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22 Sep 2020

Houses projected to bounce back mid-2021 with elevated risks for units


The difference between buying a house and buying a unit rental property has never been more pronounced, according to RiskWise Property Research.

RiskWise CEO Doron Peleg said the company's market research clearly showed that while houses show better prospects, some sectors of the property market remained high risk, particular inner-city apartment areas which were oversupplied and experiencing falling rents as Australians, many now able to work remotely, were seeking lifestyle properties and avoiding higher density locations.

Mr Peleg said there were many opportunities for buyers looking for houses with high land value as a proportion of the property, and a strong component of scarcity, especially if they intended to hold on to the property for several years or longer.

"In recent weeks there has been a material improvement in buyer sentiment and key data with a prime example the relatively high auction clearance rates for houses in Sydney with preliminary results that are consistency well above the 70 per cent mark during the past four weeks. Melbourne, however, remains soft, for now ," he said. 

"However, it's important to distinguish between the two capital cities and there is a marked difference. The Sydney property is strongly forging ahead with auction clearance rates tracking at levels similar to those of 12 months ago.

"Houses achieved a 71.1 per cent preliminary clearance rate and, overall, of the total volume of 625 properties, a 69.5 per cent clearance rate. While the volume of auctions was 18 per cent higher than a year earlier according to CoreLogic, and the final auction clearance rate is expected to finish at around 64 per cent, marginally above the decade average.

"The same story cannot be said for Melbourne, especially due to the second wave of the COVID-19 which had a major and immediate impact. Prices in Melbourne have declined by about 5.5 per cent since their peak in early April 2020, according to CoreLogic, and this is the largest fall recorded amongst all capital cities.

"Despite this, Melbourne's houses have better long-term prospects than Sydney's. Indeed, we expect 2021 to be a strong year for houses in Melbourne, with significant capital growth forecast to play out."

Mr Peleg said ultra-low interest rates would drive price increases once the pandemic is over when the long-held link between the cost of borrowing and housing prices would reassert itself.

In addition, he said Melbourne is more affordable than Sydney in terms of house-to-income and mortgage serviceability ratios while ABS data also projects that in 2026 Victoria's capital will have a larger population than NSW's.

Because of the strong population growth, Melbourne has enjoyed very strong capital growth until February 2020.

"While the second wave of COVID-19 created major volatility in Melbourne, RiskWise asserts that following the end of the pandemic, the Melbourne market will have similar projections to Sydney thanks to chronic undersupply increasing land and house values (while for units the oversupply increases both equity and serviceability risk)," he said.

In Conclusion:

Mr Peleg said the current ultra-low interest rates had created a unique environment where buying a house in many areas was cheaper than paying rent on one. 

"So while things look gloomy at this point of time, certainly in Melbourne, the market will bottom in the first half of 2021 and then the traditional connection between low interest rates, dwelling price growth and the continuous chronic undersupply of family-suitable properties, with good access to employment hubs in popular areas, will drive them up relatively quickly.

"Land scarcity has been and will continue to be a major driver in land appreciation and, consequently, the appreciation of house values. 

"However, investors should consider family-suitable properties as opposed to rental apartments which will continue to carry a high level of risk in relation to both price movements (equity risk) and serviceability (cash flow risk). This risk of negative equity has significantly increased across the country.

"Poor economic growth and a soft employment market will see the attractiveness of Australia as a destination fall in the short term. Therefore, without a significant improvement in employment conditions in the next few years, the risk to the rental apartment sector is likely to remain high."

State-by-state 

NSW:

Prior to the impact of COVID-19, NSW, and particularly Sydney, except for the recent bushfire-impacted areas, performed extremely strongly. Sydney appeared likely to reach new peaks in 2020 to become Australia's top performing housing market. This market strength was further heightened thanks to annual population growth with NSW sitting at 1.1 per cent and 1.7 per cent in Sydney, reflecting a strong local labour market.

