New research and analysis by the Property Investment Professionals of Australia (PIPA) has found that house prices increased by as much as 100 per cent in the five years after the most recent recessions
The research, conducted by PIPA Chairman Peter Koulizos, analysed annual median house price and index data for seven consecutive years, including the start of each recession or economic downturn from 1973 to the global financial crisis (GFC).
The data found that five years after each of the recessions or economic downturns over that time period, capital city house prices often increased significantly.
“In fact, looking back over the past nearly 50 years, house prices were higher five years after a recession or downturn each time,” Mr Koulizos said. “Some locations performed better than others, most likely due to local economic factors after each period.
“However, the research shows that talk of impending property doom has never happened in recent history – and these recessions or downturns lasted multiple years rather than a few months.”
Five years after the recession of 1973 to 1975, Sydney median house prices had increased 100.7 per cent, followed by Perth and then Brisbane, according to the PIPA research.
However, a few years later, following the economic downturn of 1982 and 1983, it was Melbourne who was leading the property pack with median house price growth of 67.7 per cent, with many other capital cities not far behind with growth in the 50-64 per cent range.
“When it came to the ‘recession we had to have’, Darwin produced a median house price growth of 47.3 per cent in the following five years, with Perth in second place again,” Mr Koulizos said.
“Following the GFC, as we all know, Sydney was again the front runner within five years as the start of its property boom started to take shape.”
Property Investment Professionals of Australia analysis of annual median house price and index data for seven consecutive years, including the start of each recession or economic downturn from 1973 to the global financial crisis. Credit: PIPA.
Mark Hay Realty Group Principal Mark Hay said while he did see price increases on the horizon – be cautious when looking at past data.
“We live in a different world and markets are moving dramatically,” he said. “For people to go dogmatically off old data, certainly it points to a reason to look at things, but on the same token you cannot generalise with the way everything has changed.
“The fundamentals are very strong, they point very strongly as to why they will increase.
“After any shakedown everybody does prefer the safety of bricks and mortar, which is why you see such a resurgence in the property market.”
Mr Koulizos said that over the three most recent economic downturns, there were periods of annual house price falls in many capital cities, but the price reductions were never sustained nor prolonged.
“An interesting point to that is in 2011, every capital city recorded a fall in its house price index, which was simply when the GFC stimulus money ran out,” he said. “This could well become a statistical reality this time around too, but it’s important to recognise that within either one year or two years of that period, the house price index was showing solid growth once more.
“The moral of the story is don’t panic. Property has shown its resilience through economic shocks before, and we have no reason to expect it won’t do so again.”
The COVID-19 pandemic may have created a lull in the property market that could present a unique opportunity for savvy investors to purchase their first or next investment property. But not all properties make good investments.
According to founder and CEO of Metropole Property Strategists Michael Yardney, less than 4% of properties currently on the market are ‘investment-grade’.
So what makes an investment-grade property and what are the things should you be looking for when searching for one?
What to look for in an investment property
A good property can either make or break your fate as a property investor, so it’s important to get the foundations right, says principal of Good Deeds Buyers Agents and co-host of Foxtel’s Location, Location, Location Veronica Morgan.
“If your foundation is not strong and solid when it comes to building a property portfolio you will never get a number two,” Ms Morgan told Savings.com.au.
“There’s a reason that over 70% of investors only ever get one investment property and don’t ever get to the second.”
Location, location, location
Location does 80% of the work, according to partner at Empower Wealth and co-host of Foxtel’s Location, Location, Location Bryce Holdaway.
“Most of the time, I find people talking about the property first and the location second. I would actually say that you need to really focus in on the investment-grade location because it will do most of the heavy lifting,” he told Savings.com.au.
“First-time property investors may say they have to buy a house at all costs, which means they might be 50, 60, 70 km out. Whereas if they decided that they could buy a townhouse closer into one of the big built-up areas, they might get a better outcome.
“An average house in a great location will do better than a great house in an average location.”
In terms of what makes a location great, most of the experts we asked agree that being close to either the CBD or the beach is key, as is close proximity to lifestyle amenities like cafes, shops, restaurants, parks, good schools and public transport.
Property Investment Professionals of Australia (PIPA) chairman Peter Koulizos said location is a golden rule of real estate and matters because unlike a home, it’s permanent.
“You should pick an A-grade property in an A-grade location, however, if you can only afford one of these factors, ensure you pick the right location. You can change the property but you can’t change the location,” he told Savings.com.au.
Buyers are often advised to look for areas where demand is high and the supply of new stock coming on to the market is limited.
Investors should also look at the vacancy rate of the suburb they are targeting, according to property investment adviser Niro Thambipillay from investmentrise.com.au.
“An investor needs to ensure they can get their property rented first and foremost,” he told Savings.com.au.
“Too many investors buy in an area without considering whether it can be easily rented or not and this can cost them from a cash flow and lifestyle perspective.”
Generally, the lower the vacancy rate is, the better for investors as it can be an early indicator of the potential for future capital growth.
On the other hand, a high vacancy rate can be an indication of oversupply (like a bunch of new high rise apartments being built in the area), which means investors will struggle to get their property rented out because they will all be competing for the same pool of tenants.
It’s widely known that the industry standard of a market imbalance is a vacancy rate of around 3%, so investors should aim for suburbs with a vacancy rate below that.
Potential for capital growth
Besides buying in a good location, investors are also often advised to target properties that have potential for capital growth, which can go hand in hand with buying in a good location.
Mr Yardney said investors should look for areas with a long history of strong capital growth and that will continue to outperform the averages because of the area’s demographics, including gentrifying areas.
Capital growth refers to how the property appreciates in value over time, and it’s also a key way investors build wealth, so it’s crucial in an investment property.
Ms Morgan, who has launched a mini-course for first home buyers, said one of the biggest mistakes first time investors make is not focusing enough on capital growth.
“Too many investors focus on things like getting depreciation, saving tax, they look at rental yield but what they really need to be looking at is capital growth and types of properties and areas that are likely to give you good capital growth because, without that, they’re taking way too much risk with too little gain,” she said.
Mr Yardney also says investors may wish to look for properties where they can manufacture capital growth through renovations or redevelopment.
