Author Ruby Ellery

Phase 3 – the recovery and possible boom (2022 onwards)

 

there is mounting evidence that Australia has handled the health and the economic impacts of COVID19 as well as any other nation on earth. This will be an enormous achievement if it can be sustained without re-infection waves or long-term economic damage. The jury is still very much out but it’s promising.

 

If this turns out to be true, we believe Australia becomes the global magnet for skilled migration – especially from the UK and the USA which are particularly hard hit by the virus and therefore likely by the coming recession/depression. As Australia’s economy is a significant beneficiary from population growth and export education, we think Governments will encourage this trend, once domestic unemployment has dropped. At this point, it seems likely to us and an increasing number of other analysts and policy people that Australia will profit from our status as a safe, well run place and have a migration-driven economic boom for much of the 2020’s from perhaps 2022 onwards. If that is the case, both property and rental values generally will likely continue to increase – particularly if interest rates stay low which seems likely for at least the medium term.

 

So there is light at the end of the tunnel! We think.

 

< Read Phase 2

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Phase 2 (starting now through end 2021) – the coming recession.

 

For people who didn’t live through the early 80’s or early 90’s recessions, this is going to be a huge shock. For the short-medium term Australia is entering a terrible and deep recession. Unemployment will go to at least 10% and possibly higher. But unlike all previous recessions, this one was caused by a health crisis, not underlying structural problems in the economy. So we are all hoping that rapid Government action will allow the economy to get back to where it was much more quickly. The current predictions from the Reserve Bank see unemployment back down to about 6.5% by the end of next year. Still very ugly, but less so than previous recessions which have tended to cast a shadow for up to a decade.

 

So, while the sudden impacts of COVID19 have impacted particular suburbs and price points, the Phase 2 recession will ironically be more mild and predictable in its impact once the market has stabilised itself over the next 6 months. Rental arrears will be a up a little but not too much as people over time move to properties they can afford if their circumstances have changed. Vacancy rates will remain higher, at least until the overseas students return, but even so, not drastically. We have gone up from 1.6% to about 2.8% vacancy in Melbourne during Phase 1 – that is still an almost balanced market and less than it was at other times in history. So most properties will get let in the normal 2 – 5wk period. Rent levels will also be largely stable and will recover a lot in Red and Yellow Zone areas within 6 – 12 months – faster if the students return. We do believe higher end rents will remain lower for longer, however, so the Navy Zone will probably have to accept 5 to 25% lower rent for the next few years.

 

< Read Phase 1        Read Phase 2 >

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Let’s start with

 

Phase 1 (now for another 3 – 6 months)

 

what’s happening right now. We are currently in the biggest disruption to Melbourne’s very stable rent market since the great depression. There are 3 drivers of the COVID19 disruptions:

– Overseas students returning home
– AirBnB properties returning to traditional rent
– Young adults moving back in with Mum & Dad (“household consolidation”).

These have combined to create a “perfect storm” of a sudden flood of vacant properties, but mainly in certain sections of the market. We have colour-coded every suburb in Melbourne on this map into 4 zones: Red, Yellow, Navy and Pink.

 

 

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The Coronavirus pandemic and the consequent economic impacts are impacting property markets and will give rise to opportunities to buy well – as is usually the case in tough economic climates for those who are able to do so.

First, there are some important considerations:

  • Valuations are problematic.

    1. There is a much higher degree of uncertainty about the value of a property now than there was prior to the pandemic.
    2. Normally the market is what economists call deep and liquid so that valuations made by reference to comparable transactions are a good guide. Right now there is much lower depth and liquidity in the market and so while many are talking about how much prices have or may fall there is very little reliable evidence to base a valuation on.
    3. Much of the property on the market is a function of distressed vendor activity.
    4. The size and duration of the recession which is going to follow the pandemic remains uncertain and this will ultimately be a key driver of prices.
  • Residential property investment can be lower risk than commercial property investment

    1. The Coronavirus epidemic has exposed the degree of risk in some sectors of commercial property in a way which had not been so clearly visible in Australia’s long run of economic growth.
    2. While residential property vacancy rates have increased and rents have been impacted – particularly in some geographies – the degree of impact is much less than in many commercial tenancies such as office or specialty retail space.
  • Buying the right property is always important and remains so

    1. A cheap price does not turn a poor property into a good property.
    2. Your focus in buying needs to remain on buying property which has the underlying attributes to support capital growth in the long term
    3. If you can buy the quality property cheaper now you will do will
  • Off-market sales will be a larger share of the market

    1. Many vendors are reluctant to put a property on the market in the current climate as:
      1. They don’t want to incur the marketing costs of a campaign in such an uncertain climate
      2. They don’t want to risk a failed sale campaign
  • The value of the property might be affected by a much larger amount than the vendor is prepared to accept

 

In this climate more than ever we recommend seeking advice on any property purchase you are considering.

  • If you are thinking about making an investment call us to help ensure you buy the quality of property likely to meet your investment goals
  • If you are beginning a search or already have one underway call us to access the off-market sales not visible to the market at large
  • If you have a property you are considering buying call us to get a second opinion on its suitability and value before proceeding.

We have recently begun publishing a Buy of The Week recommendation. Each of these is a property for sale by another agent (and we have no connection with or financial interest in the sale process). An example can be viewed here. If you would like to receive our Buy of The Week recommendation and are not currently receiving it click here to subscribe.

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