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In December 2019, I was quietly hopeful of what 2020 and the new decade may bring. From a real estate perspective, I had my fingers crossed for a change in fortune for the wider Perth property market, which has been in a depressed state since late 2014. I was given reasons to be optimistic for the New Year. For starters, I read an online publication, which forecasted that, over the 2019-2022 period, Perth was expected to record a median house price growth of 6%.
This was welcomed news, given Perth market’s median house price has been in the longest recessionary state in the past 45 years, having declined by 9.5% from the period between September 2015 through to December 2019. Given median prices retraced to below 2010-levels (i.e. before the Perth housing market went through a multi-year boom), I didn’t think it was ridiculous to believe a reversal could take place in the near future…
Evaluating the Broader Socio-Economic Impact
The COVID-19 pandemic has had varying impacts to what we deem to be normalcy. From a public health perspective, parts of Australia were quick to adopt lockdown restrictions following the WHO’s declaration of a global pandemic back in March. Western Australia incorporated a hard domestic and international border closure by April 5 (first time in history), implementing strict social distancing limitations up to 10 people, and requiring everyone entering the state to conduct a mandatory quarantine period. A large contingent of the domestic and global population viewed these actions as excessive, however with the benefit of hindsight, these measures were necessary in slowing the infection rate.
While we were able to steer clear of the dreaded ‘top 20’ lists in terms of infected cases and mortality statistics, the Australian population was not immune to the economic consequences of the pandemic. Since March, Australia has lost over 835,000 jobs, representing an unemployment rate that was previously seen back in October 2001. This certainly pales in comparison to the US, which saw over 34 million people unemployed at the peak of the crisis. However, Australia’s 2020 unemployment rate still sees it ranked 20th out of all countries, and 6th out of the countries in terms of GDP.
COVID has also been discriminatory in its economic effects, with personnel working within the hospitality, food and beverage, and tourism spaces being hit the hardest. These are also large employment sectors within the economy, and are much tougher to adapt to social distancing requirements compared to other industries.
How has the Real Estate Market Fared During COVID-19?
In short, the COVID-19 pandemic wreaked havoc on our economic and social livelihoods. No big surprise there given the sweeping, unprecedented actions taken to combat the virus. But what about the impact on real estate? During a time where gross domestic profit has rapidly contracted and public markets have declined to historic levels, I would have expected a similar catastrophic outcome for real estate.
What has instead happened is puzzling yet pleasantly surprising. Australia’s real estate median house prices have declined, but by less than expected. During Q2 2020, Australia’s median house prices recorded low single digit declines for major markets, which is significant when you contrast it against a 7.5% unemployment rate and a record 7% drop in GDP. While the unemployment rate may be a more telling statistic for the rental market, the GDP contraction is certainly notable when mentioned in the context of the owner-occupier market. Also, the overall market crash that many doomsayers warn us, typically happens after a decline of 15 to 20%, but we haven’t been close to that since the start of the pandemic. There may be a few explanations for this outcome:
The Real Estate Market Started 2020 in a Strong Position
Real Estate Tends to Lag other Parts of the Economy
What is important to note is that real estate is typically a trailing indicator compared to other parts of the economy. Therefore, while the rest of the economy has priced in the pandemic risk, the real estate market may still be lagging and therefore can potentially expect some further downside. However, I don’t necessarily buy-in to this argument, given lending rates are at historic lows, and the wider property market has priced in risk for at least the past two years. Therefore, while there certainly can be further declines, I don’t expect them to be as severe as compared to other parts of the economy.