An element of scarcity
There are many reasons why property experts say off the plan apartments usually make terrible investments, one of them being that high-rise and medium-density accommodation often have little to no scarcity value.
Just because high-rise developments are designed for the investor market, it doesn’t make them investment-grade, according to Mr Yardney.
“They are what the property marketers and developers sell in bulk to naive investors – usually off the plan, but they are not investment-grade because they have little owner-occupier appeal, they lack scarcity, they are usually bought at a premium and there is no opportunity to add value,” he said.
Instead, Mr Yardney said investors should aim for properties that offer something scarce, unique or special, such as an older-style apartment built between the 1920s and 1970s because their architectural style tends to be scarce and timeless and they’re often located in areas where land is rare and in demand.
Art deco, character or period properties can generally make good investments too as demand for these types of properties will always outweigh the supply.
High land to asset ratio
Mr Yardney said a high land to asset ratio doesn’t necessarily mean a big block of land, but one where the land component makes up a significant chunk of the asset value.
“I’d rather own a sixth of a block of land under my apartment building in a good inner suburb, than a large block of land in regional Australia,” he said.
In an advice column for Domain, founder and managing director of Property Planning Australia David Johnston said that knowing the land to asset ratio of a property is essential as land value typically rises which drives price growth, whereas a dwelling usually depreciates in value. Because of this, it can pay to have a significant percentage of the property made up of the land value.
“From an investment perspective, you should strive to select an asset where the land represents 70 per cent of the value of the property, with 50 per cent as the minimum,” Mr Johnston said.
“You can have a high land-to-asset ratio due to a large land size, an older dwelling or a high land value per square metre.
“Of these factors, it’s best to focus on the latter, as it is more likely to occur in a highly sought-after locations.”
Mr Johnston also wrote that in highly sought-after locations, typically close to CBDs, the suburbs are more established and have a high number of older or character style homes.
“These properties are more likely to have a better land-to-asset ratio than recently built properties that are yet to complete their depreciation phase,” he said.
Maximum appeal to owner-occupiers
Two-thirds of Australians live in a home they own while the remainder are renters, according to data from the Australian Bureau of Statistics (ABS).
With that in mind, owner-occupier appeal should be a key thing investors look for because they’re the buyers that make up the largest segment of the market.
Ms Morgan said investors should target properties that will appeal to a wide range of owner-occupiers.
“We encourage our investor clients to think like owner-occupiers, as owner-occupier appeal is really what is one of the foundations of capital growth,” she said.
That’s because owner-occupiers tend to buy with their heart, not their head when buying a property drives prices up.
“One of the big mistakes investors make is that they’re buying ‘investment stock’ and they’re not thinking about the bigger market. There’s no secondary market for that sort of stock unless it actually appeals to owner-occupiers,” Ms Morgan said.
“Ultimately who pushes prices up, it’s owner-occupiers and investors in the mix as well. But you want more than one type of buyer that’s interested in a property down the track when you go to sell it.”
Mr Yardney said this will be particularly important in the future as the percentage of investors in the market is likely to diminish.
Besides being in a good location, qualities owner-occupiers look for in a property is street appeal, lots of natural light, openness, a connection between the indoors and outdoors, good ventilation, lots of storage and a good floor plan.
A, B and C-grade properties: Why the grade matters
You’ve probably heard the term ‘A-grade property’ get thrown around quite a bit, but what does it actually mean?
“An A-grade asset is something that lots of other people want. There’s scarcity,” said Ms Morgan.
“It also has certain characteristics that make it appeal to more buyers than others. For instance, in a family-oriented area, you want a property that’s really going to have maximum appeal to families in that area. So a three-bedroom home is not going to be as appealing as a four-bedroom home.
“An A-grade property is going to have all those characteristics that a lot of people will go for. And when there’s a lot of property on the market, you want your one to stand out as being, ‘I want that I’m not going to compromise and have a triangular block or buy on a main road or buy something with a steep block. I’m going to buy something that’s got everything I want in it’.
“So that’s fundamentally what the definition of an A grade is, it’s got more characteristics that people want.”
On the other hand, B-grade properties are usually in the right suburb, but not necessarily where buyers prefer to be. So they might be further away from amenities, lack parking, or have an awkward floor plan.
“A B-grade property could be on a really good street, but the property doesn’t necessarily have a lot of emotional appeal through the actual architecture, but it’s really well located,” Mr Holdaway said.
Properties that get a C-grade could be located on a main road or on steep or battle-axe block, and have little appeal.
“C-grade is actually more of a, just a cookie-cutter approach, nothing unique about it,” he said.
Ms Morgan said the grade matters because it will affect how your investment property performs.
“An A-grade property will go up at more than the median house price, and if everything goes down, it’s going to go down less than the median. So it will always perform better than the median.
“There’s a lot of sayings that go around with property. One is ‘a rising tide lifts all ships’, well that’s crap. Any given suburb, any given types of property, you get some that perform better than others. So they’re not all being risen or dropped at the same rate.
“Another saying is ‘safe as houses’. Well, that’s actually crap too, because there’s plenty of people that lose money in property. And it happens way more than people want to talk about.”
Capital growth versus rental yield
Almost all the experts we spoke to unanimously agreed that rental yields are not a reliable indicator of a good investment property.
“You do need to be able to afford to hold property and the problem with an A-grade asset is they are typically hard to buy, they’re competitive, you have to spend more money buying that property in the first place, and often the yields are very low on an A-grade property. So it’s sort of counter-intuitive to what you would expect,” Ms Morgan said.
“The problem with that is that a lot of people go the safe route. They borrow less money and they go for where they get more rent because that makes them feel better that they can pay a mortgage off, but the problem is you’re just buying the right to collect rent, you’re not actually buying an asset that’s going to grow in value.
“Yield and growth tend to be mutually exclusive. The higher the yield, the higher the risk and the less potential for capital growth.”
Mr Holdaway said while rental yields are not a good indicator of a good investment property, they do help with cash flow.
“Capital growth is what you’re chasing, but the rental yield is what you’re actually wanting ultimately because you want to live off the passive income that comes from having the rent into these properties,” he said.
