Property market update: Sydney, April 2020

Still, ultimately, Propertyology’s head of research Simon Pressley believes that the property sector can get Australia out of its “coronavirus cocoon”.

Twenty-nine years ago, real estate led the rebound out of Australia’s last recession. The unemployment rate hovered around 10 per cent during the 1991 recession year and the subsequent two years. Over those three years ending 1993, eight out of eight capital cities produced property price growth of between 2 per cent (Melbourne) and 27 per cent (Perth).

It was a similar story 12 years ago with the global financial crisis – the biggest economic downturn in history. Property prices again increased in eight out of eight capital cities over the three years ending 2010. Darwin (32 per cent) and Melbourne (21 per cent) were the best-performing capitals, while Ballarat (19 per cent), Bendigo and Launceston (both 18 per cent) and Armidale (17 per cent) were among many strong regional property markets.

In fact, at the moment, there remain plenty of good deals to be done despite COVID-19’s grind on the economy, according to Cohen Handler’s co-founder and director Simon Cohen.

“Let’s be super clear: When we look at areas like Sydney especially, and blue-chip areas in a lot of states – blue-chip property never really crashes – it’s not like the stock market,” Mr Cohen said.

“The ‘sting’ has definitely come out of the marketplace… Vendors and property owners are a lot more motivated to do deals, but there are very few properties on the market because the valuers aren’t knocking on your door to foreclose anymore; you’ve got three, or six or 12 months of free mortgage repayments; and interest rates are at an all-time low.”

As a result, anyone who is selling up, regardless of the reason, is motivated to do so. Thus, buyers are up for some of the best deals, with discounts ranging from 10 to 30 per cent, Mr Cohen highlighted.

“If an opportunity knocks, from my experience, it doesn’t knock twice,” he said, highlighting that the government is putting things in place to revert the economy back to normal as soon as it possibly can.

Property values

Markets across Australia saw values rising in the first three months of 2020, but they could struggle to maintain momentum throughout the COVID-19 pandemic, according to Domain.

From 25 March, the federal government introduced restrictions on real estate practices to curb the spread of COVID-19 infections, including the banning of public auctions and open homes. However, prior to this, detached houses in every capital city held strong or increased in value in the three months to 31 March.

The first quarter of 2020 saw Sydney take the prize for strongest annual outcome since mid-2017, according to Domain, with house values jumping by 13.1 per cent, and units 8.5 per cent, with values almost returning to their peak levels.

However, data suggests that the COVID-19 outbreak and economic slowdown began to impact the market in Sydney by mid-March.

“New listings began to fall, suggesting vendors were becoming hesitant. This caution heightened in April with even fewer homes listed for sale, suggesting few forced sales,” Domain said.

Domain stated that signs suggest the Sydney market had begun to slow its rate of growth even before the pandemic hit.

“A combination of weak wages growth and rising prices had once again stretched affordability for some buyers, while a rise in new listings early in the year had [helped service] demand. As a result, quarterly house price growth had slowed to less than half, and unit price growth one-third lower than the previous quarter,” Domain said.

Following Sydney in terms of quarterly gains are Hobart (2.2 per cent), Melbourne (2 per cent), Darwin (1.2 per cent), Brisbane (0.6 per cent) and Canberra (0.3 per cent).

Adelaide and Perth saw house prices remain steady quarter-on-quarter. However, these markets saw gains in their unit prices of 4.2 per cent and 1.6 per cent, respectively.

Sydney’s unit market, meanwhile, saw a 2.7 per cent rise, while units in Hobart held steady over the quarter. Meanwhile, all other markets saw drops in the value of units.

With most of the reporting period taking place prior to the government’s social distancing regulations, Domain anticipated that future housing value figures won’t look as strong.

The reversal in sentiment has prompted some analysts to forecast price declines of up to 15 per cent against an unemployment rate of 10 per cent (currently 5.1 per cent).

Still, CoreLogic’s head of research Tim Lawless said that, while sales activity is highly likely to be affected by the crisis, residential property prices could very well be “insulated” from a looming “plunge” in housing market activity by low interest rates and mortgage repayment relief measures.

“The extent of any fall in housing values is impossible to fathom without first understanding the length of time this health and economic crisis persists. Arguably, the longer it takes to contain the virus and bring economic operations back to normal, the higher the downside risk to housing values,” he said.

Mr Lawless noted that, in the meantime, current restrictions on property transaction activity would limit the reliability of statistical analysis of market trends.