However, the COVID-19 pandemic has seen the landscape of the property market change dramatically with 2.1 per cent price reductions in the past three months. Despite this, auction volumes and clearance rates have improved noticeably during August. During the week ending 23 August 2020, there were 632 auctions with a final clearance rate of 66.1 per cent.

Houses and units, particularly rental apartments, have completely different risk profiles. The inherent risks of these two dwelling types, that represent different buyer cohorts, are now being realised, with rental apartments often carrying a significantly higher risk than houses.

There are major imbalances between the undersupply of family-suitable properties, mainly in the inner and middle rings of Sydney, and the high level of supply of investment properties. This will have a significant impact on price performance for these two dwelling types, where rental apartments are highly likely to significantly underperform the wider market

Areas such as the city's western suburbs, Byron Shire and the Central Coast have enjoyed exceptional capital growth over the past 10 years with further positive projections in the medium to long term, especially as more and more people work remotely and can enjoy a sea or tree-change without having to seek accommodation close to employment hubs, but rather move for lifestyle benefits.

The property market in Sydney is already showing early signs of bottoming and will likely do so by the first half of 2021 at which time prices will begin their projected upward trajectory.

Victoria:

As with Sydney, prior to COVID-19, Victoria and particularly Melbourne, except for the recent bushfire-impacted areas, performed extremely strongly. Melbourne was likely to reach new peaks in 2020 to become Australia's second best performing market. 

This was aided by strong population growth in Victoria of 1.9 per cent and in Melbourne of 2.3 per cent, and unemployment rates for both the state and city sitting at 4.8 per cent. These are key factors to support the demand for housing. However, the landscape of the property market has changed since COVID-19 with 3.2 per cent price reductions in the past three months - the largest decline across all the capital cities.

The second wave of the COVID-19 has had a major and immediate impact on the local housing market. However, following the end of the pandemic, by mid-2021 Victoria's capital city is expected to enjoy the steepest price appreciation and claim the title of Australia's fastest recovering market.

Ultra-low interest rates will drive price increases once the pandemic is over when the long-held link between the cost of borrowing and housing prices would reassert itself.


In addition, he said Melbourne is more affordable than Sydney in terms of house-to-income and mortgage serviceability ratios while ABS data also projects that in 2026 Victoria's capital will have a larger population than NSW's.

Projected population for Melbourne


Because of the strong population growth, Melbourne has enjoyed very strong capital growth until February 2020 and has similar projections to Sydney, with chronic undersupply increasing land values and unit oversupply increasing both equity and serviceability risk.

Owner-occupiers, particularly first homebuyers, are now able to take advantage of the current market created by the pandemic especially as it has helped strengthen ‘work from home' opportunities. Those with stable incomes not tied to employment hubs can now enjoy lifestyle and affordable housing. In Victoria, the areas attracting these lifestyle buyers include Mornington Peninsula, Geelong, and Ballarat. Beachside suburbs especially are outperforming the market as they offer fantastic lifestyle opportunities.

Queensland:

The impact of COVID-19 on the property market is greatly varied across this large state.

COVID-19 has significantly increased the unemployment rate in Queensland with a greater impact on regional areas, particularly those with a heavy reliance on tourism. As of July 2020, the unemployment rate was 8.8 per cent. The sustained period of the border closure between Queensland and other states has been a contributing factor to the already substantial impact of COVID-19. This is due to the strong connection between Queensland and New South Wales and, to a lesser extent, Victoria.

COVID-19 has helped strengthen ‘work from home' opportunities, meaning owner-occupiers can take advantage of ‘lifestyle' prospects instead of being tied to employment hubs. Before COVID-19 hit, there was already a strong trend of sea- and tree-change homebuyers looking for the best of all worlds – lifestyle, accessibility to employment hubs and affordable housing. In Queensland, the areas that attract those lifestyle buyers include the Gold Coast and Sunshine Coast. 

Beachside suburbs especially outperform the market as they offer fantastic lifestyle opportunities. 

However, while solid house price growth may be experienced in Brisbane, the inner-city unit market remains oversupplied and, therefore, high risk.