“I think you should chase capital growth in the early part of your investing accumulation cycle. And then towards the end, you want to be able to retire out the debt so that you can live off the rents, but in some cases, people who don’t have a lot of equity really rely on that rent return early.”
Mr Yardney said that in Australia, residential real estate is a high growth, relatively low yield investment.
“Those who try to invest for cash flow never develop the financial freedom they’re looking for,” he told Savings.com.au.
“You can’t save your way to wealth, so it is very clear that capital growth should be the main aim of property investors and not cash flow, at least not in the short-term until they have built a sufficiently large asset base.
“Unfortunately, that’s just how property in Australia works – it’s not a cash cow. Sure cash flow is important to keep you in the game, but it’s capital growth that gets you out of the rat race.”
On the flipside, Co-founder of Freedom Property Investors Scott Kuru argued rental yields are a reliable indicator of a good investment property.
“If demand is high, rents are high,” he told Savings.com.au.
“An important part of investing in property is being able to service your loans and expenses. If your rents are too low it will hurt you when you apply for a loan for your next investment.”
“Don’t buy just for depreciation reasons”
Another thing investors may want to avoid doing is buying an investment property (particularly off the plan) purely for depreciation and tax reasons.
“It’s a massive red herring,” Ms Morgan said.
“With depreciation, you’ve got to spend a dollar to get back a maximum 47 cents or whatever the top tax rate is now. I mean, it’s just simple maths. It doesn’t make sense.
“If you’re not buying with capital growth as a primary motivator, then why lose 53 cents in every dollar that you spend?
“If you look at off the plan sales in Melbourne and Brisbane in particular, over the past decade the proportion that have lost money on the second resale. In some cases, up to 60% of resales are at a loss. That’s a massive price to pay to get some good depreciation benefits.”
Mr Holdaway said too many first time investors get lured in to buying an investment property – particularly off the plan apartments – because of the depreciation.
“They get seduced by bling, which means they get sold by some slick salesperson saying they should buy properties for depreciation and for tax benefits,” he said.
“But I say that’s actually just a bonus. It’s the cream. It’s not the reason that you buy – you should actually be buying for the growth potential first before you worry about a tax outcome.
“I wouldn’t buy off the plan just to get depreciation, I’d want the investment to stack up first and then make sure I get the most depreciation that I possibly can after making that decision first.”
Savings.com.au’s two cents
Clearly, there are a LOT of things to keep in mind when buying an investment property – and we’ve only just scratched the surface!
If you are considering buying an investment property, it’s important to consider if it actually makes sense for your personal investing goals, risk profile and your current situation.
Can you afford to purchase an investment property and hold it? It makes little sense to buy an investment property if the costs of holding it will have an adverse impact on your monthly cash flow and lifestyle.
As always, have a careful think about your personal financial position and consider speaking to a qualified financial adviser before you make any major investment decisions.
Prior to the ongoing health crisis, Perth has had an “uninterrupted upswing” after months of struggling to recover from the end of the mining boom.
Just last April, the Western Australian capital recorded its sixth consecutive month of price growth, with values rising 0.2 per cent across the month to take quarterly growth figures up to 1.0 per cent, property investment consultancy Momentum Wealth said.
Sales transactions in Perth also rose for the third consecutive week as buyers re-enter the market and quality stock remains limited and unemployment had fallen from 6.9 per cent to 5.2 per cent as jobs growth trends higher, population growth bounces back to the highest level since 2014, housing supply was contained, and state final demand climb above the decade average.
Continued price growth, tightening supply and an early rebound in sales transactions are placing Perth’s property market in strong stead for a faster rebound than other major markets across Australia – making it one of three capital city markets to outperform its six-month average pace of change alongside Darwin and Adelaide.
However, the COVID-19 outbreak has halted the positive movements in the Perth property market, just as it did across most economic sectors.
According to CoreLogic’s head of research Eliza Owen: “Instead of momentum continuing from the trend seen at the start of the year, the onset of COVID-19 places it at the cusp of another downswing.”
Still, she remains optimistic that the effect of the pandemic is nothing but a minor setback to the real estate sector, particularly to major capital city markets.
While the 28-day rolling change in the daily hedonic index showed Perth dwelling values starting to fall again, value falls have been mild at -0.2 per cent. Moreover, the decline in payroll jobs across the state was 5.8 per cent between 14 March and 2 May, as opposed to 7.3 per cent Australia-wide.
“Perth has less exposure to industry sectors that have been heavily impacted by COVID-19, with 8.6 per cent of the local workforce employed with the accommodation and food services and arts and recreation services sectors, compared with 9.1 per cent nationally.”
Overall, despite heightened economic uncertainty, Ms Owen said consumer sentiment levels have been improving in line with a flattening of the curve and relaxation in social distancing policies.
“Importantly, total listing numbers haven’t trended higher and are at the lowest level in 10 years for this time of the year. The trend towards a rise in new listings and consistently low total listings implies newly listed stock is being absorbed quickly by the market.
“As of late May, total listings were down 34.7 per cent on where they were at the equivalent period in 2019. Total listings across Perth counted in the 28 days to May 24 were just 13,962. Though this is a continued headwind to the real estate sector, it may be preserving stability in dwelling values,” Ms Owen highlighted.
Property values
The latest CoreLogic figures show dwelling values in Perth declined by 0.6 per cent in May.
Although overall prices had only slightly declined in the Perth region, 64 per cent of suburbs saw either an improved or stabilised median house price, REIWA president Damian Collins said.
“Interestingly, seven of the 10 suburbs had a median sale price under Perth’s median of $475,000 and [suggest] people are taking advantage of properties in Perth that are priced at the lower end,” according to Mr Collins.
Meanwhile, the suburbs that saw the biggest improvement in sales were Halls Head, Ellenbrook, Rockingham, Byford, Yanchep, Wanneroo, Dianella, Waikiki, Balga and Armadale, according to the research.
“To ensure a vibrant property market, the WA government may need to cut stamp duty and we ask them to consider short-term changes to help incentivise buyers, as well as long-term tax reform removing stamp duty and replacing it with a broader-based land tax system.”