“If we are correct in our expectation that housing market activity is set to temporarily plunge, we could see increased volatility and a reduction in certainty creep into housing market measurements until activity picks up,” he said.

“Measures of housing values and prices rely on timely updates of recently sold properties; a material slowdown in turnover is likely to create some challenges over the coming months in how we report on market conditions.”

Supply and demand

According to CoreLogic’s latest Auction Market Preview, for the final week of April, the combined capital city auction market is expected to see a slight increase in auction volumes following last week’s drop as the nation stopped to commemorate Anzac Day.

Apart from Anzac Day, the lower volumes last week can also be attributed to the continued challenges around social distancing, with only 413 auctions held last week, CoreLogic said.

“While this week’s scheduled numbers are set to increase, with 544 properties expected to go to auction, volumes are substantially lower than what we would usually see,” CoreLogic said.

The report stated that Sydney is expected to be the busiest city for auctions, with 254 properties scheduled to go under the hammer, up from the 192 held last week. Meanwhile, there are 184 Melbourne homes scheduled for auction, up from the 144 over the previous week.

Adelaide, Brisbane and Perth are all expected to see a higher number of auctions during the week, while scheduled volumes are lower in Canberra. There are no auctions in Tasmania over the said time period.

Ultimately, the economic fallout from the coronavirus (COVID-19) outbreak is set to trigger a “plunge” in housing market activity, with the number of residential property sales to fall dramatically over the coming months as a consequence of tanking consumer confidence, a rising jobless rate and more cautious lending practices, according to Mr Lawless.

Restrictions on open homes and on-site auctions will compound the slowdown in buyer activity, as would any future policy announcements relating to peripheral services such as building and pest inspections, conveyancing and furniture removals.

CoreLogic said it’s likely the number of scheduled auctions will remain substantially lower than normal, at least until social distancing policies are lifted and on-site auctions can resume.

“With a sharp reduction in scheduled auctions, we could see the withdrawn rate start to normalise, which is likely to have a positive flow-on [effect] to the clearance rates, which has been dragged lower over the past month due to a surge in auction withdrawals, which are counted as unsold in the clearance rate statistics,” according to them.

Still, despite fear and uncertainty, Cohen Handler’s buyer’s agent for the North Shore Arija McQuillan said that it’s generally business as usual for property professionals, with a good number of investors still keeping them busy amid the ongoing health crisis.

In fact, there are still record-low properties on the market and a record number of buyers looking to buy, which could definitely benefit investors with a “competitive advantage”, or those that could leverage on their relationships with property professionals and, thus, be able to snag extraordinary deals.

“The property market is still really, really strong… In fact, I went to an auction (recently) where the guide was $5.5 million and it sold for $6,810,000. It just shows the strength of what’s going on out there,” she said.

Moving forward, Mr Cohen believes that the property market will be under no threat of total collapse as history has already proven the property market’s resilience amid global economic phenomenon, particularly during the recession three decades ago and the global financial crisis of 2008.

“When you listen to economists and people from the bank talk, they think that interest rates are going to drop again… If you’re like me and you’ve worked through different markets including the GFC, you’ve already seen these things in Sydney,” Mr Cohen highlighted.

“The great thing about property where we’re different to the rest of the world is that our property prices don’t plummet like shares do… When people are getting no money in the bank, property seems to be a safe and high return option for them.”

Rental market

Like most parts of the property market, the residential rental market has lost momentum as a result of the COVID-19 pandemic.

CoreLogic’s quarterly data has found that the momentum built up in January has decelerated, despite rental gains in March being positive at 0.3 per cent.

Capital city rents are 1.3 per cent higher over the quarter and 1.0 per cent higher year-on-year, while regional rents are 1.0 per cent higher over the quarter and 2.6 per cent higher over the year.

Six of the capital city dwelling markets experienced a month-on-month increase in rent values, led by Perth, where rent values rose 0.8 per cent in March. Brisbane rents were flat over the month, and Hobart rent values declined 0.4 per cent.

Sydney remained the most expensive rental market, with a current median rental value of $577/week. The differential between Sydney and the second-most expensive rental market, Canberra, has trended down to just $1.

“A deceleration in the growth of rents, as well as a decline in some areas, signals that this growth momentum is facing disruption,” according to CoreLogic’s Eliza Owen.

Rental vacancies have also faced decline over the past months, particularly across capital cities.

