Finance Market Update – 3 April 20
We are publishing this special update focusing on the property market and covering both residential and commercial. Specifically talking about the upcoming decline in resi property prices and challenging situations commercial landlords and tenants are in.
It is not a question of if residential property values will fall - it is a question of by how much.
Since the peak of property prices in late 2017 to what will be a new bottom in prices will show the full cycle we are actually in. The False bottom reached last year will probably seem like the middle of this crazy ride we are on, meaning the actual bottom induced from the virus will be double the previous loss.
That would be a 20%+ decline in resi property prices, peak to trough.
How could the market fall so much? Let’s talk about a few reasons…
Virtual auctions don’t stir up the same fomo
While it is amazing to see the industry and real estate agents pivoting to a new business model in the face of bans on auctions and open houses, buyer sentiment and confidence is shot.
I asked in an earlier update how can you sell a house if no one can see it and the answer is starting to emerge.
Not only will most people be unwilling to spend hundreds or millions of dollars on a property during a virtual auction but the method of the auction being online itself does not generate the same psychological head space and fear of missing out so people just won’t bid in the same way, which is to say the way that drives prices up.
The heat of the moment is lost.
We see this as auction clearance rates have plummeted from about 80% consistently all year to less than half and an increase of private treaty sales. Buyers are cautious over buying right now.
However, those that are willing and able too buy during all this could be taking advantage of a unique set of circumstances and acquire an amazing property. Skyward Financial is working with the major banks and non-bank lenders to keep funding lines open so if you want to buy let’s talk about your loan options.
Financial drought of home loans
12.6 million hectares of land burned during the bush fire crisis, which has been followed up by a global pandemic currently working its way to the peak of infections, both of which were proceeded by one of the worst droughts in our country’s history. What a disastrous sequence of events.
Unfortunately, we are not through it all yet as a new kind of drought is emerging, a financial drought.
While banks have been quick to get headlines recently after the rate cuts, government funding packages and offering small business loans, actually getting money out of them is a different story, one that doesn’t read well on the front of a newspaper.
For example, in some cases they are taking weeks to even look at applications, and once they look at them the risk tolerance has risen so much that loan approval amounts have dropped and people working in harshly affected industries like hospitality will struggle to even get a loan approved.
In many ways you can’t blame banks for slowing down the flow of credit to potential borrowers, but this drought will have more significant negative price implications for property than the royal commission.
This comes back to a point I keep making – in the short term, it is the availability of credit that drives the property market.
If you can borrow $900k you will likely buy a more expensive property, or at least, be able to keep putting your hand up at auction a few more times. But if you can only borrow $780k you won’t be buying as expensive property and your hand will come down a few waves of the paddle earlier than if you could have borrowed more.
This is a dramatically oversimplified explanation of what happens but illustrates real world outcomes – if people can borrow more they will spend more, which drives up property prices.
Conversely, if people can’t borrow as much they won’t spend as much, so prices fall or at least aren’t pushed up so quickly.
Compound the lack of credit, high household debt levels, increasing unemployment and the aforementioned issues with online auctions and we have a situation that could see residential property prices fall by 20% or even 30%.
Who will survive the winter - businesses or landlords?
There is a fight raging between the two sides and no matter who wins by Christmas this year we will see many empty shops, and sadly, closed down businesses.
While the government is sitting on the fence and instructing businesses to talk to their landlords to strike up an agreement the grey area of this compared to the residential policies is causing confusion and tension.
Already there are stories of tenants refusing to pay rent, lie about their revenue loss to get waivers and asking for months of free rent. While on the other side landlords are demanding to still be paid, or give a few months rent free or an agreed price reduction.
The circumstances vary dramatically.
And that is a huge part of the issue, the inconsistency of it all, or more accurately the variability of the way to handle the situation which leads to one side usually coming out on top. This causes more than financial strain it causes issues between the two sides of the market.
While not taking sides here let’s explore both perspectives.
To start with, should business owners get a few months or more free rent?
The case for this is in a way being made by the government, as they are introducing the JobKeeper payments for businesses to retain staff for the next 6 months, the timeframe in which the government seems to think will be the hard bit and after that this will largely pass, which hints that businesses should plan to open back as normal by then. In order to be able to open back up then (and avoid collapsing) removing one of the major fixed costs of a business, rent, could see many businesses survive.
But should a business just get a free kick on rent automatically?
Probably not. At the very least they should be able to provide supporting documents like financial statements that show a decline in revenue to make the case of reducing rent.
For example, if a businesses revenue falls to 70% of the average, a point in which the government also thinks they are entitled to the JobKeeper payments, then they have a case to make to lower or waive rent. They should show they need it in most cases.
From the landowner or landlords view, why should they forgo income?
Chances are if the tenant in a commercial property leaves it will take a lot longer than 6 months to fill the space with a new tenant.
And depending on the type of commercial property potentially even longer, and even then there is no guarantee rents will be back at the same levels pre-virus crisis, especially as many people will become forced or choose to continue to work remotely and have less desire to shop or buy in person.
Foot traffic will not be the same again for the foreseeable future.
So, the argument to give full or partial rental reprieve is that in most cases it is better to get a portion of the income or at least keep the tenant than to have one of the many empty shop fronts that can be seen along major roads, in shopping malls and elsewhere.
Further, most banks and commercial property lenders are offering six months pause on repayments, often with interest capitalised, which means the landlord’s is not out of pocket on any mortgage repayments.
This might negatively affect the yields on the commercial property and subsequently values, but better to be holding a shop with a tenant than an empty one.