Australian Residential Property Markets

Angie Zigomanis said uncertainty around the government support programs and the shutdown of international borders is affecting the residential property market.

The main short-term impact on residential property is people don’t know where they’re going to be in 12 months’ time. They’ve seen friends forced onto JobKeeper or JobSeeker, so I suspect many are holding off on purchase decisions.

The other thing affecting the market is the shutdown of international borders. There’s been a spike in vacancy rates over the past few months and landlords are having to discount rents to become competitive. The inner-city property market is most affected, and that market is more concentrated in Melbourne than in NSW or Queensland. NSW rental bonds data reveals there’s been a drop in new bonds and a pick-up in bond returns in the past few months.

Australia’s two biggest student markets are China and India. Opening up the borders might start with China, but India is another big market and our borders are likely to stay closed to India for some time, and to our next two or three top student markets, which include less advanced countries.

In terms of mortgage distress, the Government urged banks to be lenient and the banks have offered a period of mortgage relief for people who are financially distressed. Nearly 500,000 households have asked to postpone their mortgage payments.

In terms of forced sales, it’s hard to say how many would be brought to the market, especially given the mortgage relief that is currently being offered to otherwise stressed households. Banks are aware that a high number of mortgagee sales will place downward pressure on prices, so will try to keep this from happening. Certainly the number of properties on the market and sales volumes has fallen.

Prices started to decline about mid-April. May was the first complete month of decline since this time last year and since before the Federal election, but prices haven’t been dropping away sharply. Melbourne’s had the largest decline and Melbourne and Sydney is where we’d expect the markets to be most constrained because they are the markets most exposed to the collapse in international migration. Falling rents are mostly occurring in the inner-city markets, the big apartment pockets around universities, for example, are the ones taking blows.

Short-term rentals are another part of it, especially in the inner city where there were a lot of people posting their properties on AirBnB or Stayz. Obviously if the borders are shut, that source of income is closed off so those landlords are now seeking longer term domestic tenants.

We’ve just done some numbers on apartment completions for each capital city. This year is a big completion year in Melbourne. Apartment completions in Sydney have started to fall away but the numbers are still relatively high, it’s probably another 12 months before they start falling off more dramatically.

Brisbane had its peak about two or three years ago, and apartment completions had already been falling away. It has been digesting the oversupply of apartments so now has more of a demand problem. Melbourne still has some supply issues and in Sydney it’s probably a combination of demand and supply.

Tourism is probably the biggest risk as I suspect Australia will, until things become a lot better, insist on a two-week quarantine period once borders are initially re-opened unless you are coming from certain countries. You’re not going to come for a two-week holiday if you’re going to spend all your time in quarantine.

A lot of those markets and sources of property occupants, whether it’s from a tourism perspective or from a tenant perspective, are likely to be largely shut down until at least 2021 and possibly beyond.

In the broader residential market, the supply pipeline across the country has started to ease off over the last couple of years. It was getting shut down by the change in bank lending criteria that came about following warnings from the regulator and from the Banking Royal Commission and the resulting falls in prices. The number of new projects coming to the market has actually already declined significantly, and this will come through in diminished supply after the current construction pipeline is worked through.

I expect that 18 months from now, production and completion levels are going to be at a level that’s closer to what’s going to be demanded from the low-level of population growth. The market was already heading down ahead of the COVID-19 setback, so that’s a positive and will help current stock to be absorbed more quickly.

Notwithstanding circumstances in Victoria, Australia looks to be handling COVID-19 better than say the US or the UK, so we’re likely to be a more attractive foreign investment destination than some other countries. That’s a positive for overseas migration down the track, and for overall economic conditions in Australia.

One of the unknowns is what will happen when people come off support measures like JobKeeper and JobSeeker in September. It is likely that the government will adopt some system of tapering these measures in the following months. However, if the economy does not begin to recover, there will come a point where the Government is going to run out of things to throw at this problem.

The Government incentives are also interesting for the housing market. The Federal Government HomeBuilder program is temporary and unlikely to provide a significant economic boost, while State Government incentives to first home buyers incentive may have a short-term impact but you can only be a first home buyer once and demand will fall away once the incentives expire. There are still many unknowns with the outlook for the housing market, dependent on the pace of reopening the economy after lockdown and extent of recovery in the economy afterward.

Author: Angie Zigomanis