Market update – The view from the coalface, sentiment and push-pull factors (Ep.49)

In the ninth Podcast since Covid-19 took hold, we turned our thoughts to the property market forces at play, how sentiment is increasing as restrictions are easing and what’s on the horizon for property. 

In this episode David Johnston, Cate Bakos and Peter Koulizos take you through: 

  1. Supply of properties on the market continue to remain low, however competition is picking up as more buyers are jumping into the mix.  
  2. The outlook for construction remains uncertain as building and development contracts come to an end, however Government intervention is likely to support new building projects.  
  3. How the downturn has sparked interest in diversification, as we see investors looking for more balance in their portfolios, flocking to assets with a higher yield. Could this be an opportunity to snap up a great capital growth asset while yield focussed properties have higher demand? 
  4. The tried and true fundamentals of property remain the same throughout Covid-19, and that is that quality real estate is holding strong.  
  5. The long-term impact of reduced rents as demand for rentals decreases and supply increases and the sub-markets likely to be impacted the most.  
  6. How the reduction in interest rates is helping to offset many of the negative market forces in play.  

We wish you and your families the best of health and say a big thank you to all our health workers during this time. 

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Show notes

  • Property Prices 
    • What we’re seeing in the property market is an adjustment as a result of supply and demand. Supply has dropped massively, which has meant that there is still competition for properties that is actually picking up. There is misalignment between what the media is saying and what buyer’s are experiencing. They’re getting smashed at auctions against 15 bidders and realising that what the media is portraying is incorrect. Whereas vendors who are thinking of selling aren’t out in the market, they’re reading the headlines suggesting up to 30% price drops, so they are not entering the market.  
  • Construction 
    • At the moment builders are building and developing contracts that they signed last year. But generally, nobody has signed new contracts to build. Once they finish this work, there’s virtually nothing in the pipeline. One of the big volume builders in Adelaide, normally sign 80 contracts a month, in April they signed up 2. This is a big concern that people just won’t have any work, but hopefully the government is smart enough to see that that that is coming and like they’ve done in the past, they will bring in some incentives to get the construction industry going again.  
    • First home owners grants and other incentives may be the key to keep the construction industry going, because construction and the property industry are a huge component of our economic health. There’s currently a push on right now to try and get up to a $40,000 incentive for first time buyers to purchase new properties. There’s been headlines of the $1 billion spend by the New South Wales Government and the Victorian Government on construction. 
    • How it will impact: if we’ve got less buildings being released, that means less new stock on the market as well. That suggests that we’ve got an undersupply that will be further exacerbated. We know what under supply combined with consistent demand does to a property market. It does distort it and it does push prices up. We’ve got two very competing drivers here: one is that we will have job losses due to construction slowing down and our segment of our employment that is represented by construction is significant. The second driver is the under-supply of new dwellings on the market.  
  • Market segmentation 
    • The competition on a $3M house and how many active bidders you have at auction is very different to a $450,000 property.  
    • What we know about downturns (we are in one but it is yet to play out in values), is that the softer areas of the market are impacted harder. Historically, that is medium to high density apartments. Fringe suburbs where we have a lot of first-time buyers who are highly leveraged and then generally that the top end of the market as well because people are less inclined to spend as much dollars on property values when they see their net wealth dropped by 20% overnight because of share markets dropping in value so significantly.  
    • Every property is unique and there are many sub-markets within the broader market. Quality real estate is holding strong. These go to the fundamentals that we’ve talked about for a long, long time. Through covid-19, although the first pandemic in 100 years, the fundamentals of the property market apply in the same way as they would in any economic recession. 
  • Reductions in rents 
    • When the disruption occurred, there was a deluge of tenants who were in distress and under financial pressure and needed to negotiate. But that was very short lived. It was very sad and it was very intense and I’m not finding now that tenants are coming out of the woodwork. Those who were impacted were very vocal at the time, and now it’s settled down a little bit. It will be quite a while until our rents back up to historical levels and we are now seeing tenants playing musical chairs. And potentially find a property for the same rental that’s a bit better, or find a similar property for a little less rent. And so that’s a risk to landlords right now losing a tenant.  
    • We’ve had decreased demand, young kids may have moved back home because they can’t afford the rent because they lost their job in retail and hospitality. Those people that are not covered by the JobKeeper payment like those people in temporary visas, might be living with other households. On the other side we’ve got an increase in supply because during the travel ban, people leasing property on Airbnb have put their properties on the permanent rental market. So, what we saw was a decrease in demand and increasing supply. 
    • The CBD market will be one of the worst impacted – you have travelling workers no longer working and international students who normally stay in these apartments, not to mention those leasing their properties for short-term stays.  
    • If you have a tenant in trouble – you should negotiate the rent and understand that if you do lose a tenant you may not be able to rent out a property at the same rent and it may take a little longer to get a tenant. But my advice to you is no tenant is better than a bad tenant. Don’t just go for the first tenant that comes along, as the residential tenancies legislation make it very hard to get rid of tenants, even though they might be causing issues. 
    • The major offset to this and other issues in the property market is the reduction in interest rates. The relative cost hasn’t actually changed that much in terms of holding onto the properties. Growth versus yield do some because of this dropping rental returns that we are saying in different places, you know, some will do some recent investors are targeting regions, what are the pros and cons of that. 
  • Growth v Yield 
    • What we have seen a lot of investors do is target capital growth. It takes a significant downturn and a strong threat to job security and people are racing for their overall portfolio to be a little more balanced.  We’ve seen a move to the regions or move to smaller properties with a lower price that typically give you a bit more of a rental return.  
    • If people are targetting yield, potentially, that means there’s more upside longer-term for opportunity in the capital growth space right now. But if investors are more mindful of risk and a bit more cautious, we’re going to see a shift because an event like this shakes up the status quo.  
    • This is why you need a property plan, and why you have significant buffers and risk management strategies and you have a diversified property portfolio. These types of concerns don’t matter as much and actually provide a time for opportunity if you’ve set yourself up with a really strong plan and position. 

Cate Bakos – The Property Buyer’s Golden nugget: I know I’ve used this one before, but I think it’s a good reminder that we should always pick the economist’s or the journalists that are right to listen to. There’s a lot of white noise and there’s so many opinions and we’ve covered, that if you’re really wanting to track how you think the outlook is headed, rely on the people that you found trustworthy in the past and pay careful attention to sentiment changes or to any points that they are raising. 

Peter Koulizos – The Property Professor’s Golden nugget: my golden nugget is, don’t panic. In the headlines you will see some really bad news. We saw a couple of weeks ago Comm Bank predicting 32% drop in property prices, but what the headlines didn’t mention was that was in their very worst case scenario, what they are actually predicting Is a drop somewhere between 11 to 12%, which is what three of the four major banks think as well. Westpac thinks it’s 15 but the other three three think that it will be between 11 and 12. So don’t panic and I just want to reinforce what Cate said, get your information from trusted sources. 

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