It’s a sellers’ market - and looks to stay that way.

It’s always nice to start with some good news, and the latest Core Logic data shows national home values increased by 0.9% during January, to a record high above their 2017 peak.

Breaking down the statistics

However, across the country, each state’s capital city tells its own story. While Darwin property prices rose by a whopping 2.3% in the quarter (11.4% for the year), Melbourne lagged behind, only posting a rise of 0.4% (-2.1% for the year). Yet despite this, Darwin’s prices are still down by about 20% from their 2014 peak, whereas Melbourne prices are close to their all-time highs.

Since lockdown ended in October last year, real estate agents report strong demand for property with limited supply. Overall, houses are in greater demand than units, and nationally house prices are up by 3.5%, while units are unchanged.

And people are again borrowing to buy property.

·         Home loans increased to a record high of $26bn in December, with the number of first home buyers up by 9.3% in December and 56% over the year.

·         Construction loans also grew, increasing by 17% in December and doubling since the Home Builders Grant was introduced in June.

A side effect of this is a shortage of properties for sale, with homeowners preferring to upgrade their property and collect some ‘free’ Government money, rather than go to the expense and trouble of moving.

Back on track

According to the Chairman of the Reserve Bank, economic recovery is occurring faster than expected and he believes GDP will recover to pre-COVID-19 levels by the middle of this year. He also predicts interest rates will remain low until 2024 and it’s these bullish statements which are fuelling demand and tempting people to invest in property.

The consensus in the community is that Melbourne house prices will increase. These low interest rates are encouraging people to hold on to their asset rather than sell it because they are earning virtually nothing if the money is sitting in the bank. And together with the improving economy, Federal and State government incentives and a lack of safe alternative investment opportunities, property investment looks quite attractive! In fact, we’re seeing auction clearance rates at around 80%.

The only grey cloud on the property horizon is the lack of population growth. But this isn’t expected to have an impact until later this year or even next year, given the current strong pent-up demand.

What about property supply?

Agents are complaining about a lack of housing stock to sell, and they are probably right. The number of available properties on the market is down 28% from the same time last year and this has certainly helped fuel property prices.

There are many reasons why people sell property, but agents are now seeing a new reason – I call it the COVID effect…

Since lockdown, people have been reassessing their lives and their lifestyles – whether its working from home or where they live. With remote working or even early retirement on the horizon, some people are selling up in Melbourne to move to either the country or coastal suburbs, the Sunshine Coast or northern NSW.

Will it last?

Well, real estate agents are reporting enquiries and appraisal requests are about the same as this time last year, with a few doing more market appraisals than usual. They explain this as a catch-up from last year.

Market appraisals are a lead indicator of vendor intention, as a property appraisal usually leads to a sale. However, it appears property owners aren’t rushing to sell into this market, so we don’t expect a significant increase in property supply in the short term.

In addition, stronger prices and limited supply may not be translated into the CBD apartment market. The reduced number of overseas students and tourists have left many inner-city apartment owners without tenants and forced to pay large outgoings. Vacancy rates are around 30% and new tenants are simply moving from an existing lease to find lower rent. Although the prices for apartments so far appear to be steady, city real estate agents expect some forced selling into weak demand, which may translate into price declines.

What happens when JobKeeper ends in March?

The end of JobKeeper isn’t expected to impact residential property. While some business will close, it shouldn’t come as a surprise to employees that the business is failing.

The consensus among real estate agents I’ve spoken to is that Melbourne house prices should increase by an average of about 5%+ this year. This of course assumes no new lockdowns, continuing low interest rates and the successful rollout of the COVID vaccine.

We’re watching carefully to see how the story unfolds…

Robert Allanadale, Director

The Pandemonic Property Crash that wasn’t!

Earlier this year, the Commonwealth Banks economist predicted falls in property values of up to 30% if the COVID pandemic were to take hold. This hasn’t happened in Australia, or even in the US, where the COVID situation is diabolical.

Official unemployment was also predicted to be above 10% (currently it’s 7%) but this could rise once Jobkeeper disappears.

It was a brave person to buy a property in June (my daughter did and she had some sleepless nights). However, Melbourne house prices have barely moved with property values less than 5% off their highs and rising, and auction clearance rates around 75%.

What is supporting property prices and will it last?

Interest rates are at biblical lows. In the last recession in the 1990’s, interest rates were pushing 19%! However, homeowners can now borrow for around 2% and investors under 3%. This is encouraging people to borrow and buy property, thus supporting the market.

Agents complain of  shortage of residential property. Until recently, vendors have been holding off putting their property on the market resulting in far fewer properties for sale than the corresponding period last year. . Thus, buyers are chasing fewer properties.  We are seeing a FOMO affect at auctions – especially for the more affordable properties  - where there are often 6 - 10 potential bidders at an auction.

Governments support property. First homeowners get stamp duty relief – 50% on new home purchasers and 25% on existing homes up to $1,000,000. This is good news for sellers as well as buyers, as the stamp duty savings will slowly be factored into higher property prices. The $25,000 grant for home extensions has proved popular – try getting a builder within the next six months or even just someone to draft plans for an extension!