COVID's impact is Unevenly Distributed
A pretty fascinating indicator has been the correlation between the median housing prices and each state’s management over the virus. For instance, the latest CoreLogic Home Value Index showed Sydney and Melbourne recording a monthly decline of 0.5% and 1.2% in home median price values. This can be contrasted with the rest of the country, which recorded either a nil outcome, or in some cases, positive month-on-month growth. Coincidentally, New South Wales (where Sydney is located) and Victoria (where Melbourne is located) represent the two states with the highest infection and mortality rates across the country, and also are homes to approximately 40% of Australian residents. What will be interesting to see is whether this trend continues in the coming months, as it will certainly lend favour to the view that the virus is forcing some to re-evaluate their decisions to live in the more densely populated, urbanised areas.
What About the Rental Market?
While real estate appreciation has fared OK in light of circumstances, it is a somewhat different story in the rental market. Despite the government’s JobKeeper program’s valiant effort to support recently unemployed or furloughed residents, in some cases the payments do not adequately cover rent and other standard living expenses. However, the situation is much better than in other countries (see what’s happening in US states such as New York and California as an example). Secondly, while eviction moratoriums were a necessary and timely stopgap measure, it is of course temporary. Once lifted, the fear I have among others is that it will show a much bleaker view of the rental market, starting with a flood of potential evictions.
I’m not suggesting this fear will crystallise – it is likely that the eviction measures will be extended in line with extensions to local safety protocols. However, my concern is on the structural unemployment created by this pandemic, where that portion of the population has lacked chances to identify, interview for, or up-skill themselves to be attractive prospects for employers. Depending on the population size that falls into this grouping will determine the size of the mid-term impacts to the rental market.
From a landlord/investor perspective, the environment has been encouraging for refinancing purposes, however not much else is promising. To be clear, most landlords/investors hold debt on their investment properties, which they service through rental payments. I’ve come across enough people who believe most landlords carry full equity on these properties, so I just wanted to clarify what I believe is a commonly held misconception. In a normal market environment, this approach is still risky if appropriate safeguards are not in place and if you don’t actively manage your properties. During COVID times however, that risk is compounded by the fact that your rental stream is compromised, while you still hold an obligation to the bank for your principal and interest.
Has the Real Estate Market Received Sufficient Support?
Now I understand the major banks have enforced mortgage holidays for at least a period of three to six months, but you have to truly understand the implications of these holiday periods. Most importantly, these holidays operate as deferment periods and not forgiveness measures, meaning that you will not only be required to repay your committed mortgage amount, but you will also be on the hook for the unpaid interest accrued during the holiday period, which is capitalised to the loan amount.
I personally didn’t opt for this holiday when offered by my bank, because I would rather get hurt now than in the future. However, I sympathise with the group of landlords and investors that would have no other option to accept this holiday period and be subject to a higher repayment amount post-period.
Overall, real estate has fared considerably better than other parts of the economy, but there are still a number of troubling unknowns. On the liquidity side of things, the question is on how long the government can support unemployed individuals either through cash injections or the deferment of key obligations.
Further, what accommodations will be made for landlords/investors if the mortgage holiday periods expire while eviction moratoriums are extended. Finally, if we continue to have spikes in COVID infection and mortality rates, will we see an increased rate of population migration and a potential rebalancing of house prices across the country. These are just some of the questions that I’m asking, and I will be sure to write about the answers once the picture becomes clearer.
On a closing note, I wanted to express my sympathy to all of those that have been economically impacted by the COVID crisis. I wrote this post to make sense of the macro trends in the market, but what it is lacking is the personal impact. I am hopeful that we quickly get back on track after a vaccine is found and correctly administered. In the meantime, I only wish for people to stay safe, healthy, and to hang in there for as long as they can.
Please feel free to leave a comment below on your thoughts of the real estate market and its potential outlook.
The content outlined above was written, edited and published by the Lost Realtor. The author has over 20 years or real estate sales and investing experience in the Australian property market. He has held senior positions in Australian building companies, including being the General Manager of the residential sales division of Collier Homes. His qualifications include a Bachelor of Commerce degree and a Graduate Diploma in Building and Construction Law.
This is a very insightful article. I will share it with some of my friends who will find it an interesting read.
Thanks very much, Marion – appreciate the support!