Supply and demand
Combined capital cities returned a preliminary auction clearance rate above 70 per cent during the week concluding 24 May, marking the highest seen since early March before restrictions to on-site auctions and inspections were rolled out nationwide, according to CoreLogic’s Property Market Indicator Summary.
The improved clearance rate was across a higher volume of auctions over the week, with 613 scheduled auctions.
However, while volumes were higher week-on-week, they remain significantly lower than what would usually be seen, with 2,055 homes taken to auction over the same week last year.
“Given it’s been a few weeks since the ban for onsite auctions and inspections [was] lifted, agents and vendors have had the chance to start implementing marketing campaigns, and we are likely to see volumes gradually increase each week,” the report noted.
Breaking down the capital cities, the preliminary auction clearance rates for the week concluding 24 May are 77.9 per cent for Sydney, 73.2 per cent for Canberra, 72 per cent for Melbourne, 45.9 per cent for Brisbane, 38.5 per cent for Adelaide and 0 per cent for Perth.
Rental market
According to data compiled by the Real Estate Institute of Western Australia (REIWA), listings across Perth fell by 17 per cent in May to 4,676 – its lowest level since November 2013.
The strong demand for rental properties ultimately continues, with a 27 per cent increase in leasing activity compared with April, and the vacancy rate dropping significantly in the last two years, Mr Collins said.
Halls Head saw the biggest spike in leasing activity growth with 33 leases for the month. This was closely followed by Nollamara (20 leases), Coolbellup (16 leases), Joondalup (18 leases) and Como (18 leases).
In terms of the number of rentals coming into the Perth market, Property Club noted that Perth recently saw a 5.8 per cent drop, while the number of properties being constructed is down 18 per cent, with buyers preferring old homes over new ones.
“The construction of new family homes in Perth has crashed over the last five years and is getting even worse and underlined by the latest national data from the RBA,” according to Property Club’s national manager Troy Gunasekera.
At the moment, only 8.8 per cent of total housing finance was for new properties. Normally, this number would be closer to 40 per cent.
The coming “rental famine” would be most acute for family homes in the outer established suburbs of Perth, he said.
“The supply of rental properties in these outer suburbs has been reduced by investors being forced to sell off their rental properties over the past five years due to the banks forcing investors from interest-only to principal and interest loans.”
“These rental properties are being bought by owner-occupiers because recent tax changes mean that tax depreciation benefits for second-hand properties have been removed, meaning investors are not buying second-hand homes,” Mr Gunasekera explained.
As a result, Property Club found that, while rents in Perth’s inner city are falling, rents for family homes in the outer established suburbs are starting to rise even amid the health crisis.
“Family homes in Perth are now receiving multiple applications and landlords are now in a position to raise their rents… The expected recession and rising unemployment will make it harder for first home buyers wanting to buy a home, meaning that they will stay in rental properties for much longer, reducing the supply of rental properties.”
“At the same time, owner-occupiers will be forced to sell their homes because of the impending recession, and these people will be searching for rental properties during a time of reducing supply.”
In May, REIWA determined that Perth’s overall median rent sat at $350 per week and should remain stable until the end of the year,” with any increase in rent only allowed on new rental listings.”
Legislation implemented in the Residential Tenancies (COVID-19 Response) Act 2020 means occupied rentals cannot have a rent increase until October.
2020 outlook
Despite headwinds, investors are being reminded that the pain in the property market will be short-lived, with property prices expected to bounce back post-pandemic.
Research conducted by PIPA found that five years after each of the recessions or economic downturns over the past 50 years – from 1973 to the GFC – capital city house prices saw significant increases.
For instance, five years after the recession of 1973 to 1975, Sydney median house prices had increased 100.7 per cent, followed by Perth and Brisbane, as the economy grew after the downturn.
Consequently, after the economic downturn of 1982 and 1983, Melbourne led the property pack with median house price growth of 67.7 per cent, and many other capital cities were not far behind with growth in the 50 per cent to 64 per cent range.
“When it came to the ‘recession we had to have’, Darwin produced median house price growth of 47.3 per cent in the following five years, with Perth the second-place getter again. Then, [following] the GFC, as we all know, Sydney was again the [frontrunner] within five years as the start of its property boom started to take shape,” according to Property Investment Professionals of Australia (PIPA) chairman Peter Koulizos.
Over the three most recent economic downturns, there were periods of annual house price falls in many capital cities, but the price reductions were never sustained nor prolonged, he added.
Ultimately, the moral of the story is “Don’t panic”, the property expert said.
“Property has shown its resilience through economic shocks before, and we have no reason to expect it won’t do so again,” he said.
With Australia being one of the very few countries that have a balanced budget, and the fact that its government debt is the lowest in the world, Propertyology’s head of research Simon Pressley remains just as confident that the country is in a strong position to cushion the impact of the COVID-19 outbreak.
The COVID-19 pandemic has caused fear and panic among investors in the property market as it halted economic growth across the world.
However, Property Investment Professionals of Australia (PIPA) chairman Peter Koulizos believes that the pain in the property market will be short-lived, with property prices expected to bounce back post-pandemic.
Research conducted by PIPA found that five years after each of the recessions or economic downturns over the past 50 years – from 1973 to the GFC – capital city house prices saw significant increases.
While some areas outperform others due to different economic reasons such as employment, capital cities generally continued to grow.
For instance, five years after the recession of 1973 to 1975, Sydney median house prices had increased 100.7 per cent, followed by Perth and Brisbane, as the economy grew after the downturn.
Consequently, after the economic downturn of 1982 and 1983, Melbourne led the property pack with median house price growth of 67.7 per cent, and many other capital cities were not far behind with growth in the 50 per cent to 64 per cent range.
“When it came to the ‘recession we had to have’, Darwin produced median house price growth of 47.3 per cent in the following five years, with Perth the second-place getter again. Then, [following] the GFC, as we all know, Sydney was again the [frontrunner] within five years as the start of its property boom started to take shape,” according to Mr Koulizos.
Over the three most recent economic downturns, there were periods of annual house price falls in many capital cities, but the price reductions were never sustained nor prolonged, he added.