Jobkeeper saves the day. The Reserve Bank predicted that Jobkeeper has saved 700,000 Australian jobs. Although this Scheme is being scaled back, there doesn’t seem to be a significant increase in the unemployment numbers, which suggests that it is serving its intended purpose. It will of course be interesting to see what happens once Jobkeeper disappears altogether after next March. Don’t be surprised to see a significant increase in business failures by the middle of next year.

Banks support borrowers. Unlike in prior recessions, banks have provided loan repayment moratoriums to customers suffering financial hardship. Although interest on loans still accrue, the number of borrowers taking advantage of this have fallen from a high of 436,000 loans in June to 145,000 in November. This has meant that there are no distressed sellers on the market so far. Again, this may change once the moratorium is over.

The RBA pushes rates down down down!  At the expense of savers, the Reserve Bank has now lowered the official cash rate down to 0.1%, and they predict low rates for the foreseeable future. Although this was probably an attempt  to keep our currency low, it runs the risk of fueling a property boom as real estate is one of the few places left to invest where a return is assured.  

Who is buying property? It seems like just about everyone – first homeowners, investors, up-sizers & down-sizers, tree changers even developers. For those people with secure jobs (and there are plenty), buying a property now makes sense, especially with the low cost of borrowing. Often, it’s cheaper to pay interest than to pay rent. Prices in Victorian country towns have performed well with people exiting Melbourne. It doesn’t take many people to move to a country town to have a big impact on prices. Horsham prices were up 25% this year! With regional property considerably cheaper than city property, people are embracing the joys of country life while retaining their city job working from home.

What could possibly go wrong? The big unknown for the Melbourne residential market is the impact of a population decline. Australia wide, its estimated that net migration will decline from 154,000 people in 2019-20 to minus 72,000 by June next year. The sharp drop in migrants, particularly international students, will drive the population decline, especially in Melbourne and Sydney. With new stock coming on to the market we could see lower rents and subdued prices in the medium term. We  still have a negative view on CBD apartment prices, especially in the medium term. Anecdotally, we hear that rents for those apartments are being reduced by up to 40% and vacancy rates are now over 10% (up from 2.5% in June last year). These factors must have an impact on apartment values at some stage.

Given the lack of overseas students, no overseas tourists, and continuing supply of new properties on to the market, this is one area where the experts may just be right.

Robert Allanadale, Director

Melbourne CBD apartments - is it time to buy?

The word on the street is to expect significant falls in the value of Melbourne CBD apartments over the next 12 months.

The demand for apartment living has shrunk - few foreign students, no overseas travellers and Melbourne’s declining population all point to a looming crunch in apartment values.

One city agent predicts that next year, prices for B and C Grade apartments could fall by up to 30%. However, A Grade apartments (those suitable for owner occupiers), may only fall between 5 - 10%. At present, Student Accommodation Units are almost unsalable, as tenants are few and outgoings are high.

Vacancy rates for city apartments is now over 25% with some apartments being empty for over 6 months. Rents have progressively fallen by around 30% over the year. This is traditionally the time when renters vacate and return in January/February. However, its expected that next year this may not happen.

At the moment, it is very much a renter’s market. Existing tenants are moving to larger units for less rent in the same building. New tenants are ‘shopping’ between landlords’ asking for lower and lower rents. It is a ‘race to the bottom’ for landlords to secure a tenant.

The good news is that values of city apartments appear to be holding up to date, due to record low interest rates and limited stock. However, unless rents recover and supply remains tight, then prices are expected to fall.

Another supply driver is the number of new apartments that fail to settle on completion. Developers keep this number a closely guarded secret. Anecdotally, the number is around 30%. This would suggest a massive overhang of unsold properties. As values fall, this number will only increase as purchasers see the value of their apartments decline and either can’t borrow, or are happy to lose their deposit rather than overpay for a property.

Landlords are feeling the pinch, especially those who are highly geared. As property values fall, banks will force owners to sell, which will only increase the number of properties for sale. Once the moratorium on debt repayments finish early next year, properties will be forced onto the market.

Record low interest rates gives borrowers some protection, but capital losses, lower rentals, increased supply and low demand will take its toll on this section of the property market. This is likely to become evident in the second quarter of next year.

So if you are in the market for a city apartment, keeping the cheque book closed for the time being looks like a good option.

Robert Allanadale, Director

What are the agents saying?

Each quarter we survey a number of residential real estate agents across Melbourne to get their views on what is happening in the property market and where it is likely to go in the next six months.

We ask a series of questions and here is a summary of what they had to say. The survey was conducted before the recent announcement allowing agents to open.

Firstly, what business have you been doing during Stage 4 Lockdown?

In Stage Four Lockdown, no one can enter a property unless they live there. This means vendors can’t get tradesmen, gardeners or cleaners to work on a property to prepare for sale. It also means that agents can’t inspect property and certainly can’t show a prospective purchaser through.