According to the REINSW Residential Vacancy Rate Report, vacancy rates were down in Sydney, decreasing 0.4 per cent to 3.0 per cent.

The largest drop was felt by Sydney’s outer ring, with the report highlighting that vacancy rates decreased from 3.5 per cent to 3.0 per cent. Meanwhile, the inner and middle rings both decreased by 0.3 per cent to 2.5 per cent and 3.6 per cent, respectively.

Further, the Hunter region also saw a drop in vacancies from 2.1 per cent to 1.3 per cent, while Wollongong and the rest of the Illawarra saw an increase in vacancies from 2.1 per cent to 3.8 per cent.

The other regions of NSW reflected a general trend of decreasing vacancies, with only two of the 12 areas – South Coast and South Eastern – reporting an increase.

“Of particular note this month is the 11 per cent decrease in survey response rates from property managers when compared to February. This is attributed to the disruption being caused by COVID-19, a trend that is expected to continue over the next few months as property managers are focusing on the volatile and uncertain rental landscape,” the report noted.

Commenting on the changing trend in the rental market, REINSW CEO Tim McKibbin said: “We are in uncharted waters for the rental market. There is a significant amount of uncertainty about the impact on rental vacancies arising from the fact that many renters are facing job losses or reduced pay.

“Notwithstanding the six-month moratorium on evictions, this will likely cause more tenancies to be given up – for example, by people moving in with other family members. Also, some short-term accommodation properties are now being listed as available for long-term rentals. These two factors are increasing the supply of rental properties.

“I believe we will therefore see a rise in vacancies over the next few months.”

2020 outlook

As a result of the COVID-19 pandemic and the safety measures implemented thereafter, a few essential services have been taking hits over the past weeks, particularly the construction sector.

The 5.3 per cent fall in the number of building and construction industry jobs revealed in the last six weeks shown in data released by the ABS is alarming and reinforces the need for immediate government stimulus measures, according to Denita Wawn, Master Builders Australia’s CEO.

“Stimulus can’t wait because jobs are being lost now, and we need to protect the livelihoods of the 1.2 million people employed by the industry around the country and the viability of the nearly 400,000 building and construction businesses that pay their wages,” she said.

While the first stimulus package of $17.6 billion should directly help the small and medium-sized businesses that are turning over less than $50 million, due to payments of $2,000 to $25,000 as well as wage subsidies to hire and retain apprentices, the numbers indicate it has not gone far enough.

Professionals are, therefore, calling to fast track projects to kick-start the construction sector.

“Results of a new Master Builders survey of its members [show] that 73 percent have seen a substantial fall in forward work on their books of 40 per cent on average,” Ms Wawn said.

“Governments must act now because while many builders and tradies are getting by on work that commenced prior to the onset of COVID-19, that work is fast running out and new orders have fallen off a cliff.”

To help push for the recovery of the essential property sectors, several NSW councils will be allowing home owners to lodge development applications (DAs) online, ultimately reducing wait times for DA approval.

Metro Sydney, Newcastle, Central Coast and Illawarra property owners will be able to lodge DAs from the comfort of their home, ahead of a statewide mandate that will come into play from 1 July 2021.

According to the NSW government, 42 councils will be required to implement ePlanning from the said date, which will be extended to encompass the remaining 86 councils by the middle of next year.

Minister for Customer Service Victor Dominello said ePlanning is transforming the state’s planning system and enabling information and data to be accessed from anywhere at anytime.

Calling it “a game changer for home owners”, Mr Dominello said “the average time taken by government agencies to respond to requests has been reduced by up to 20 days, with DA processing times being slashed by more than half in some councils”.

He said the initiative “puts the customer at the centre of the DA process by eliminating paperwork, allowing applications to be submitted anywhere in real time, avoiding delays and boosting transparency”.

Rob Stokes, the Minister for Planning and Public Spaces, has said councils that make up the initial mandate account for two-thirds of all DA determinations in NSW, which will equate to $39 billion in development value for the state economy.

“Mandating ePlanning is one of the key ways we are transforming the NSW planning system to boost its timeliness, certainty and transparency as well as enabling housing supply,” Mr Stokes said.

Still, while there are stimuli pushed forward to help keep the property market afloat, experts reminded investors to be more cautious amid uncertain times.

According to Domain economist Trent Wiltshire, subdued population growth, particularly net over search migration (NOM), may easily add to housing market headwinds.