“An interesting point to that is that in 2011, every capital city recorded a fall in its house price index, which was simply when the GFC stimulus money ran out,” he said.
“This could well become a statistical reality this time around, too, but it’s important to recognise that within either one year or two years of that period, the house price index was showing solid growth once more.”
Ultimately, the moral of the story is “Don’t panic”, the property expert said.
“Property has shown its resilience through economic shocks before, and we have no reason to expect it won’t do so again,” he said.
On a similar note, Propertyology’s head of research Simon Pressley urged investors to take comfort in knowing that “the current economic volatility has a cause with a defined solution and a relatively defined time frame.”
After all, Australia is one of the very few countries that has a balanced budget, and the fact that its government debt is the lowest in the world means that the country is in a strong position to cushion the impact of the COVID-19 outbreak.
“When we get out of our cocoons in a few [months’] time, there’s going to be an enormous release of pent-up demand,” Mr Pressley said.
“All the things we haven’t been able to do, we will be doing that stuff. That will stimulate the economy quickly. Then we have the stimulus packages on top of that – we have credit supply with the gates being open; we have all-time record-low interest rates, and we have property yields of 5 per cent.”
Property values
SQM Research’s monthly report showed the combined capital asking prices increased by 0.7 per cent for houses and 0.1 per cent for units over the month to 5 May 2020.
Median unit asking prices are now at $574,900, while median houses asking prices are now at $994,300.
Compared to a year ago, the capital city’s asking prices posted increases of 9.4 per cent for houses and 3.0 per cent increase for units.
The strongest monthly growth was seen in Sydney house prices with a 1.1 per cent increase, as well as in Melbourne’s unit market, which saw a 1.0 per cent increase.
Over the month, some capital cities recorded marginal asking price increases, with the exception of Perth, Canberra and Hobart, which all recorded declines for both houses and units.
Melbourne, Adelaide and Darwin were the only capital cities to record increases in both house and unit prices.
PRDnationwide’s latest research showed that, despite a lower cash rate and more lenient lending practices, there remains a large discrepancy when it comes to average loans in each state and median house prices in each capital city.
Over the quarter, Brisbane’s median price was recorded at $542,000 while its average state loan was at $412,297.
Meanwhile, Sydney had a median house price of $1,142,212 and average state loan of $592,338 and Melbourne had a median house price of $859,500 and an average state loan of $493,471.
Currently, finding an affordable property option in capital cities continues to be difficult, especially for first home buyers, according to the PRDnationwide report.
“Despite a lower cash rate and more lenient lending practices, there is still a large discrepancy between the average state loan and median house price in capital cities, like 51.9 per cent in Sydney and 76.1 per cent in Brisbane.”
“Further attributing to the challenge are capital cities, which have experienced solid growth in their median house prices, with the December quarter 2019 reporting a weighted average Australian median house price of $775,918 – representing annual growth of 5.8 per cent.
“The Australian median family weekly income grew by 2.5 per cent over the same period of time, resulting in the home affordability index declining by -4.3 per cent. Although housing affordability in major capital markets continues to be challenging, regional areas should not be dismissed,” the report highlighted.
Moving forward, ANZ Research is forecasting a peak-to-trough decline in property prices of 10 per cent, led by sharp declines in Hobart (11.2 per cent), Melbourne (8.5 per cent) and Sydney (8.1 per cent) over the course of 2020 and 2021.
Growth trends are expected to begin turning positive in the back end of 2021.
Supply and demand
While property values have fallen, REINSW president Leanne Pilkington points to the positive clearance rates as a sign the property market has not fallen as far as predicted.
According to CoreLogic’s forward indicators, newly advertised properties were up 4 per cent for the week ending 24 May, giving an indication sellers were re-entering the market.
Preliminary auction clearance rate, meanwhile, was recorded at 70.9 per cent during the same period.
Across capital cities, clearance rates were highest in Sydney (77.9 per cent), followed by Canberra (73.3 per cent), Melbourne (72 per cent), Brisbane (45.9 per cent) and Adelaide (38.5 per cent). In volume terms, 613 homes were taken to auction, up week-on-week from 400.
“It is interesting that the analysts who are now saying the market needs a ventilator are the same ones that were previously saying we were in a boom when the market had 80 per cent clearance rates. So, the way I do the maths, the distance between apparent boom and bust is 2.1 per cent,” Ms Pilkington said.
CoreLogic expects volumes to pick up over the coming weeks in response to the lifting of the on-site auction bans.
As open-home restrictions begin to lift, a Brisbane-based Coronis Agency has reported more than 80 potential buyers attending the first scheduled open home of an Archerfield property – a three-bedroom, two-bathroom property which received more than 56 phone and email enquiries within 48 hours.
Director Anthony Hunt said that the general feedback he received from most parties is that “they want to buy something right now, despite everything going on with COVID-19”.
“Many of them are first home buyers with pre-approval who are looking to get their foot on the property ladder and aren’t fazed about going out in public to attend open homes,” he said.
The director believes that what they’re more concerned about is the lack of properties to choose from and how quickly properties are selling at the moment, so much so that buyers are willing to look outside of their desired suburb to purchase the right property.
His message to those who are considering holding off on selling: Don’t wait.
“In the past week, the Coronis sales team has received more than 1,000 buyer enquiries, and from that, 550-plus groups attended an open home on the weekend, so there is no doubt about it – buyers have a strong appetite to purchase now, they just need more options to choose from,” according to Mr Hunt.
Rental market
Real Estate Institute of Queensland (REIQ) found that despite the perceived effects of the COVID-19 outbreak, Queensland has reported a relatively stable vacancy rate of 2.44 per cent for the last quarter.
Some of the state’s tourism property markets, however, saw varying results following the mandatory restrictions which resulted from the health crisis.
The Sunshine State’s capital city Brisbane, saw rental vacancy rates drop by almost 1 per cent “on the back of a better-than-expected 0.5 per cent bump in economic growth in the December quarter and 2.2 per cent over the past year,” REIQ research noted.
Brisbane’s inner-city districts experienced the largest fall in vacancies by 1.2 per cent.
