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As of October 2020, the Australian real estate market continued to battle through the impact of the COVID-19 pandemic. The real estate market, like other parts of the economy, was not impervious to the economic impacts stemming from the pandemic. However, the extent of the impact varied depending on where you live in the country.
Overall Outlook of the Economy
When trying to explain the current state of the Australian economy, you don’t need to look beyond the impact of COVID-19. The once-in-a-lifetime pandemic continues to present a health disaster first, and an economic catastrophe in the mid to long term.
Australia has fared better compared to other countries, in large part due to an expedient and forceful government response (i.e. mandatory lockdowns, shelter-in-place orders, social distancing requirements). While necessary for the slowdown of the spread of the virus, these restrictions have materially disrupted traditional workplace environments.
While the larger businesses have been able to transition their workforce to remote working in a fairly efficient manner, smaller businesses are much less fortunate and capable of restructuring their business models. For some market sectors, such as retail and hospitality, remote operations is a practical impossibility.
As some of the Australian states begin to ease restrictions, the lingering economic impacts continue to be felt. The national unemployment rate increased to 6.9 percent in September 2020, representing a 32 percent year-on-year increase. The sad reality is that some of these job losses may be due to structural unemployment, and the question then turns to identifying areas of the economy that can take on these displaced workers.
Median home prices declined by 0.5 percent in October 2020, but continue to show promising signs of a recovery. Per the Corelogic Housing Market Report (October 2020), the majority of the Australian capital cities (with the exception of Melbourne and Sydney) recorded price growth for the three months ended October 2020. Previous market laggards such as Perth, Brisbane, and Adelaide, have recorded modest monthly growth numbers, with Brisbane and Adelaide currently recording all-time highs in median home values.
One argument for the variability in home values across the capital cities, is the correlation between median home prices and the overall control of the pandemic. For example, Melbourne and Sydney represent Australia’s two largest property markets. They also house the largest portion of the Australian population, have had the highest COVID-19 infection rates of all Australian capital cities, and have arguably been less pro-active on quarantine measures compared to other states.
At the time of writing this post (November 14), Australia’s total daily reported cases were in single-digits. In the absence of a virus resurgence and another wave of lockdowns, the property market should continue to exhibit recovery signs. Further, Melbourne and Sydney should also expect to see an uptick in their home median prices, given the domestic and international marketability of these cities.
Home Financing
We’re currently in a very interesting and uncertain time in Australia’s monetary policy history. The effective cash rate (i.e. the rate after taking into account inflation) is close to zero and is bordering a negative territory. While this is welcome news for borrowers in the short-term, it is an unsettling long-term sign, as it signals a potential erosion in bank funds and their ability to lend to future borrowers.
While it’s arguable that interest rates will remain low for the foreseeable future, I don’t expect the Reserve Bank to allow the effective cash rate to move into negative territory, or at least keep it for a prolonged period. This should be positive news for borrowers looking to obtain a mortgage or refinance in the short-term. However in the event of further rate cuts, pay close attention to whether the banks are passing on the full cut to borrowers.
Mortgage holidays continue to be made available to distressed borrowers who have been materially impacted by the pandemic. As of August 2020, approximately 7 percent of all housing loans had deferred repayments, with a disproportionate amount of these loans being in the state of Victoria (where Melbourne is the capital). The positive news is that the deferment percentage has declined from a peak of 8 percent (in June 2020), signally a positive trend in mortgagee behaviour.
On the demand side, first home buyer financing accounted for nearly 31 percent of all owner-occupier financing for the month of September. This suggests that new market entrants are not dissuaded by the impacts of the pandemic and are willing to take advantage of market opportunities. It also indicates the big bank’s willingness to lend to borrowers during this time.
Rental Market
Rental vacancy rates have followed a similar trend to the owner-occupier market, especially where Melbourne and Sydney are concerned. The two most populated cities have recorded the highest vacancy rates, mainly due to COVID-related reasons (e.g. decline in foreign students and international visitors). This is a sharp contrast to other markets, particularly Perth, which recorded a 0.8 percent rental vacancy rate in October.
The extension of the eviction moratoriums in states like Victoria and South Australia are surely welcome news for those hard hit by the pandemic. However, these moratoriums in themselves aren’t sufficient to solve the ‘postponed crisis’ that will have cascading effects on the wider property market.
To elaborate, in the event that the moratorium ends and renters are unable to make rent, evictions are likely to follow. In markets where rental vacancy rates are rising, there is a risk that landlords may not be able to replace the tenant. If the vacancies persist, landlords may not be able to cover their monthly property costs and may be forced to prematurely sell their properties. As such, any extension of rental deferments should be accompanied with extensions to government-backed financial support programs (i.e. JobKeeper), to avoid harmful knock-on effects to the rest of the market.
Another noteworthy development is the apparent movement of renters from city dwellings to regional and coastal areas. While this may be a temporary move to avoid populated areas, it should raise warning signs for the large number of property investors that are reliant on these tenants.
My Thoughts on the Australian Real Estate Market
The Australian real estate market has fared remarkably well over the past few months, given the circumstances. However, I don’t think we’re out of the woods just yet.
The government measures put in place to protect tenants were necessary short-term measures to get through the worst part of the pandemic. But once these measures end, it is naive to believe that the market will return to normalcy. The simple fact is that there will be evictions, some of which will lead to distressed mortgages, leading to forced sales/foreclosures.
While it is not clear to what extent the impact will be, there remains a threat that the market’s current recovery may be stalled or potentially reversed. Mortgage holidays cannot last forever, particularly if interest rates continue to move into negative territory and banks need cash flow. If more landlords are pushed towards selling their properties, this will likely place downward pressure on home median prices.
As we move further along with the pandemic recovery, it would be promising to see a governmental focus towards population growth, particularly in the smaller markets. Population growth should help offset a potential rise in pandemic-induced vacancies, or a transition away from city living. It should also serve to continue with the positive trend that we’ve been seeing for the past few months.
I would love to hear from you and your thoughts on the current state of the Australian real estate market, along with your predictions for the months ahead. If you’re interested in other posts similar to this one, you can find them here!
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.