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Pressure mounts as COVID-19 takes hold of property market
Doron Peleg
02 Aug 2020

Buyers' Market - pressure mounts as COVID-19 takes hold of property market

Poor sentiment, nervous vendors and a second wave of COVID-19 put home buyers in the driver’s seat for houses while rental apartments face mounting pressure thanks to reduced investor activity

The ongoing impact of COVID-19, particularly the second wave and its consequences on VIC, is creating a buyers’ market, according to RiskWise Property Research.

 RiskWise CEO Doron Peleg has stressed that first and foremost home buyers need to plan their financials and ensure that they have secured jobs and ability to service the mortgage. “Good borrowers”, i.e. owner occupiers with stable incomes and jobs are in a good position to get very good terms for their loans.

 The next step is to undertake thorough research of the area, then search for homes properly and negotiate aggressively, as the COVID-19 pandemic continues to impact the Australian property market.

 “In the immediate term, particularly during the September quarter, we are expecting to see far fewer transactions across all states and territories and home buyers simply dominate nervous vendors in many areas, particularly in Melbourne,” Mr Peleg said.

 “While it is tough times for sellers, buyers will be well positioned to negotiate aggressively, depending on the quality of the property and the vendor’s financial position. 

 “The current market conditions are temporary, though. Many homeowners who can hold on to their houses through this period will do so, especially if they have high-quality properties in popular areas.”

 Mr Peleg said COVID-19 had created an opportunity for home buyers who have their financials sorted and are looking for a long-term holding period.

 Preapproved buyers armed with the latest, comprehensive data will be well positioned to establish their preferred price, but it will also rely heavily on their ability to negotiate and manoeuvre the selling agent, who plays an important role in protecting and presenting their client’s interests.

 “The longer the pandemic restrictions remain in place the more pressure we’ll see put on the already nervous sellers, which will swing the pendulum further towards savvy buyers,” he said.

Longer holding periods and wealth creation over time

The average holding period for houses in Australia, that in 77.6 per cent of cases belong to owner-occupiers, is 11.2 years.

In Sydney and Melbourne, the values of houses have increased by 22 per cent and 33.8 per cent, respectively, in the past five years. This shows that although 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 Sydney simply enjoy strong demand and, with the chronic undersupply, deliver solid capital growth.

Increased competition and improved offerings to home buyers

The lower volume of transactions has further increased the already intense competition among the banks and between the banks to non-bank lenders, that generally have higher risk appetite and greater reliance on technology.

Consequently, many lenders allow high-quality borrowers with steady jobs to get a loan with only 10 per cent deposit and often with no mortgage lenders insurance.

First home buyers are particularly an attractive cohort as they are often perceived by the banks as “clients for life”, who will use other products of the bank and later on might purchase investment properties.

This means that home buyers who have secured jobs can leverage on the current market conditions, ultra-low interest rate, intense completion and government grants. 

High-Risk Alert - Investment Properties - Rental Market

Although there has been very strong population growth in the past five years, the Australian rental market has been soft, due to high supply and, in some cases, oversupply of rental properties.

Consequently, the average annual growth in the weekly median rent increased only 1.1 per cent a year during that period. This is very low in absolute terms and also below the very modest annual inflation rate.

The rental return, particularly in Sydney and Melbourne, is very low at 2.9 per cent and 3.2 per cent, respectively.

COVID19 has had a major impact on a market that was already experiencing areas of weakness, particularly where high concentration of new units and off-the-plan units exist.

Material increases in unemployment in sectors such as hospitality, tourism and the arts, which ABS payroll data estimates has been around 20 per cent, have a significant impact on the demand for rental properties, as people in these sectors are more likely to rent than in other industries.

Therefore, cash flow risk has increased materially with many tenants not renewing their contracts and others negotiating the terms or asking for a relief.

Consequently, landlords who are required to cover significant shortfalls between lower rental income, often struggle to service the mortgage.

As of August 2020, an investment in rental property, particularly in areas that have high supply of new units, is a high-risk endeavour from both capital growth and cash flow perspectives.

Investor activity is highly likely to remain low and the demand for rental apartments in high-supplied areas is likely to be very soft in the next 12 months.