According to REIQ CEO Antonia Mercorella: “Across Brisbane, vacancy rates have remained tight, which is a great reflection of a healthy market albeit some more pronounced fluctuations within the apartment sector will inevitably be expected in future data.”
“Ultimately, Brisbane continues to prove that it’s remained fairly buoyant throughout the current pandemic and continues to be the most affordable capital city in Australia,” she said.
The Gold Coast, meanwhile, saw an end-of-summer sharp spike result in a 1.2 per cent rise to 3 per cent, while areas slightly north of Brisbane have remained generally stable.
For example, Caboolture saw a drop in vacancies from -0.6 per cent to 0.8 per cent, while Redcliffe saw a marginal rise of 0.1 per cent to level out still within a tight vacancy range at 2 per cent. Further north, the Sunshine Coast hasn’t offered up any side effects from COVID-19 as of yet, with a 0.2 per cent drop in vacancy rates across the region to 1.4 per cent.
Areas back along the coastline, on the other hand, saw some “unmistakeable movement upward”, particularly in Noosa (+1.3 per cent to 3.6 per cent) and Fraser Coast (+1.4 per cent to 3.1 per cent), which includes Hervey Bay (+2.4 per cent to 4.3 per cent).
“Drive a few hours north and more stable yet tight vacancy rates become the norm once more from Bundaberg (+0.9 per cent to 2.4 per cent) through to Rockhampton (-0.3 per cent to 1.3 per cent),” REIQ noted.
“However, the outlier here is Gladstone. With mining and infrastructure projects on the go, demand for trades has boomed – with vacancy results reflecting rental demand by a staggering 2.5 per cent to a record low of 1.6 per cent for the region,” REIQ noted.
Mackay stands as the only area across Queensland that’s remained unchanged over the quarter (2.5 per cent).
Commenting on the results, Ms Mercorella said: “Any further surges in vacant properties across Queensland’s tourism regions are likely to be addressed by future tourism-focused initiatives to boost domestic holidaymakers.”
“It’s an optimistic start to the year. The next quarter will reveal more about the true impact of COVID-19 on the Queensland rental market,” she said.
2020 outlook
Richard Sheppard of Insynergy Property Wealth Advisory said that property prices are unlikely to fall much further in most major locations.
After all, good property markets have proven themselves resilient as they continued to rise over the decades, even after it bore witness to different economic shocks, “including a different coronavirus, SARS, in 2003”.
This time around, some locations will fare better than others, including Brisbane, Canberra and Adelaide sub-markets which have strong fundamentals for the medium to long-term, according to Mr Sheppard.
Yields in these markets are 4.5 per cent to 6 per cent-plus for a “well-selected property”.
With investor interest rates as low as 2.84 per cent, investors can have positive cash flow of about 1 to 3 per cent net of costs, he added.
Further, some vendors are offering six to 12-month rental guarantees for added security and peace of mind.
“Property values would need to go backwards more than this for you to lose money. Of course, there is a risk of higher vacancy with job losses. However, the above markets have already had substantially reducing vacancy in the years leading up to now,” Mr Sheppard highlighted.
The easing of COVID-19 restrictions, coupled with optimism surrounding the daily new case figures, ultimately “offered a glimmer of light at the end of this tunnel”, according to him.
To further assist the recovery of the real estate market, property professionals urge the federal government to provide a stimulus package for the building industry, which has been lagging behind as a consequence of the “new normal”.
According to KDL Property Group managing director Kent Leicester, a stimulus package from the federal government to support Australia’s building industry will keep a pipeline of residential housing projects on track and protect more than a million jobs.
The proposed multibillion-dollar scheme could ultimately include the government constructing residential housing to help the building the industry through the COVID-19 crisis.
“The construction industry produces almost 10 per cent of Australia’s gross domestic product and is the third-largest employing industry behind healthcare and retail. There is an opportunity here to support a sector which generates more than a million jobs, many of them very small businesses or sole traders,” he highlighted.
Mr Leicester added that the government should also be looking to counter an expected fall in immigration with a focus on attracting skilled migrants.
“Australia to this point has not been hit as hard as other countries such as the United States and Britain by the COVID-19 pandemic, and to many people overseas it might seem like one of the most desirable places to live in the world,” he said.
Hotspots
Self-managed super fund (SMSF) investors rattled by the financial market turmoil caused by the coronavirus (COVID-19) pandemic are turning to new residential real estate for capital growth, according to Mr Leicester.
KDL Property Group has experienced a similar pattern of SMSF investors looking to invest in new residential homes during the global financial crisis (GFC), which highlights investors’ desire to stabilise their funds by putting some of their money into new residential property.
“The attraction of new homes on freehold titles is the potential for higher cash flow compared to apartments and townhouses, as well as no body corporate levies,” Mr Leicester said.
SMSF investors are now looking to invest in new homes in growth areas, including two residential land estates in Logan, south of Brisbane, which is currently considered a hotspot for good capital growth.
KDL’s Montana Logan Reserve features 93 residential home sites with an array of entertainment, shopping and recreation close by. Nevada Park Ridge features 80 blocks close to unspoilt bushland.
“Lower yields are currently on offer for investors in Sydney and Melbourne property compared to residential real estate in South East Queensland,” Mr Leicester noted.
Despite the severe economic impact of the COVID-19 pandemic, the property professional remains positive about the SEQ property market while interest rates remain at record lows.
“It is still an excellent environment to enable investment in the recovery phase and property will be a safe haven with the share market experiencing so much volatility,” he concluded.
The “extremely uncertain” housing market outlook may be set to trigger a “collapse” in demand that could last until late 2021, according to ANZ Research.
Property prices and construction activity are expected to fall throughout 2020 and into 2021, before a “modest” recovery in the back end of 2021, largely due to the closure of borders, which limits the new overseas arrivals and thereby curtails the largest source of population growth.
“Net overseas migration currently accounts for around 240,000 people or nearly two-thirds of Australia’s population growth… The federal government estimates Australia’s net overseas migration will fall by more than 85 per cent in 2020-21 (from 2018-19 levels) due to international travel bans instituted in response to the coronavirus,” ANZ Research added.
“This drop in population growth will remove a major driver of economic growth and housing demand, at least for a period.”
