Whilst Covid is by no means over we are now at last seeing a shift towards normality within Australia and for the first time since the first settlers to this ancient land, without the pressures of immigration.
Industry property projections prior to covid stood, despite our worst economic downturn since the Great Depression, our recession being led by lack of productivity as opposed to finance. As a result, house prices across didn’t fall. In fact in many locations, capital appreciation has been far greater than any of us had expected.
Every cloud…
It was mostly younger people working in retail, tourism, education and hospitality bore the brunt of the pandemic, with the resulting rental drops having an adverse effect on investor demand, slowing developers in their tracks and the fear of the unknown shutting wallets and stalling deals. But hasn’t stopped a new tranche of incentivised owner occupiers entering the market, and whilst there is construction going on all over the land it is very easy to get caught up in this unprecedented cycle.
Click bait newsfeeds hawking 20% increases in 2021 just adds fuel to the fire, as many motivated quite simply by the fear of missing out, jump blindly into the market. But let us take a moment to reflect, why when in what should possibly be a dormant market, things appear to be on the rise?
Firstly, supply has been at an all-time low. Unable to travel, most of us have been hunkered down at home many for over a year now and rather than move on, many have chosen to renovate, repair and stay put resulting in fewer listings, today’s count approximately 25% below the five-year average.
Regardless of Covid restrictions what property that has been available has still seen huge demand. We are in the lucky country after all, where some are luckier than others, willing to spend above and beyond vendor expectations. We continue to see examples of this especially within the tightly held ‘premier’ suburbs and we can only expect this to increase now that we are on the move again, riding the wave of consumer confidence.
Even away from the major metro’s activity has been hot, aided by sea changers seeking a new life in quieter places bolstered by the seemingly more affordable prices to their deeper pockets. Lack of opportunity for our usual discretionary spend on travel and holidays coupled with the costs associated with being ‘out and about’ has made for nice bulges in savings accounts and that’s of course before we include the impact of the lowest cost of debt we have seen in an aeon… if at all.
Aren’t we lucky…
Recent statistics suggest that approximately three quarters of new approved mortgages are associated with owner occupiers. Generous government incentives such as the ‘First Home Loan Deposit Scheme’ and cash backs for those qualifying for ‘HomeBuilder’ have created further demand, albeit in the new construction space and mostly for detached houses within affordable new subdivisions, on mostly green field sites.
Verifying this, The Australian Bureau of Statistics (ABS) have recently released data from the December 2020 quarter, showing that the number of new houses that had commenced construction was the second highest on record. Sensibly in order to smooth out the construction pipeline and support jobs for longer the government has just extended the HomeBuilder construction timeframe from 6 to 18 months, although there are no further grants available.
So, these incentives have worked. Whilst many of us had to sit it out at home, with many small businesses watching their savings slip out of the door, the government in their infinite wisdom of keeping Australia PLC alive allowed builders to keep working. Yes, I get the economics… but I still don’t get the logic. (Perhaps my perspective has been skewed, as I for one, shut out of the office spent nine months working from home next to a construction site, with all the discomfort of heavy tools and machinery and of course an unsettled dog... but that is another story!)
Consequently, construction costs are on the rise. The demand for builders and tradies already busy with all our covid inspired home renovations is at an all-time high, as are the prices of timber and steel, the former due to bush fires compounded by covid and the latter as recovery outpaces slow supply and distribution. Developers of course (and why wouldn’t they?), seeing opportunity from this new seem of incentivised purchasers, naturally have notched up their land prices as their supply levels dwindle.
As I’ve mentioned before, Covid has changed our focus on property. At times of need, a roof over our heads becomes of primary importance, the more we value it the more we spend on it… a self-fulfilling prophecy and whilst I applaud any effort to get Australians onto the property ladder, (not forgetting how so many have been helped by their parents and/or grandparents topping up their deposits), I do worry that this has created a bit of a false economy, especially in the regional areas where both this perceived affordability and incentive has fuelled demand.
Looking across the country many regional towns have had the spike in prices that has been alluding them for years, as they get up to speed with the country as a whole. If we look at capital growth levels across the nation, we really are just following the average 6.35% median home growth trajectory that we’ve been on for the last 25 years, albeit in fits and starts if you’re the type to monitor the data closely. In many places we are just simply catching up; when you look at the demographics of some of these areas you will see that they do have a natural lid on sustained growth and investing there today might not perhaps deliver the outcome you want.
Still at this rate, at some stage in the next year or so regulators will have to cool the market, which means macroprudential tightening is no doubt around the corner. Banks will increase their interest buffer requirements, reduce their loan to valuation and debt to income ratios, and no doubt APRA will join the party with further rules as to what type of loans are made available.
