The demand for property never stopped and people are looking to buy. In this update we talk about what could support demand and a recovery in property prices and the challenges on the supply side for both commercial and residential properties.
Latent demand
One of the key factors that could lead to a fast recovery, and indeed another boom, in house prices is pent up demand.
Before the virus crisis infected the Australian property market it was on track to reach or exceed the peak values from 2017. This is something I predicted would happen and was looking very real until we went into the great lockdown to flatten the curve of the virus, which inadvertently flattened the curve of clearance rates, home loan interest rates and property prices.
The prediction was largely based on the premise that low interest rates directly inflate property prices through spurring on market activity, which leads to (more competition and) higher prices.
The negative price impact of the virus as it relates to the property market came from a collapse in the supply side – not the demand side.
There was and remains strong demand for property.
The number of listings of available properties for sale, the supply side, reached historical lows as people pulled their assets off the market in fear of price falls and losing money.
The number of people coming to buy properties also dropped, but a considerable factor was that people were not allowed by law to visit open houses or auctions, so of course the numbers dropped.
Demand was suppressed.
This has changed over the past few weeks as laws in NSW and other states have been eased. Since then, we have seen clearance rates and the number of listings of properties for sale steadily increase. A sign of things to come perhaps.
Further, we talked about very real psychological reasons about why people buy things if they think they are going to miss out. This will be a strong undercurrent supporting demand.
So, as people are allowed back out into the market to inspect property to buy it will likely feed into increased sales activity and therefore a recovery in prices. Peoples buying activity will also be supported by ultra-low interest rates.
Combining all of this starts to make a case for a sharp lift in prices.
The question is this – is demand strong enough to ignore the (global) recession to push property prices back up to pre virus crisis levels?
Building supply
On the supply side we have a mixed picture.
Commenting briefly on the commercial property market, it is highly likely we are at the start of a significant price correction largely driven by declining rents and therefore values and a sell off of key retail properties.
The amount of sub-lease available space available in commercial properties is about as high as it was during the recession in the early nineties, which will probably be exacerbated by a huge shift in the modern workforce from being clusters in office towers in one central business location to being more widely dispersed and working from home or smaller work sites.
A cultural and structural shift that is taking place which has not seen the flow through of repricing in the market yet.
We will also likely see a sell off from flagship commercial properties which just aren’t making commercial sense anymore with the reduced foot traffic and high rents. Similarly, many corporates will be asking themselves if they need so much floor space in office towers in the future.
While the short-term outlook for commercial property appears negative, ultimately I believe the desire to work close to people will prevail. We are social animals after all and no amount of Zoom meetings can replace spontaneous interactions, which are not only enjoyable, but can provide genuine value for businesses in many ways.
For residential property supply seems set to bounce.
We talked as few updates ago about stressed investors bringing new properties to the market and this trend appears to be continuing, even gaining momentum, and could lead to more properties coming to the market.
By the end of the year when the six-month repayment pauses end many investors will be left with a choice, lower rents, no rent or sell (potentially at a loss or lower than would have got last year).
Those that decide to sell will be joining a wave of properties coming to market, or should I say, a wave of newly built apartments preowned by investors coming to market.
Demand will probably soak those up relatively easily, especially from first home buyers looking to get into the market.
First home buyers may as well buy instead of rent because the monthly cash outlay is comparable in many circumstances, which means the main barrier is the deposit, which the government is helping with under the First Home Buyers Guarantee Scheme, a program Skyward Financial can help with.
Investors, or indeed owners, who cannot afford the home loan repayments will highly likely be given extensions on loan pauses or reduced repayments of some sort.
Banks will work with people to avoid having a forced sale.
The royal commission is still fresh in the regulators and people’s minds, so banks do not want to be seen evicting people from their homes.
This means the bank forced sales to the housing supply side will not materialise.
This is an important point because many doom predictions point to this factor being a crucial piece in the worst-case scenario. A huge amount of properties coming to the market from people who can no longer afford them.
Sure, there will be heaps of these, but not as many as to be a deciding factor in a property price collapse.
Afterall it is in the banks best interest not to see property prices collapse too much given that is where they make most of their money and have most of their assets.