Finance Market Update - 10 September 21
Now might be a good time to buy property. In this fortnights update we talk about commercial and residential property and why now might be the dip in property prices before a boom next year.
Timing is everything
If you agree with my prediction that next year we will have an economic and property price boom then you should consider buying a property now.
This goes for both commercial and residential property so let’s talk about each of them. But before that let me acknowledge the severe risks on the horizon.
We face a lot of continued uncertainty across how the economy will perform over the short, medium, and long term.
Change and uncertainty are the only constants in the future.
If you read the previous update you will know that my perspective is one of optimism supported by recovering incomes from investment in businesses which will boost employment, high consumption and demand, and property markets continuing the upward trajectory.
The major risks in my view are the adjustment to living with covid and the negative realities that brings such as hospitalisations or worse, and a potential unexpected shocks. I actually think both these things will happen. People will get sick and something from left field will happen, but we will deal with it, and move onward and upward. Based on our tenacity, supported by huge government spending, people buying things and businesses investing, the recovery will continue towards a new normal.
And in that new normal real-world assets like property are both a good inflation hedge and practical.
Back to property, let’s first talk commercial.
Across the different asset classes in commercial real estate, namely offices, retail, and industrial, there are also grades of how ‘good’ the specific property or asset is.
For example, when you are walking through Sydney CBD and see the really tall towers they are ‘A’ grade assets. The top ranking possible. They obtain this privilege mainly through their size, location, and tenants. Unfortunately, since the virus crisis started most of those tall towers are empty which will eventually drag down on their yield and value.
This is especially true as anecdotal evidence points to a continued flexibly working arrangement by most employers and will likely be 3 days in the office and 2 days working from home. Something I predicted a year ago when I talked about the difference in demand and requirements to be in the office. This will vary across industries and businesses, but this will likely be the average structure going forward.
The implications of this for those A grade office towers is dramatic.
Most of the tenants in those buildings are very large firms with multiple levels being occupied and thousands of square metres leased. As they start to structurally build in workforce flexibility their requirement for so much space will reduce. This reduction in requirements will see available square metres for sub-lease and lease increase which will drive down the cost per square metre and subsequent yields from the assets which will drag down the prices of the assets. However, for now even with high vacancy rates investors have still been putting money into the asset class.
One counter to this trend that commercial properties in CBD’s could be repurposed into residential or more mixed-use buildings for both living and working.
This was one of my predictions at the end of 2020 that offices would repurpose themselves and I still believe this is a trend that will occur. Or at least, as written about in this great article we could see the rise of the ’15 minute neighbourhood’ essentially saying people will live and work in closer proximity, I’d say repurposing offices into co-living makes sense for this transformation.
On the positive side the standout type of commercial property at the moment is industrial.
This includes factories, warehouses, and storage facilities. These types of industrial buildings are in huge demand for both investment and to lease.
Part of the rise in this sector is explained through the booming e-commerce sales as many sales moved online from the virus crisis. The other part is that, at least in NSW, there appears to not be enough quality commercial industrial space in desirable locations for reasonable prices.
I specifically called out industrial property as an interesting investment opportunity January 2021 and the sector is will remain attractive for both investors and businesses needing the space. So, if your business is growing or you are interested in investing in commercial property and want to understand your borrowing options Let’s Talk.
Residential property still has a bit of room to grow.
As I’ve said before there are five forces that are (still) creating a property price boom and more recent elaboration these points are below.
My prediction remains we will see record high property prices in 2022.
High demand, higher than almost ever.
This is obvious from the real prices being paid for property diverging from the ‘under quoted’ advertised prices and reserve bets from the owners to guarantee a minimum price. There appears to be massive pent-up demand as most people came out of lockdown (excusing those in Victoria whose state government apparently has no options but to lockdown millions of people entirely rather than isolated places) with more cash and need for more space seeking to buy into a rising tide of a market.
The demand is also skewed to the high end and houses in general as people want more space to work and play at home.
Low supply has been a persistent issue, not just for listings of people selling, but there is a broader structural issue here.
