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COVID-19 not all bad news for property buyers
20 Aug 2020

COVID-19 has had a marked effect on the property market throughout the country, but particularly in Sydney and Melbourne where there has been a complete about face in affordability.

What had been expected prior to COVID-19:

In November 2019, RiskWise Property Research projected these markets would reach new peaks by the end of 2020, meaning it would be back to 'square one' for housing affordability.

The research company also suggested this could spark the reintroduction of macroprudential measures by APRA if 'speculation' by investors rises and increases the risk to the financial stability. 

"At the end of last year we were expecting new peaks in both Sydney and Melbourne with additional peaks thereafter until the market reached a new tipping point," RiskWise CEO Doron Peleg said.

"RiskWise projected strong price increases across a large number of areas in Sydney and Melbourne in the short term, and particularly the long term, thanks to a good (while a somewhat deteriorating) employment market and strong population growth, particularly in Melbourne.

"The RBA's interest rate cuts, some loosening of credit restrictions, significant improvement in buyer confidence and increased auction clearance rates provided very strong indications regarding these markets.

"Buyer sentiment in relation to housing measures had also noticeably improved and the Westpac-Melbourne Institute's House Price Expectations and Time to Buy a Dwelling Indices showed a consistent trend. Auction clearance rates had also recovered and were largely above 70 per cent in Sydney and Melbourne."

In addition, he said the population of both the capital cities was continuing to climb, putting more pressure on the housing market.

What actually happened:

Mr Peleg said since COVID-19 there had been a marked impact on the housing market throughout the country, with increased volatility in Sydney and Melbourne, especially now there is a second wave of the pandemic.

However, he said, this left homebuyers in a solid position to leverage on the current market conditions.

"Home buyers with long-term holding strategies are well positioned to negotiate aggressively to purchase high-quality houses that usually enjoy very strong demand.

"And even though there were credit restrictions by APRA, scrutinising of loan applications as a result of the Royal Commission and material price reductions until the election results in May 2019, houses in the major capital cities simply enjoy strong demand and, due to their chronic undersupply, particularly in the inner and middle rings of Sydney and Melbourne, deliver solid medium and long-term capital growth, which puts homebuyers, and especially first homebuyers, in an enviable position." 

Government incentives such as the First Home Buyers Deposit Scheme, the avoidance of Lenders Mortgage Insurance (LMI), as well as stamp duty exemptions all help to put buyers in a good position, he said. 

"Lower interest rates also materially improve housing affordability in terms of serviceability ratio, i.e. the monthly repayments for any price point are simply lower," Mr Peleg said.

 What to expect:

"What this all means is now is the time to buy if you are a first home buyer or an owner-occupier with a secure job, as this current slowdown in the property market is only temporary, with houses in popular areas likely to experience solid capital growth in the medium to long term.

"Once the COVID-19 issue is resolved, most likely in 2021, the traditional connection between low interest rates and increase in dwelling prices is likely to take place."

He stressed, however, that investors buying rental apartments unsuitable for families were taking an enormous gamble, with both equity and cash flow risk expected to materially increase. Serviceability is also a major factor for investors who rely on a stable rental income to cover the costs associated with property and particularly the mortgage.

"This is especially the case in areas of oversupply, Brisbane inner city being a prime example where there are 5,431 units in the pipeline, making up an addition of 5.9 per cent of the current stock.

"COVID-19 has only served to increase the risk. Currently, there are a large number of high-rise properties being offered to a smaller number of investors. This is because there are less investors in the market mainly due to the pandemic."

He said investors should simply "time the market, do nothing and wait for dust to settle" before they buy, and they should choose the property they purchase carefully. This simply means that investors should focus on family-suitable properties and if they have limited budget to simply look for more affordable areas that enjoy good ‘fundamental' demand for houses, such as Geelong. While the rental return is lower, the capital growth is materially higher and, therefore, in the medium to long term, the overall return for houses is higher than units. Houses obviously, carry a significantly lower level of risk, as land scarcity mitigates the potential for oversupply in most areas with good access to the major employment hubs. 

Mr Peleg said it was important to note that even following the 2019 election results and "things had settled down in the property market" it took time for things to get back to normal.

"Once the pandemic is finally over, prices will not increase by 10 per cent within a month. It will definitely take some time for buyers to gain confidence and ‘pull the trigger'. Which means investors have time to make the decision whether to buy a property."

However, he said it should be noted that houses carried significantly lower risk because generally the cohort of renters, especially in the more established suburbs, comprised families and, in many cases, those with permanent full-time jobs. They were also more likely to deliver good medium and long-term capital growth.

Mr Peleg said additionally, as rental properties were not fully substitute products with owner-occupied dwellings, there was inherent risk associated with them as they did not appeal to families looking for three bedrooms, with outdoor space, close to schools, transport and employment hubs.

Affordable lifestyle opportunities:

"Obviously, some property markets are less volatile, and these are being taken advantage of by mobile professionals who work remotely in stable corporate environments," he said.

"These are the ones looking for the best of all worlds – lifestyle, accessibility to employment hubs and affordable housing - and COVID-19 has provided them with just that.

"These include areas of southeast Queensland such as the Sunshine Coast and the Gold Coast, just over the NSW border in Byron Bay and further south on the Central Coast, in areas such as North Avoca, Terrigal and Wamberal. Then there's also sought-after locations such as the Hunter Valley, Wollongong and the South Coast, and in Victoria, the Mornington Peninsula, Geelong and Ballarat.

"Beachside suburbs are especially outperforming the market as they offer such fantastic lifestyle opportunities.

"While many organisations were using remote working to improve productivity and the attractiveness of workplaces to entice the best talent, reduce office costs and reduce international and intrastate travel prior to the onset of COVID-19, it has now become an accelerated phenomenon with offices across large cities trying to minimise face-to-face meetings that required commuting. 

"While there was definitely uncertainty during the first wave of the pandemic, the second wave shows us quite clearly these new work practices are here to say most likely until end of 2020 and well into 2021," he said. 

"Therefore, the demand for regional areas offering great lifestyle choices is likely to further increase among those with stable incomes."