Searching for certainty in unprecedented times

With uncertainty being the ultimate nemesis of investment, it is no wonder that investors are scrambling to quickly make sense of this novel COVID landscape.

In the Australian property space, it would seem that the prognosis is polarised.  On the one hand, we have some banks projecting up to 30% losses while other experts are singing the tune of a ‘once in a hundred years’ opportunity.’ 

If we turn to the past to make sense of the future, it is difficult to dismiss the fact that the crisis has bought with it the greatest fall in GDP since the Great Depression.

Professor Peter Phibbs of The University of Sydney is skeptical of a quick bounce back.   

 “We are talking about the biggest drop in national GDP since the Great Depression. That wasn’t a great decade for property.  If we do get a vaccine in 2021 things will improve but that’s not a certainty. We are also looking at zero international tourism until this happens.”

Presently, the two levers that have driven the Australian property market over the last ten years, being strong population growth and declining interest rates are now missing.

“Interest rates because we are at the bottom of the cycle and population growth because of COVID-19 lockdowns.   According to the Government, net international migration for the next financial year is forecast to shrink by 85%,” he said.

While Government intervention may help stimulate activity, the Professor suggests that challenging economic circumstances will likely hold back investors.

“For real estate agents, their best option might be to hope that State Governments get rid of stamp duty to increase the rate of transactions. But with muted price increases and tenants experiencing difficult economic circumstances and the current stretched yields, investors will be hard to find.”

As we progress through the pandemic and out the other side, we can count on the past few months having a lasting imprint on the way we work and live.  

According to Dr. Maria Belen Yanotti, Lecturer in Economics, from The University of Tasmania, the dramatic increase in the number of Australians working remotely from home will likely continue.  This will in turn, impact the housing market.

 “In the recovery phase, we could potentially observe greater geographic diversification and less city concentration.   Residents may begin to place greater importance on liveability, space and lifestyle. This will probably help several property markets (both city and regional),” she said.

In our recent white paper; COVID-19 vs Property,  we surveyed a group of 146 property experts to find out how they think the virus will likely impact Australian property. Identifying as university academics, industry body heads and real estate agents, most of the respondents indicated that they believe the greatest impact of the virus will be felt within three to 12 months with locations reliant on holiday and short term rentals set to take the biggest hit. 

Interestingly, a number even suggested that by this time next year, prices could be higher than they are at present.

No doubt opportunities will arise and there will be a silver lining to the COVID-19 crisis from an investors’ perspective.   In any challenging macro-environment there are always individual market opportunities. 

The pandemic and subsequent uncertainty surrounding it has re-emphasised the importance of investing in property that is underpinned by diverse fundamentals. 

Diversity in terms of tenure of property ownership, categories of property in the area, types of population reliance, low supply and varied employment are all crucial factors that help mitigate downside risk.

By contrast, ‘one industry towns’ will always be highly susceptible to market fluctuations.  In the current climate, we have observed tourist suburbs with a high concentration of Airbnb property become the Gladstone equivalent of the coronavirus shutdown.

The Yarra Valley hub and other holiday hot spots have faced extreme rental losses, with the Victorian suburb of Healesville demonstrating a 40% reduction in median asking rents in recent weeks.

Where to now?

Just for now, we are resisting buying the dip. 

Professionally we are advising our network to watch, wait, and gather more information before launching back into property investment in a wholesale fashion. 

Without a doubt, doing your due diligence is now more important than ever before.

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