South Australia:

Houses in well-located suburbs of Adelaide have performed well, however, it is well to be wary of the oversupplied new unit market.

Prior to COVID-19, as of February 2020, the unemployment rate in South Australia was 5.8 per cent and population growth 0.8 per cent. Overall, the labour market was relatively soft with a reduction in actual employment which meant slow growth for dwelling prices until 2019. At the beginning of 2020, however, buyer confidence increased, particularly in Adelaide, and this saw an improvement in auction clearance rates and, consequently, it appeared dwelling prices had reached the bottom.

However, as of July 2020, the unemployment rate has worsened to 7.9 per cent. As expected, COVID-19 has significantly increased the unemployment rate, which negatively impacts the residential property market. The recent bushfires have also had a significant impact.

Western Australia:

Sentiment may finally begin to improve in Perth, proving that COVID-19 remains well contained.

Prior to COVID-19, the unemployment rate was 5.6 per cent and population growth 1 per cent. A weak labour market and a sharp increase in unemployment presented a recurring problem for price growth in recent years. While buyer confidence increased prior to COVID-19, particularly in Perth, and housing finance showed signs of improvement, overall, economic activity remained well below the 10-year average and the effective unemployment was still significantly above the 10-year benchmark.

As of July 2020, the unemployment rate has worsened to 8.3 per cent. As expected, COVID-19 has significantly increased the unemployment rate, which is impacting the residential property market even further. 

Perth housing prices contracted by 0.6 per cent in July. However, irrespective of COVID-19, while Perth is very affordable, the overall demand for both houses and units is low and the risk associated with units, which are experiencing continued weakness, is higher than the risk associated with houses.

Tasmania:

In early 2020, the property boom had eroded Hobart's affordability advantage with price growth decelerating. 

Affordability issues, with preferred alternatives in Melbourne, created a situation where the Apple Isle became less resilient and the property market continued to experience decelerated price growth despite low supply of dwellings.

COVID-19 has had a material impact on demand with a 2 per cent drop in house rents and a 4.4 per cent drop in unit rents since March. These measures provide a strong indicator regarding the unattractiveness of the market to property investors.

Northern Territory:

Darwin's population continues to decline, and the Northern Territory economy is in a poor state. Prior to COVID-19, population growth in the Northern Territory was already poor which has had a sustained impact on dwelling prices. 

The poor economy continued to play a part in its subdued property market with 8.5 per cent price reductions for houses in the past three years and 18.7 per cent for units. It was the only state/territory in Australia that experienced population loss in 2019.

However, after several years of major price reductions, prior to COVID-19 these had started to decelerate and, in some areas, to stabilise. The advent of COVID-19 had a major impact on dwelling prices in Darwin with price reductions of 0.7 per cent for houses and 3.5 per cent for units in the past three months.

ACT:

Extremely strong employment figures have been a key driver in the ability of the property market to deal relatively well with negative shocks, such as the recent downturn.

Prior to COVID-19, the unemployment rate was ultra-low at 2.9 per cent. Further, the ACT consistently delivered strong economic growth of 4 per cent, eclipsing the rest of the country. An extremely robust job market and strong economic growth ensured houses were strong performers although new units presented higher risk. 

The ACT dwelling market has been the best performing market of the capital cities, increasing 1.3 per cent in value between the end of March and the end of July. This came as national dwelling values declined 1.4 per cent in the same period. In addition, the ACT market showed a healthy price growth of 4 per cent for houses and 2.7 per cent for units in the past 12 months and had, prior to COVID-19, a good medium to long-term outlook.

While COVID-19 has had an impact on the ACT market, at this stage it appears this will be moderate both in relation to the labour market and the property market. The government is a major direct and indirect employer in the ACT. Also, many businesses provide products and services to people who are employed directly and indirectly by the government. 

Consequently, while price growth is likely to decelerate, the risk for price reductions of 5 per cent or more appear to be low at this point of time.