Sydney and Melbourne markets, in particular, are expected to be most impacted by the decline in population growth.
In the year to June 2019, Sydney’s population grew by 87,000, with 85 per cent of those newcomers being overseas migration.
In Melbourne during the same period, the numbers are also significant, with 77,000 overseas migrants accounting for 68 per cent of the total population growth of 113,000.
However, RPM Real Estate Group pointed out that, while there has been a period of bleakness following the declaration of the pandemic, signs of buyer activity in April and May are promising in “pointing to a potentially earlier than expected recovery”.
According to their latest research, real estate platforms reporting an increase in international buyer enquiries, and sales offices are experiencing higher visitation when comparing the first two weekends of April to the first two weekends in May.
While the result for the Melbourne market was a relatively modest 638 lots, it was still above the previous trough being 499 lot sales during the same time last year.
RPM CEO Kevin Brown said: “The situation we find ourselves in is totally unprecedented, and we can’t accurately crystal ball what’s to come; there are just too many unknowns at play.”
“Australia’s response to COVID-19 has been swift and effective compared to many other countries, so we believe that will bode well for the property market in the medium to [longer-term]. However, we do expect the June and September quarters to show falls on the back of cancellations and price contractions.”
Research conducted by the Property Investment Professionals of Australia found that, five years after each of the recessions or economic downturns over that time period, capital city house prices saw a significant increase.
Five years after the recession of 1973 to 1975, Sydney median house prices had increased 100.7 per cent, followed by Perth and then Brisbane, as the economy grew after the downturn.
A few years later, following the economic downturn of 1982 and 1983, Melbourne led the property pack with median house price growth of 67.7 per cent, while other capital cities were not far behind, boasting growth in the 50 per cent to 64 per cent range.
PIPA chairman Peter Koulizos said that while some areas outperform others due to a variety of economic reasons, including employment, capital cities continue to grow.
“The moral of the story is don’t panic. Property has shown its resilience through economic shocks before, and we have no reason to expect it won’t do so again,” he said.
Property values
Australia’s property market fell by 0.4 per cent over the month of May, five of the eight capital cities experiencing a price drop – representing the first drop for most since June 2019.
The latest CoreLogic figures showed Darwin as Australia’s most impacted city, falling by 1.4 per cent, while Australia’s second-largest market, Melbourne, fell by 0.9 per cent. Sydney fell for the first time since the health pandemic began, falling by 0.4 per cent.
However, contrary to doom-and-gloom headlines following the COVID-19 pandemic and its subsequent effects on the economy, market conditions are returning to normal and seeing an increase in volume.
Ultimately, data showed better-than-expected results as the national economy was battered by COVID-19’s impact, according to CoreLogic’s head of research Tim Lawless.
“Considering the weak economic conditions associated with the pandemic, a fall of less than half a percent in housing values over the month shows the market has remained resilient to a material correction,” he highlighted.
“With restrictive policies being progressively lifted or relaxed, the downwards trajectory of housing values could be milder than first expected.”
According to CoreLogic, the top of the market caused most of the overall falls in property values, with the most rapid decline in housing values recorded across the top quartile of the Melbourne and Sydney markets.
Melbourne’s most expensive quartile of the market recorded a 1.3 per cent drop in values over the month, compared with a 0.6 per cent fall across the broad “middle” of the market and a 0.3 per cent fall across the most affordable quartile.
Similarly, in Sydney, the top quartile was down 0.6 per cent, while the lower quartile posted a 0.1 per cent increase in values.
Mr Lawless noted that the quartiles experiencing price drops now are the very same sectors of the market that were recording the most significant rise in values during the most recent growth phase, before the COVID-19 pandemic put a halt to market activity.
Melbourne’s top quartile values are still 13.9 per cent higher than they were a year ago, while Sydney’s top quartile is up 16.5 per cent over the year.
Despite the falls, the overall outlook is more positive than first expected, largely due to a shift in consumer sentiment.
“The reduction in values through May comes as transaction activity in the market shows more positive signs. The CoreLogic estimate of sales activity bounced back by 18.5 per cent in May after a drop of 33 per cent in April,” Mr Lawless highlighted.
By mid-May, onsite auctions were reinstated in most states and territories and property inspections were gradually opening up.
Supply and demand
CoreLogic found that the week concluding 31 May saw 867 capital city homes scheduled for auction, with preliminary results returning a 65.9 per cent clearance rate – representing a steady incline from the previous week as restrictions ease across many states and territories.
The number of auctions held this week was the highest since the week ending 19 April.
In Melbourne, 259 homes were scheduled to go under the hammer this week. So far, 192 auctions have been reported, returning a preliminary success rate of 71.9 per cent. The previous week saw a final clearance rate of 68.0 per cent across 168 auctions.
In Sydney, 469 homes were scheduled for auction this week, returning a preliminary clearance rate of 68.1 per cent across 320 results. In comparison, last week saw 309 homes were taken to auction with a success rate of 65.0 per cent.
“As mentioned over the previous few weeks, with restrictions easing across many states and territories, we will likely see the number of homes taken to auction continue to increase,” CoreLogic noted.
Looking at the bigger picture, CoreLogic’s findings suggest that residential property sales declined about 40 per cent over the month, with the magnitude of decline fairly uniform across different parts of the country and generally driven by a decline in consumer confidence.
Further, CoreLogic’s data on listings shows the amount of stock available for sale is approximately 25 per cent lower than it was around the same time last year.
According to CoreLogic’s Eliza Owen: “The low level of listings signals a tough period for those developing and selling residential real estate, but it also signals a lack of distressed sales flooding the market. In other words, not many people are selling because not many people have to sell.”
“It is likely that reprieve on mortgage repayments has protected people from distressed sales, at a time of rising unemployment, falling wages and falling numbers of hours worked.”
Prime Minister Scott Morrison has earlier acknowledged the threat that a COVID-induced decline in migration could pose to residential property market activity.
Mr Morrison made specific reference to the impact of subdued levels of migration on the residential construction sector, adding that the issue has been a “key topic of discussion” between all levels of government.
