Macquarie, Bendigo, Adelaide, Heritage Bank and Suncorp, along with other lenders, offer mortgage relief for impacted customers.
The major banks have since outlined different ways to support those affected by the coronavirus pandemic and its economic impacts, including mortgage repayment relief and interest rate reductions.
Last 19 March, the Reserve Bank of Australia, the federal government and the Australian Prudential Regulation Authority announced a raft of new measures to support the domestic economy in the wake of the coronavirus outbreak.
In response to these measures, the Australian Banking Association (ABA) announced that its members would suspend principal and interest loan repayments for distressed small business customers for six months.
All four major banks have announced they will also extend the ABA’s initiative to distressed home loan customers, enabling them to defer repayments for up to six months.
The big four banks also announced other measures for personal and business customers, including interest rate reductions.
According to Piper Alderman’s partner Margot King, it still feels a little premature to think about how COVID-19 will affect the property market since the worst is yet to come.
However, the health crisis has clearly had a significant effect on the way Australians live and work, at least temporarily.
For one, experts predict an acceleration in the “remote work” trend as businesses implement continuity plans and direct employees to work from home, which could permanently shift working patterns.
Despite structural changes brought by technology in the past 20 or 30 years, bringing companies to reduce space by adopting open plan and agile working, the overall growth in demand has still seen low vacancy rates and high rent in the Sydney and Melbourne markets, proving the resilience of the capital city markets.
However, if the predictions around changes to working life caused by COVID-19 eventuate, Ms King believes that there could also be an accelerated structural disruption in the office property market.
“The interesting questions for the office sector and for urban planners will be whether this change in working life will be widespread and permanent enough to shift some demand from office to residential. Whether widespread remote working will change the face of our cities by shifting some density away from the central business district,” she said.
“Whether we can reap the benefits of decentralisation while at the same time protecting the urban environment and the benefits that dense living and working offer.
“These impacts are yet to play out, and there are currently more immediate concerns. But in considering the overall economic picture, policymakers should consider the potential impacts that such a fundamental and sudden shift in working life might have.”
Meanwhile, Pure Property Investment’s Paul Glossop said that the COVID-19 virus may have a similar impact on the Australian economy as the GFC in 2008.
Property investors may have to face a dramatic rising in house prices as seen in the 10 years following the global financial crisis. “Today’s ultra-low interest rates are likely to be a bigger driver of the property market than share-price movements,” he highlighted.
Despite this possibility, NAB group chief economist Alan Oster remains very optimistic about the housing market.
He said NAB’s forecast remains unchanged, with house prices expected to rise 0.5 per cent every month, reaching around 7.5 per cent growth in Sydney and Melbourne.
“If the virus is still around by the end of the year, then you will have an economic impact … but that’s not our forecast,” he said.
At the moment, the economy is undeniably facing short-term challenges, but property markets are underpinned by the fact that 70 per cent of property owners are home owners who are there for the long term and a total LVR of 22 per cent across all houses, both investments and owner-occupied.
Is it a good time to invest in property? Mr Glossop, who’s personally in the process of acquiring two new assets for his portfolio, says yes.
“From my perspective, having personally been involved in multiple cycles and working with a team of investors with over 85 years of combined property experience, while this issue will have an effect on our economy, it will only have a short-term impact on our property markets,” Mr Glossop highlighted.
“Consumers will become less confident and sit on the sidelines waiting for things to become clear, but it’s our belief that 10-14 months from now, in particular five years from now, and most certainly in 10-15 years from now, this pandemic will have had no influence on where Australian property market will end up and the value of your and my home.”
According to him, it’s highly likely that the market will see a strong recovery in the second half of the year, making now the best time to buy.
Track the major market movements in Melbourne and get to know more about the capital city’s growth drivers and hotspots through Smart Property Investment’s April 2018, May 2018, June 2018, July 2018, August 2018, September 2018, October 2018, November 2018, December 2018, January 2019, February 2019, March 2019, April 2019, May 2019, June 2019, July 2019, August 2019, September 2019, October 2019, November 2019, December 2019, January 2020 and February 2020 market updates.
Visit Smart Property Investment’s Property Market News page to get updates on other major capital cities.
By CMSadmin | Thursday, 9th April 2020
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