The year of 2020 is likely going to be remembered as one of the most interesting and eventful years of an entire generations’ lives, across a number of areas, not least of which is investing. Financial markets have unsurprisingly taken a hit, however with circumstances resembling nothing the world has ever seen before, that hit has been followed up with what some analysts have defined as irrational.
The trickle on effect is now spreading to other areas of the economy, with some analysts suggesting property may be next, but things are not quite as grim as some have forecast, with more realistic scenarios seeing property markets take a mild dip, paving way for a new generation of successful investors in Australia's millionaire maker market.
Following a record breaking 38% dive following the outbreak of COVID, we’ve seen share markets make surprising bounce backs and follow-on drops, entire exchange indexes display the characteristics of small cap shares, oil prices drop below $0 for the first time in history, airlines go bust, unemployment rates skyrocket and entire industries become all but redundant.
Amidst the chaos, real estate, the bedrock of Australian investing, has managed to remain relatively unaffected. Whilst property markets have seen considerable reductions in sales and listing volumes, and auction clearance rates have spiked up to 65% in some major cities, the asking price for those who are listing has dropped just 0.9% and 0.2% in Sydney and Melbourne respectively from March to April. The sentiment in Brisbane has even improved, with a median ask price increase of 0.7%, showing that Aussie homeowners still have a lot of confidence in the market.
Nevertheless, this situation is now at a stage where the entire economy is being affected, and It would be unwise to assume that property is completely immune. The strength of property markets to date has attracted the attention of leading economists and analysts over the past month and there appears to be little doubts that a real estate market hit is imminent. How large, which areas and regions will be affected most, and for how long the downturn is to last vary from report to report, but one thing is consistent: a dip is coming.
However, whilst there are some more pessimistic forecasts doing the rounds in the media, we see this drop realistically being less severe, easily recoverable, and therefore presenting some of the best opportunities in property investing for a generation.
What are “they” saying?
There are mixed predictions on house price changes. In a review of the effect of unemployment rate rises, AMP Capital chief economist Shane Oliver suggested that in a best case scenario capital cities would see a 5 percent price decline, and in a worst case scenario, that number could be as much as 20 percent.
Meanwhile, a recent report from CBA has forecast a median house price drop of 10% within the next 6 months, which seems to be a figure that many analysts are agreeing with.
Some analysts are anticipating more serious changes, though. SQM Research founder Louis Christopher reported to ABC’s The Business that if a second wave of coronavirus hits, we are likely to see a “major fall” in prices.
"When I say major we're talking up to a 30 per cent decline over a 12-month period, with the bulk of those declines occurring in Sydney and Melbourne," he said.
This may seem a bit doom and gloom, however it is important to note that these predictions are largely hinged on variables that still remain quite unpredictable and, in some cases, not very likely.
The economic effect of this pandemic is already in motion to impact Australian property markets, so some impact is now all but inevitable, but the more pessimistic outlooks are based on the pandemic getting substantially worse, and so far Australia’s response has proven effective, with many restrictions easing. Whilst we can expect a drop, it is perhaps unrealistic to expect the worst of these outlooks to come to fruition.
Key factors to watch:
With this kind of uncertainty, knowing what to look out for is imperative. The best approach for this is to work with a professional, and Buyers Club consultants are the best in the game, keeping our members in the know on the changing investment landscape. Whether you are a member or not, here are a few of the key factors to look for when considering these property market forecasts:
Coronavirus itself: the magic number here is known as the COVID-19 Growth Factor, and it is calculated simply by taking today’s new cases and dividing it by yesterday's new cases. if this number is above 1 then the pandemic is worsening, and if it is below 1, we’re heading in the right direction. Our current growth factor as at May 20th is 0.98, and with low numbers of new cases this is a comforting statistic. Our highest growth factor was on March 18th where we hit 1.28.
Latest outlook: Australia’s restrictions have continued to ease and our progress out of the pandemic is looking more promising than slipping backwards at this point...as long as we can all behave ourselves.
Unemployment rates: April saw some alarming increases in the unemployment rate, which has an effect on all areas of the economy. Current unemployment rate estimates for May are sitting around 7%, however there is a risk that this figure could be much higher. Analysts suggest that if unemployment reaches double figures, a much more serious and widespread economic downturn could occur, and the anticipated “V” shaped recovery may not be possible.
Latest outlook: April’s reported unemployment rate hit 6.2% which is a substantial increase, however we are still a long way from double digits, and with restrictions easing allowing many businesses to get back to work, this is more likely to flatten than spike again.
Mortgage holiday endings: perhaps the best test the real estate market will face is the removal of mortgage holiday periods. In the face of unemployment rises and credit defaults, many Australian banks offered loan repayment pauses, allowing borrowers to temporarily stop paying their mortgage. However this is not removing the debt, it is simply postponing it. At some point, these mortgage holidays will end, and if this is timed with some other factor negatively impacting factors it may be the trigger for vendors to drop their asking prices.
Latest outlook: Australia’s household debt-to-income ratio of almost 200 per cent, the bulk of this being mortgages, and is one of the largest in the world, so that isn’t promising. However we also have a property supportive government, and between state and federal governments new initiatives to soften the adjustment are being proposed each week.
There is opportunity awaiting for those who are prepared.
With all this uncertainty, it can seem a bit difficult to know exactly what to do. To this end, we refer you to one of the greatest investors of our time, Warren Buffet, who famously quoted:
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.
Right now there is a lot of fear in Australian property markets, and this creates opportunities for those who can see it, or more-so, those who are prepared and have a plan. It is imperative that you have a well thought out strategy in place for capitalising on the changes set to occur.
Being reactive in a changing market is dangerous and could land you in hot water as a result of rushed decisions. Buyers Club members have access to experienced and professional property investing consultants, who are committed to helping each and every member put together an effective and market relevant plan.
Having a buyers agent has never been more important than now, with adjustments to rental yields from price drops, growth area changes as work and lifestyle shifts bring people into their homes more, and an increased demand for reliability and affordability in the wake of uncertainty.
You can put yourself in the best position to be greedy while the rest of the market is fearful, and realise investment returns not possible in a more straightforward and steady market, but it cannot happen with the right preparation and planning, and the time for that is now.
Become a member today and our Buyers Club consultants will work with you to strategise, plan and prepare for the right investment at the right time.
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