For decades, federal and state governments have inadequately executed on property development to cater to economic needs of their civilians and provide (relatively) ‘affordable’ housing. Australia is the largest island country in the world with more liveable landmass than we use so it is arguably crazy that we have concentrated into a handful of cities with explosive property prices, compared to regional and coastal areas. The virus crisis is somewhat changing this as people flee cities for sea changes.
Vision is not commonly associated with government and housing planning is no exception.
One can imagine that if it were a mandated task of the government to provide housing (amongst other things like education and healthcare) to its people that the average house price in metro cities in Australia would not be some of the comparatively highest in the world and would mean we would not have some of the highest debt to income positions of any western democratic country.
It is hard to understand why housing is left so much to the private sector when the economic security of the country depends upon individual having their own economic security, and at the most basic level that security comes from having a place to live.
Low interest rates cannot be sustained forever but they can stay around for a while longer.
It is easy to forget that the current low rates are a response to an emergency, that they are at emergency levels to support the economy, and they can’t stay this low forever.
The emergency was a once in a century life-threatening global pandemic and disease that has killed millions. The more we get over that locally, the faster low rates should and will rise.
We are rather insulated from the worth of it so it is easy to forget the world is largely suffering and sick right now.
The main, if not only, lever the RBA and other centrals banks had to combat the virus crisis was to lower the rate.
Five years ago, the average owner-occupied P&I fixed 2-year home loan rate was about 4.3%. Today it is about 2.3%. Soon it will be somewhere in the middle.
Funnily, in one of these updates from March 2019 we talked about how low rates and the growth in credit were causing property prices to increase, and now rates are even lower and credit growth is historically high. A known trend that has been recurring. Historical data points to higher property prices from here.
Be careful of inflation when rates start to rise, often inflation is already here when they go up.
Government financial support has seen government debt hit record highs.
JobKeeper was an entirely necessary payment from the government as they ordered millions of businesses to shut their doors and people stay inside their homes, but it will bring issues in the future. Billions of dollars in debt must be repaid in the future by future generations.
But the tapering of government support has not led to any ‘cliff’ in property price drops like so many expected which I adamantly refuted previously.
For now, many people have had their jobs saved and a lot of people, believe it or not, are actually financially better off now than pre virus crisis because of the ‘free’ money from the government. Many peoples savings bank balances are higher now than before.
This also means people feel richer and might have more money to spend on a property, further adding to rising prices.
But the free money train has stopped. No more JobKeeper and less money being thrown at people. This is mostly a good thing but neglects sectors like the arts, entertainment and travel which were disproportionately affected by under financially supported in specific ways.
Conversely to government support is government intervention, and as we talked about in an earlier update we could see the government intervene with restrictions on Debt to Incomes to cool the market but as the banks raise their rates it takes the pressure off APRA to step in.
While there is high debt from this, Australia has recovered GDP faster than after any previous recession and has led the world in recovery. A truly stellar result. One that I predicted at the end of last year in last years wrap up update which you can read here.
FOMO is a real psychological phenomenon.
In fact, people are often more fearful of missing out on something than doing the thing itself.
This is a key driver, often overlooked or inadequately quoted in media, about how key it is. Housing and shelter are a basic human necessity, both physically and mentally. We will always be driven to acquire safety through the bio-organic algorithms that dictate our survival instincts.
Once we pass the necessity phase and get used to being safe and having somewhere to live, we want more of it. A bigger one, a bigger house, with an extra feature and in a location we like and that suits our perceived status in the social hierarchy.
All of the ‘crazy’ buying activity is not viewed as crazy by the people paying those prices. They think it is worth it. And it most cases they are right because they are the market for that house and product, so they and the people they compete with (i.e. the market) are the ones who set the price, driven by their mentality and hopes and fears.
While I remain bullish on property it is not without risks. This is all general comments and not advice and you should consult professionals such as financial advisors, accountants, lawyers, property buyers and Skyward Financial as your broker before making any decisions.
If you think there is opportunity in property, now is a good time to act.