Everyone seems to have an opinion on the direction of property prices – some economists are predicting little or no change whilst others are predicting a decline in value of up to 30%. So who is right?
The principal reason property prices decline is there are more anxious sellers in the market than enthusiastic buyers. This is clearly the case in these trying COVID-19 times.
Let’s take a good look at the various factors that influence supply and demand:
Loss of tenants
In some cases, tenants have lost their jobs and can no longer afford to pay rent. This may include university students that have lost their part-time work at the local hotel or with one of the many fast-food chains. Many in this category have had no alternative but to move back to their parents’ residence.
Decline in rents
Some rent is better than no rent. This category tends to include couples or families, where one person has lost their job or their hours have been materially reduced. They don’t or cannot, afford to move from the area they live, so they negotiate a rent reduction with their landlord.
Unemployment is tipped to increase to as high as 10%. Unemployment affects the ability of tenants to pay rent, along with unemployed landlords and homeowners, to make their minimum loan repayments.
During a recession, we would not expect to receive a pay rise. For homeowners, the opportunity to pay off the principal of the loan prior to retirement diminishes. Therefore, if we cannot pay off the loan prior to retirement then we have no alternative but to either sell the property and downsize or delay retirement.
For investors, they are in a similar predicament. Where the property is positively geared the landlord may be able to hold onto the investment property longer, however where it is negatively geared they may have no option but to sell.
Over-supply of property (particularly home units)
It has been well documented that there is or has been an oversupply of property, particularly in some capital cities. Again, with supply and demand, if there are more properties being built than being sold then the prices must decline. We also note there has been publicity where some of the large construction companies have not been able to source finance for their development as there has been a material decline in off the plan purchases.
Lack of immigration
Clearly, with travel restrictions as a direct result of COVID-19, there are fewer people entering Australia. This includes tourists and students. Many tourists book with online hotel booking sites such as Stayz and Airbnb – clearly this market has been affected. Students, on the other hand, consider more permanent accommodation. Again, the fewer people looking for accommodation the larger the detriment to the investment property market.
Working from home
With the ability to work from home, there is no necessity to rent or purchase a property close to their place of work to save on peak hour travel time. Many employees can conduct their role from home through technology such as Zoom and don’t need to reside in the city of their employment.
In summary, the answer lies in that dreaded curve that we know as the COVID-19 curve. Clearly, the longer this pandemic drags on and the more protracted the isolation, the greater the negative impact on property prices.
If you believe that the current dilemma will last for another 12 months then understandably that is bad news for a seller in the property market but potentially good news for a potential first home buyer. Conversely, if you believe that this pandemic will disappear as quickly as it started then the impact will not be as great as many are predicting.
My view? Well, unfortunately, I am one of the more negative commentators – I don’t see the economy returning to normal quickly. For most of our clients that have been overweight in cash over the past 12 months, I believe that there will be investment property buying opportunities after January 2021. I say this because no one is forecasting the development of a vaccine that will be delivered in commercial quantities before that time. Furthermore, I see more people will be coming off JobKeeper and moving to JobSeeker in the near term.
Therefore, if you like property and you are in an industry that has seen only a minor impact as a result of COVID-19, and you are cashed up, you need to start researching the market now or speak with your adviser.
Should you require more information about property prices, submit an online enquiry now or call Peter Quinn on +61 2 9580 9166. We also offer a FREE 45-minute consultation should you have other financial planning, taxation or superannuation issues you may wish to discuss.
The information in this document does not take into account your personal objectives, financial situation or needs, and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.