The government is expecting net overseas migration to fall to approximately 34,000 in 2020-21, well below levels needed to maintain GDP growth – estimated at around 160,000 to 210,000.
“There’s obviously a big gap there. It’s a short-term gap, but it’s going to be one of the real impacts of this crisis because our borders aren’t going to open up any time soon,” the Prime Minister said.
As borders remain closed to overseas migration and unemployment rises, new housing demand is likely to see a continued decline, with Sydney and Melbourne arguably showing a higher risk profile relative to other markets due to their large exposure to overseas migration as a source of housing demand, along with greater exposure to the downturn in foreign students, stretched housing affordability and already low rental yields that are likely to reduce further on the back of rising vacancy rates and lower rents.
Apart from subdued population growth, rising unemployment and concerns about job security, expectations of price falls, larger households due to people wanting to save money, some forced sales, and restrictions on transacting real estate would be among the main drivers of prolonged weakness in the housing market, according to Domain economist Trent Wiltshire.
“Property sales are likely to decline by even more than prices,” he highlighted.
Rental market
Rent prices are also likely to be more affected by the COVID-19 pandemic than property prices, according to CoreLogic’s Eliza Owen.
CoreLogic recorded a -0.4 (of a percentage point) decline in rent prices nationally across Australia over the month, led by Hobart, where rents declined by -1.1 per cent.
“Rental markets have been particularly dampened by falls in employment. This is because jobs have fallen by about a third across accommodation and food services, and arts and recreation services.
“These are industries where workers are generally young, on less income and are more likely to be renters,” Ms Owen said.
Metropolitan Melbourne, in particular, have seen rental prices fall following a month of some improvement in vacancy rates across the state, according to the latest monthly rental data from the Real Estate Institute of Victoria (REIV).
Median rents for houses are now more affordable at $470 per week, down from February’s $480 per week, but still higher than the same time last year.
Metropolitan units are also cheaper to rent, from $450 per week in February down to $430 per week.
While there has been some improvement in vacancy rates, with metropolitan Melbourne recording 2.3 per cent for two consecutive months, Victoria needs vacancy rates of 3 per cent to 4 per cent to maintain a healthy market, according to REIV.
Commenting further on the figures, REIV president Leah Calnan said Victoria’s temporary measures in place due to COVID-19 make it “challenging to gauge the real situation but the underlying strength of the Victorian property market is undeniable”.
“Victoria’s rental accommodation supply is growing, more rental homes are now available but there remains a need for more properties to be listed to cater for growing demand. The state government needs to work more closely with property owners, to help build a reliable supply of rental accommodation in Victoria,” she explained.
Herron Todd White’s May 2020 Month in Review also highlighted how the COVID-19 pandemic “left the property market in the inner Melbourne suburbs and CBD in limbo” as it caused a spike in vacancy rates and an oversupply of rental stock in the heart of Melbourne.
Ultimately, experts believe that Melbourne and Sydney rental markets may have a harder time recovering compared to other capital city markets as the sudden halt in overseas migration leaves them more vulnerable to an influx in supply compared to markets such as Perth where these levels have been much lower.
2020 outlook
Despite uncertainties and negative predictions for capital city markets, there could very well be a silver lining in the Victoria capital, especially for first home buyers.
According to Herron Todd White, it’s an ideal time to be jumping onto the property ladder for beginner investors, especially with the city’s agents reporting that more investors are deciding against new investments for fear of receiving no rental income due to COVID-19’s impact on employment.
Buyers with job security who are looking into the property market prior to the pandemic are, therefore, urged to “take advantage of the current market conditions as sellers are more open to negotiation”.
Highlighting record-low interest rates and the state government’s first home buyer’s grant, which currently stands at $10,000 for metropolitan homes and $20,000 for newly built regional homes, Herron Todd White dubbed the Melbourne market as “favourable” for those looking to buy their first home.
Buying opportunities are further supported by incoming infrastructure, including the Neometro’s development, which is set to benefit the property market of Brunswick, one of Melbourne’s growing inner-city suburbs.
MaxCap Group, a leading commercial real estate debt specialist, proudly announced the closing of a construction finance facility for Neometro’s development on 5 May 2020, supporting the development of design-focused, higher-end residential projects by one of the most established and trusted players in the Melbourne apartment market.
To date, the Neometro has developed in excess of 300 apartments, in the highly sought-after suburbs of Fitzroy, Brunswick, South Yarra and St Kilda.
Less than five kilometres north of Melbourne’s central business district, 17 Union Street is a sustainable seven-star energy-rated, mixed-use development comprising of 39 residential apartments, two ground floor retail units and a rooftop garden.
The site is close to retail, hospitality and educational institutions and is located directly opposite Jewell Train Station.
At the end of the day, investors need not panic about the current state of the Australian property market, La Trobe Financial’s chief investment officer Chris Andrews said.
“The property market is in hibernation, and conventional price signals – like auction clearance rates and the things we often look at being really useful leading indicators – for the time being, they are sidelined,” he said.
While commentary and analysis around the property market will continue, investors are advised to “always remember when you are reading that – it’s based on a small number of unusual transactions”.
Post-hibernation, Mr Andrews said housing supply “is likely to be sticky and unresponsive.”
“The effect on the supply side is just beginning to show in the data, so expect a decline in approvals to accelerate over the next few months as banks restrict credit to developers and prospective purchasers put plans on hold. This will help put an effective floor under house prices,” he said.
Even with a conservative economic outlook, house prices are predicted to retrace by no more than 8 to 12 per cent.
Still, when compared to the increases seen in Sydney and Melbourne just over the last 12 months, where Sydney was up 14.3 per cent and Melbourne was up 12.4 per cent, property holders generally have substantial buffers in place, Mr Andrews highlighted.
“When you take into account the substantial lead time in getting the project to approval, and then of course actually completing the construction post-approval, you can get a sense of the stickiness of the supply side as we come out of the hibernation phase,” he explained further.
“That’s the sort of dynamic that’s driven the resilience of housing markets in prior correction events. If you want to baseline your thinking about property in a moment of volatility, there it is.”
Ultimately, there’s “certainly no need for particular concern or panic about the property markets at present,” Mr Andrews concluded.
