Covid-19 vs Property

I recently took part in the Ripehouse COVID-19 survey along with 146 other industry experts and academics and have now been able to view the report in full. I commend the team for putting the report together, especially during such a fluid and evolving set of circumstances. Real estate is such a pivotal part of the Australian fabric and the report cuts through much of the typical media noise around the very real concerns homeowners and investors have alike for the trajectory of the property market.

The research asked several questions of the experts around the likely direction of property prices based on a framework which is very likely to almost exactly match the real word scenario. Thankfully that makes the opinions and information even more valuable.

The report was broken into a number of key areas and I’ve addressed five of them individually below;

  1. When will property be hit hardest?

The consensus view was that it would likely be at least three must before we saw the evidence of any price movements within the data. Realistically, my view is that this the minimum time frame due to the lagging indicators and time it takes for a property to be properly marketed by the agents and for a settlement to take place and be report by the ABS, Core Logic etc. It remains to be seen if there will be some properties hitting the market with a shortage of buyers as suggested by REIWA President Damian Collins. I certainly think that opportunistic buyers will be active in the market and it’s a possibility that we’ll see extremely low transaction volumes but potentially a relatively balanced supply and demand equation. However, it’s likely that the buyers will be in the strongest negotiation position and certain locations and sectors of the market will suffer far more than others.

  • Which housing demographic is most exposed to COVID-19 Fallout?

The report found that 42% of respondents believed that lower socio-economic areas would be most impacted. In my opinion the definition of ‘exposed’ is interchangeable with ‘suffer(ing) hardship’. Those mostly likely to suffer hardship are property owners without a significant enough buffer to weather the storm. Active property investors in their accumulation phase are typically highly leveraged and this could force them into a position where they need to sell if their tenant isn’t able to pay rent. Of course, the freeze on mortgages from the banks provides some significant respite to those in that situation. The same issue of having a buffer is true for households. There’s enough evidence to show that even average households don’t sit on cash reserves that would enable them to go without employment for a month or more, with those in lower socio-economic demographics living much more week to week. Those employed in casual positions, and or in industries such as travel, hospitality and retail are likely to suffer disproportionately in my view.

  • Which state do you think will be hit hardest?

Around 73% of experts pointed toward NSW as the state most likely to be hardest hit. NSW has suffered the highest infection numbers and when combining this with a higher density than other states and a higher cost of housing, this makes NSW more venerable to cost of living pressures as unemployment increases.

  • Which property sector will be most impacted?

The report highlights that most of the identified sectors are likely to suffer, with retail, hotel, holiday homes and AirBnB style properties taking the brunt. Respondents were clearly most concerned by AirBnB properties in their comments. I’m included to agree with Damian in that those with flexibility to move back to a tradition rental model will minimise their losses and that holiday homes will suffer for the next little while, especially in regional areas with high unemployment.

  • Do you see upwards or downwards pressure on price?

This question was an interesting one that presented some interesting answers. The question asked about prices looking towards March 2021, so roughly 12 months’ time. Many commentators suggested prices would be the same, if not higher. My view is that it’s just a question of timing. There’s no doubt that the strong fundamentals pre pandemic will return, but it’s a question of whether 12 months is enough time. My view is that it’s possible, but 12 months is probably the earliest we could see prices rise unless we see a relaxation of lockdown and distancing measures before the end of middle to end of May.

The report shares some adroit suggestions on the suburbs most likely to be hardest hit and is well worth a read. No surprises that locations with a high exposure to short term accommodation and tourism are predicted to be hardest hit.

In summary, the report provides some excellent insights from industry experts and commentators, as well as policy suggestions to help the property sector remain robust, which is especially important given how import it is to State Government budgets and as a major employer of Australians.

As for how the crisis likely to impact the Quantity Surveying/Tax depreciation sector, it will be like many other industries that are reliant on transaction volumes such as real estate agents, conveyancers, pest and building companies etc. However, the data shows there’s a significant lag effect between the actual transaction and an investor contacting a quantity surveyor. This indicates that most of the ‘pain’ will likely arrive at least 3 months after the market starts to move. Unfortunately, that exposes companies with pipelines that lag the market as much of the support nets such as Job Keeper arrangements are set to expire in September. Hopefully the curve continues to flatten, and our rates of infection continue to decline, and we don’t suffer localised outbreaks as we begin to relax the lockdown measures. The best news for the real estate sector is a swift and safe return to normality as soon as possible.

Mike is interviewing Ripehouse Advisory CEO Jacob Field on a live webinar on Wednesday the 6th of May at 7.30pm. Register here for the event or a copy of the replay and we’ll get you a copy of the research paper.
https://event.webinarjam.com/register/7/yyvrgsv

Mike Mortlock is a Quantity Surveyor and Managing Director of MCG Quantity Surveyors. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating. You can visit them at www.mcgqs.com.au Mike Mortlock is a Tax Depreciation expert, Quantity Surveyor and Managing Director of MCG Quantity Surveyors. He is a regular speaker and commentator having been featured in the Financial Review and Sky Business. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating for investors. You can visit them at https://www.mcgqs.com.au