Real Estate Market update – So many factors.


Real Estate Market update – So many factors.

April 2020 – Summary

We are starting to see some impact from the virus on housing market conditions due to a drop in consumer confidence and weaker economic conditions. We saw a weakening in the growth trend as confidence slumped and social distancing policies took effect.

We aren’t expecting the housing market will be immune to a drop in sentiment and weaker economic conditions, however, the extent of the impact on dwelling values remains highly uncertain.

Capital growth trends will be contingent on how long it takes to contain the virus, and whether additional policy constraints are rolled out for businesses or for personal activity.

From a transactional perspective, we are expecting the number of residential property sales to fall dramatically over the coming months – that’s a consequence of tanking consumer confidence, a rising jobless rate, and more cautious lending practices.

Restrictions on open homes and on-site auctions will also add to the slowdown in buyer activity, although we are seeing the real estate sector broadly adopting digital enablement strategies to ensure homes can still be inspected, sold and settled remotely.

Considering the temporary nature of this crisis, along with unprecedented levels of government stimulus, leniency from lenders for distressed borrowers on their mortgage repayments and record low-interest rates, housing values are likely to more be insulated than sales activity.

The coming months will truly be testing for markets, for businesses, for families and the global economy overall, but it won’t last forever.

As the virus is contained, economic conditions will improve and consumer spirits will lift.

Interest only loans to end.

Australians with interest-only home loans are facing a “ticking time bomb” with hundreds of thousands of those mortgages to tip over into principal and interest loans in the coming months.

Interest-only loans are usually offered for five years by Australian lenders, meaning those who borrowed in the 2015-16 calendar year will now have to pay the principal (the actual loan amount) plus interest when the change kicks in over the next year.

Around 730,000 interest-only loans will become principal and interest loans over the course of 2020, with the average repayment to increase by a whopping $3,600 a year. Most interest-only loans have a set three to five year interest-only period, after which they convert to more expensive principal and interest repayments.

And if borrowers took out a loan larger than the 2015-16 average of $395,000, the financial sting will be even bigger.

In fact, borrowers who took out a $1,000,000 loan would see their average monthly repayment rise by $789, or $9,468 over the course of the year, the new research from Finder found.

Thousands of home buyers could be forced to sell their home as they find themselves under financial strain when the interest-only period of their mortgages comes to an end.

COVID 19 Impact

Consumer confidence is a big influencer

Markets thrive on confidence and wither when it dries up. This is evident through what has happened with share markets around the world since the COVID-19 crisis kicked into gear.

Australian consumers’ confidence fell by 27.8 per cent last week, according to the latest ANZ-Roy Morgan Consumer Confidence Rating, bringing it to a 30-year low. Confidence is now 17% below the lowest point seen during the GFC in October 2008.

Share markets are extremely liquid so they are much quicker to react to negative sentiment than non-liquid assets, like property. Nevertheless, low levels of consumer confidence will eventually make a mark on the residential property market.

The time-consuming nature of buying and selling property means the market doesn’t respond to a fall in confidence as rapidly – and in most cases, as substantially – as the share market does.

Right now, the broader economy is mostly faced with low confidence because of widespread health concerns, the shut down of public venues and concerns about job security.

Given this, the buying and selling of properties might not be a high priority right now, which could lead to a fall in demand for properties in the near future.

Property prices could fall – but perhaps not rapidly.

This doesn’t necessarily mean we will see a significant and rapid fall in prices – but there is likely to be a reduction in turnover.

Lower demand, reduced turnover and potentially lower prices will be a challenge for the market, but given we are dealing with a virus pandemic and not a global financial crisis, the hardship will likely be short-lived.

While the rental market is starting to show signs of the impact of COVID-19, the buyer market is holding up relatively well, for now. Search activity has slowed over the past two weeks but it is still well up compared to the same time last year.

While experts have predicted the pandemic could cause a downturn, property values have so far held firm — but the worst is believed to still be ahead of us.

Whether vendors chose to take offers below their price hopes “depended on their personal situation”.

“There are a lot of opportunists out there looking for cheap properties, but it’s important to keep in mind that this downturn is not being caused by a financial crisis,” Mr Basso said.

“There are government reprieves in place, like mortgage payment freezes, that will cushion the blow in terms of how much prices will fall.”

Rental Market

The one major influence on rental activity is a change in employment conditions, and we’re now clearly seeing COVID-19 impacting the rental market. Search activity from renters is down over the past two weeks but it is also down year on year. This is unsurprising given that most renters are young and fall into the low-income bracket.

The other indicator we’ve been monitoring is listings, and currently the number of rental listings is rising. This is partly because many homes that were rented out as short-term accommodation are now being listed as long term.

Compounding the issue is a drop in demand; more renters are moving to share accommodation or moving to live with family. We don’t know what will happen to rental prices just yet but it’s likely prices will fall.

Property is a safer risk

While property will be impacted over the next month, it is still generally considered safer than the sharemarket, which continues to show incredible amounts of volatility. As yet, we are not seeing distressed sales, likely because most banks are now offering six-month mortgage repayment breaks to people impacted by COVID-19 job loss.

Property owners and buyers are showing positive signs, all things considered. However, sentiment is likely to change over the coming month. Investors without a tenant may struggle to pay off loans, and as unemployment rises we might start to see distressed sales occurring.

For now, it is too early to tell what the ultimate impact on the market will be.

After COVID?

Once COVID-19 is under control, the housing market is likely to be buoyed by a combination of record-low mortgage rates and the prospect that they will remain at these levels for some time.

In addition to this, a slowdown in property transactions in the coming months will likely create more pent-up demand for housing, which will burst once consumer confidence begins to sustainably improve and the housing market commences its recovery.

Overall, these factors should see a fairly swift rebound in property demand once the COVID-19 crisis has passed.


For further information contact:

Paul Basso, Principal, First National Real Estate Basso, on 03-59-811200

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Paul Basso

Author Paul Basso

Established in 2000, First National Basso is a business based on transparency, honesty, personal service and trust. With a commitment to innovation, First National Basso has continually evolved and grown to become one of the longest running and most trusted real estate teams on the Mornington Peninsula.

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