“Lower immigration means reduced demand for property, which will put downward pressure on prices,” he said.

“Lower population growth will be one of a number of factors that will contribute to property price falls in 2020. Other factors are 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 such as the ban on auctions and open for inspections. Property sales are likely to decline by even more than prices.”

The impact of weak NOM may be varied from state to state, with Sydney and Melbourne to be “hit hardest”, according to Mr Wiltshire.

“In recent years, Sydney has tended to attract a large number of migrants, but then lose residents to other cities and regions, so it’s possible that Sydney and Melbourne will be hit hardest by the reduction in migrants, which would mean a larger fall in property prices in Australia’s two largest cities,” he said.

“Weak population growth in the year ahead will also likely mean low rates of home building for at least the next year.”

Moving forward, the professional sector of the property market will be the lifeline of home owners and the market itself, Mr Cohen highlighted.

Apart from helping investors navigate the changing landscape, access and relationships with professionals will be the two most important keys to thriving in the property market right now as they may lead you to opportunities that will otherwise be buried under the cloud of uncertainties and fear.

According to him: “Build up relationships with people who are like-minded, who appreciate the job you do. “It’s those introductions, those leads, those referrals that they give you that can help you really start off on the right foot.”

“If it’s a mortgage broker you’re dealing with, they not only speed up the process, but they can also get their client into something they couldn’t find on their own at a price of less than what they would’ve paid for themselves. It becomes a team effort where everyone wins, and in business, I think an outcome where everyone wins is a phenomenal outcome.

“Strong and tight relationships give us a huge competitive edge.”

Should you invest now?

Despite uncertainties, Adrian Wilson of Ayre Real Estate urged investors to turn to the property market during the COVID-19 pandemic, arguing that those investors are far better off than those who have traditionally traded in stocks and bonds.

According to him, people will always need a home, whether they are buying or renting.

“Pricing can fluctuate relative to the current market conditions; this is the same for any asset class. At least with property, you can lease it, live in it or divest it, and it has two revenue streams: potential for capital growth and rental income,” Mr Wilson said.

“Additionally, if we look at the history of the inner-city market of Sydney, pricing has generally remained relatively stable, with minor declines in softer markets, and growth has always remained stable – if not been stronger – than perhaps any other market in the country in periods of momentum.

“Of course, it’s difficult for buyers to guess the timing of the market perfectly and pick the bottom, but the feedback we have had from purchasers transacting in the past month have commented that they are taking a medium/long-term view and believe that the current market presents some great buying opportunities with potentially less competition to secure premium property.”

Mr Wilson advised property buyers to avoid waiting too long. “Many buyers got caught out recently when the market took a turn and spiked in November-December last year and ended up chasing the market upwards against more buyer competition in a booming market.”

“The same could happen again very quickly in the coming months. If you have medium/long-term property goals, now could be a very good time to start rethinking your next property purchase,” he said.

The fact that property is an asset class being looked after by the federal government amid the COVID-19 pandemic should also be an encouraging note for investors, according to real estate expert Tom Panos.

“Look at what the government has done… They haven’t intervened and tried to support other asset classes. You don’t see them saying, ‘Your wine collection has gone down 25 per cent, let’s try to help you out’. You look at the sharemarket, you don’t see a lot of stuff coming out of that, [in comparison to what’s come out about the real estate market],” he highlighted.

“This is a message for property investors; it’s a message for mortgage brokers, and it’s a message for real estate agents and property managers as well: the government wants real estate in Australia to achieve and keep driving forward.

“The banks are highly invested in real estate in Australia. Real estate is always going to have huge support from the government, from the regulators, and the banks are highly connected in making sure the values of real estate in Australia are maintained.”

Mr Panos also believes that property prices won’t drop too much during the pandemic as there aren’t “forced sellers” at the moment, particularly because of government support and mortgage assistance programs.

“I actually spoke to someone who said they’re better off at the moment in terms of cash flow… So I think what will happen is you’ve got the government working in cahoots with the banks, which makes it very, very hard for distressed sales to take place,” he said.

For those jumping into the market today, Mr Cohen encouraged chasing capital growth in order to make the most out of the eventual recovery and rise of the property market.

“I think yield will be good because you are going to be buying properties cheaper, but the upside by getting a killer deal is still, for me, the most exciting thing. You want to say you bought it for $1.5 (million) and you and I are talking in six months and you’ve just been offered $2.2 (million) – that’s what gets me excited,” he said.