The property market has been surprisingly resilient during COVID-19. Actually, change that to remarkably resilient. The spring property market will face several crucial pressure points that will test that resilience though.
If you ask 10 experts for their opinion/forecast on how the Sydney property market will play out for the remainder of 2020, you will get 10 different opinions. The range of possibilities is so vast that one is better advised to watch the critical ‘signals and signposts’ in the market rather than following another person’s courageous prediction/best guess.
International borders – the continued closure of the international border will continue to hurt both the economy and the property market. The Australian economy contracted 7% in the June 2020 quarter. In recent years, any chance of dwelling oversupply in Sydney was quickly resolved by swelling population numbers. The Government’s policy gave developers confidence to continue creating supply out of thin air, by building high rises across the city and into the suburbs. Now the anticipated buyer demand has ceased yet the dwelling supply remains.
Going forward, this equation puts enormous pressure on developers and provides home buyers with leverage.
Vendor indifference/distress – One distressed vendor in the market who succumbs to a bargain hunter can inadvertently set the water mark for subsequent vendors. At a basic level, if a financially distressed vendor in a block of generic apartments reduced their price to achieve a quick sale, buyers will quickly call that the current market value. Even though there were extenuating circumstances that forced the sale price lower. This scenario could be described as a form of market contagion.
A version of this equation can play out across all segments of the market.
Indifference of vendors – A sign of a healthy market is vendors who can both emotionally and financially stare down bargain hunters. This indifference in vendors helps support the market. There were many bargain hunters in the market during the early stages of COVID-19, few succeeded as the market/vendor resilience became evident very early in the pandemic.
The retail banks’ considered response to their clients during COVID-19 was enormous in ensuring we avoided market carnage. A little over 12 months ago we were all digesting the findings of the Banking Royal Commission. How quickly times change.
Rental market – Whilst the sales market has been remarkably resilient during COVID-19, segments of the rental market were severely battered. Price corrections in the order of 15% to 20% were common at times. The resilience in sales values and the weakness in rentals has seen property investors desert the market. Any healthy property market needs incoming investors to help support prices and absorb stock. The rental market has suffered from contagion as sitting tenants look online to see superior properties available for lease at lower prices than they are currently paying.
If and when the rental market’s prices return to pre COVID-19 levels, investors will return to the sales market.
Employment – The true employment data is clouded by JobKeeper. Anecdotally, we all know the employment market is under pressure, but ascertaining an accurate read is near impossible at present. Keeping people in work is the Government’s greatest test as it aims to wind back support packages.
Unemployment is an obvious enemy to the market. Less easily spotted but equally damaging is underemployment where people are forced to accept less pay/hours or take a job below their professional status, just to make ends meet. The inevitable cut back in their spending habits feeds into an overall contraction.
Conversely, if employment holds, buyers have shown a clear propensity to take advantage of record low mortgage rates. First home buyers will also find buying opportunities emerge that were unlikely to have if it was not for COVID-19.
First home buyers are one of the few segments in the property market that you could reasonably anticipate an increase in buyer demand.
The Spring Market
Stock levels – low stock levels have protected vendors and frustrated buyers during COVID-19. This equation will be tested during the traditional spring season when listings surge. The early signs suggest the spring stock will come early this year. In recent years, the surge of stock seems to arise after the October long weekend, however we note that spring campaigns were appearing from late August. Interestingly, many of these campaigns were successfully sold in less than a few weeks, by motivated buyers left over from the dearth of winter listings.
Government and banks – They were quick to rush support packages to the economy and mortgage market in the early stages of COVID-19. At the time, many elements of how the economy would perform during the pandemic were unknown and ill defined (as they still are). The Government and banks initially put a deadline of September 2020 on these support packages, e.g JobKeeper.
The market quickly fretted about an impending crunch or cliff as the September deadline became approached. The Government and banks were forced to extend further relief to assuage panic.
Heading in 2021, the ongoing role being played by the retail banks and the Governments of the day is a huge piece of the puzzle in determining how best to transact property this spring.
In the last twenty years, there have been several other monumental/global events that have clouded the outlook for buyers and sellers. In September 2001, the world was trying to absorb the atrocity of September 11 in New York, in March 2003 the Iraq War commenced and in September 2008, some of America’s oldest banks began to fold. In each instance, it paid to take a long term approach with an eye on the fundamentals whilst keeping a watchful eye on short term events.
*Originally Article authored by Peter O’Malley, Harris Partners.