Interest rates will undoubtedly rise…
With the Job keeper allowance over, employment pressure increasing and cost-of-living rises, you only have to drive past a servo and note the price of fuel to witness that barometer, all compounding what the future might look like.
Not owning a crystal ball, I find that a healthy layer of risk management is enough to start planning ahead, both for the good times and the bad. For example, if the vaccinations we’ve been promised by October fail to roll out as expected, the borders remain closed and that magic tap to our economy, immigration, stays firmly shut, I think you will agree selecting the right property in the right area is key when there are so many factors that could send your investment strategy backwards.
Another thing to consider as more property investors return to the market, is a lack of what I would call bona-fide opportunity as the supply chains wake from their slumber. Supply is still short and within this good investment opportunity limited. Agreed, now that both developers and financiers are venturing back into the market this will be addressed in time, but as will the increase in investor demand.
So best be prepared…
Getting into good property is like waiting for a bus… a minute late and its already gone. Sure, there’s another bus coming but that one takes you the long route around the houses. You might even have to change with more delay, and whilst it might get you where you are going eventually it’s not ideal; wasting time and money, stressing you out unnecessarily all because of lack of planning.
With demand getting stronger, you need to be in a front-line position to secure the best opportunity as and when they present themselves. Get the right advice, find someone to help with the research and the maths, and when ready engage your mortgage broker to line up your finance.
Locked and loaded…
Then and only then are you ideally placed, waiting patiently to pull the trigger on the right opportunity. Remember there will be other investors primed and looking, so rather like being prepared for an auction, you must have your finance sorted before you can commit to anything.
Finance aside, we must never underestimate the value of good research. Research allows you to understand what type of property and location to invest in and critically, what underpins the future of your investment.
Just because a property or an area has had a sudden blip in value does not mean it is necessarily sustainable. Let’s face it everywhere across Australia has had that rise recently. Equally, because it has a dual key / dual income and on the surface might show you a good rent, what exactly will underpin your future capital appreciation and will attract and sustain the right tenants over the long term? Indeed, what exactly is the demand for this kind of property today, tomorrow and in the future? What exactly is your tenant profile?
Whilst you might need a bit of professional help looking at demand levels in different areas, we can all visualise who our tenant might be. Simply look at the local demographic, if the profile of the rental pool looks like something you had not envisaged, then that should give you a strong enough gut feeling to keep looking at other properties… highly likely to be somewhere else.
It is well documented that areas close to employment and amenity have far more demand and provide better opportunity in terms of capital gain. Property with good access to a CBD, where land is closely contested and mostly built out outperforms properties in the outer suburbs. In the same vein, capital gain is slower within acres of subdivision released side by side, as greenfield sites gain approval for housing one after another and in many cases with no major local employment or amenity to underpin it.
No two properties are the same, property moves in cycles and there are cycles within cycles, so plan accordingly. Research what you are looking for to give you what you need and importantly take advice from those with the relevant experience. There are so many charlatans selling property under the guise of property investment, in many cases all they are doing is listing and selling, using the FOMO and other such forceful tactics to get folk to sign. When you do find someone with a good track record take time to listen to them. Don’t be afraid to ask them for references and ultimately respect their time and knowledge, after all they have the experience and resources you need to be part of your team, ultimately having your best interests at heart.
Before I close, we need to look at the impacts of immigration. Australia relies on approximately two thirds of is population growth from immigration, with the borders shut this will have a continued impact. According to Dr Elin Charles – Edwards, demographer at the University of QLD “by 2030, around one-million fewer people will be calling Australia home than we would have seen otherwise.”
Now he might well be wrong. I’m sure our friends in foreign lands looking ahead at an uncertain future now realise how well Australia has been in terms of health, wealth and lifestyle throughout the pandemic and would like to join us at any opportunity. But what if he’s right… what wave of good fortune is going to keep us sailing forth?
To conclude, there is great opportunity today albeit rare. Nationally I see some good uplifts within the market for all the reasons above but as ever these will at some point waver until our international borders open again. Much as I’d like to see this sooner rather than later, I do not believe globally we have come across the right solution to see that saving grace just yet.
Be prepared…
Stay away from the herd (and the click bait), stay focussed on the prize and stick to what the research dictates, do your risk management and you will be in best position to outperform the market.
Your first stop might just be as easy as a quick call to Tony (drum roll please... did I mention the new guy?! Please welcome Tony to the team!) or myself at Positus, we’d be only too happy to hear what you would like to achieve and show you how we can help you on your property investment journey.
If you are not already one, you might also want to be introduced to some of our happy clients, after all it is what we strive to do... make people happy.
Oh and we also sail… forth, naturally 😊.