Despite this, there have still been some sales over the past three months.

Off-the-plan sales and land sales were still taking place, although at a far reduced number. Some houses have also been sold where the purchasers had inspected the property prior to Stage 4 Lockdown. However, as the time went on these properties have been reduced in number.

Some agents reported selling property where the purchasers were desperate and were prepared to buy, just relying on photos taken by the vendors. Again, there are not many of these.

Needless to say, sales volumes have greatly reduced. Some agents have been using this time to focus on staff education in anticipation of restrictions being eased. It goes without saying that all are very keen to start business again.

How successful are virtual auctions?

All agents we surveyed have held virtual auctions using different platforms. Most say they obtained satisfactory results and similar clearance rates to on-site auctions. However, there is not the same sense of urgency that can be created at an on-site auction, although some strong sales were achieved.

As bidders must register and provide their credit card details to bid, the agents believe this results in only genuine bidders bidding. It also allows them to get to know the bidders better than where there is no registration requirement.

However, it seems that some bidders were reluctant to bid unless they could see other bidders. Those platforms where everyone can see everyone else were better than just where the auctioneer only could see everyone and called out the bids.

Virtual auctions were considered better than no auctions, but it was clear that all the agents preferred to hold on-site auctions. It may take a little more time before purchasers to fully embrace virtual auctions.

What will property supply look like short term once Stage 4 is over?

Agents report that property listings and sales are well down during Lockdown. The REIV believes sales were down 80% in August. This suggests there are a very large number of properties in Melbourne that have not come on to the market yet.

Now not all of those properties will come onto the market at once, but there still will be a larger number than usual, once property sales get underway. Some vendors will prefer to wait until the market has stabilised, perhaps into mid next year before selling.

There are other vendors where it is essential that they sell. We know of a number who have purchased a residential property earlier in the year and are unable to sell their home. They are carrying two mortgages. There are others are in aged care facilities and need to sell to meet their liabilities. 

All agents have booked a number of properties to be auctioned once the Government allows properties to be properly marketed. Now that this has happened, properties requiring presentation works will still take 3 to 4 weeks to prepare. Based on a four-week marketing campaign, auctions will be pushed to November and December. That will then be the peak selling period which will carry over into January and February.

Agents also expect a busy time giving appraisals once restrictions are lifted.

What is the likely demand for property once Stage 4 is over?

All the agents surveyed said that there was strong demand for residential property in all price ranges with the possible exception of apartments.

There have been vendors who have sold their home earlier this year and now, as purchasers, are unable to buy. As renting was difficult, they were effectively homeless. These have become desperate buyers.

There have been some reservations about predicting how long this demand will last. Much will depend on when COVID-19 is controlled and the impact it will have on the economy. If we get a ‘third wave’, then the market will be severely impacted.

Although low interest rates will support demand, if unemployment continues to rise after JobKeeper finishes, this will soften demand for property next year.

Many essential workers have been earning good money during Lockdown, and some inquiry for investment property is being seen from this group.

The CBD apartment market is being hit. With no overseas students or tourists, rents are coming down and it is taking longer to find a tenant. As vacancy rates rise, it is expected that these properties will face price declines.

Where are property prices heading in the short term?

Although bank economists are predicting property price falls of up to 10% this year and a further 10% next year, and prices have come down by 3.2% in the June quarter, agents believe that once they can properly market properties, they expect prices to remain stable in the short term. 

This is due to the pent-up demand for property, a lack of supply and the low cost of debt.

However, some agents believe there is a risk that demand will reduce mid next year, and supply will increase due to some homeowners experiencing financial hardship. This will lead to price declines.

Other agents even predicted price increases next year once COVID-19 was controlled, as seen in some other countries notably New Zealand.  

Are there vendors under financial pressure to sell?

Agents are not seeing any vendors selling due to financial pressure or MIP sales. This is mainly due to the Government support given with JobKeeper and the moratorium by banks requiring loan repayments. However, both are being phased out over the next six months.

Agents are expecting to see some forced vendor selling in 2021, particularly due to small business failures, vacant shops in many strip shopping centres and rising unemployment.

And finally, a tree change that we can see.

We also speak to agents across the State. They all report that there has been an enormous increase in enquiry for property from Melbourne residents.

Properties that they have had on their books for years, have recently sold. Properties that come on to the market are sold within days to Melbourne buyers. There is a clear exodus of people from Melbourne to the country.

This is not altogether surprising given the ability to work from home is now established along with the affordability of country property.  Expect prices in country towns with good access to Melbourne to increase.

Easing COVID Restrictions.

As from Monday 28th September, residential estate agents will be open for business!

Agents are now able to conduct limited property inspections with buyers and renters which is great news for everyone. Outdoor work such as gardening can be resumed and, in some circumstances, cleaning as well as painting can also be completed.

We have found that we were able to arrange presentation work by our tradesmen, but we expect that all trades will be very busy over the next few months.

If you are thinking of selling, we believe it is better to sell sooner rather than later.

We live in interesting times.

Robert Allanadale

Director