Once in a lifetime challenges create one in a lifetime opportunities
While COVID-19 has certainly pushed some property markets backwards, others like Canberra have not seen any decline at all. One thing we feel very confident about is that it has also created a once in a lifetime opportunity for property investment.
The next few months are likely to prove one of the best opportunities in our lifetime for investing. This is where property is similar to the share market. There is bigger opportunity when there is bigger fear amongst the market. These are the times smart investors and leaders make money.
Yes, there has been a small drop in values in many markets, but that is actually the time you want to invest. Not in areas that have dropped, but in the areas that have strong fundamentals for great returns over the next 5 to 10 years.
BIS Oxford Economics has just released one of its strongest forecasts in years. While they agree that many markets will have a small decline over the next few months, they forecast up to 28% growth for some markets over the next 3 years, and BIS are typically very conservative, so the better suburbs in the best capitals are likely to perform even better, especially those that already have rental returns far higher than current interest rates.
History tells us what the future holds. Australia has recovered from 8 property market disruptions over the past 80 years. In this article we take a look at what the experts say, what the fundamentals tell us and where we should be investing in property right now.
According to respected property research analyst Cameron Kusher, the real estate industry could bounce back quickly for two reasons: it has not yet been forced into a full shutdown; and the cost of borrowing is the lowest it has ever been.
Indeed, buyers who are in a position take advantage of the present market conditions can reap the benefits over the long-term, with the added bonus that they will also be supporting the economy.
This is not some sort of negative opportunism: it’s smart investing and it’s good for the economy, which is absolutely vital at the moment.
In our view, property prices are unlikely to fall much further due to the coronavirus crisis.
For those individuals who are in a position to take advantage of current market conditions, now is the time to organise your finance, finalise your strategy as well as your expert team, and start making offers.
Buyers who purchase in the next few months can benefit from market prices about three to seven per cent lower than they were just a month ago, depending on the location.
That said, Canberra property prices do not appear to have fallen and pockets of Brisbane and Adelaide also have remained robust during the crisis.
Feeling uncertain? You’re not alone.
In 2008 we predicted the bottom of the Sydney property market and then its peak in 2017.
There are interesting similarities, because when we advised clients to start buying in Sydney just after the GFC, they felt much the same way that most people do now.
The bottom of the share market was around mid-March, which also coincided with the peak of community fear and uncertainty surrounding the coronavirus.
The bottom of the property market is generally when there is peak negative news, which was the situation about a month ago – notwithstanding the fact that we were in the early stages of flattening the curve. However, we anticipate the bottom of some property markets will last for roughly the next four weeks.
The easing of COVID-19 restrictions, and optimism surrounding the daily new cases figure offers a glimmer of light at the end of this tunnel and for those who now know where they stand in terms of job security, there’s a sense of realisation that this situation could present some opportunities as well as the obvious challenges.
History the likely fortune teller
History shows what happened to the Australian property market during similar events, like SARS, bird flu and mad cow but also the GFC, the 1991 recession, the 1987 stock market crash and Sept 11.
During the GFC unemployment only went up by about 1.5%, but interest rates were reduced from about 8% down to about 5% and the government spent many billions on stimulus packages, which pushed almost all property markets up, especially those with the strongest fundamentals. A similar thing happened during the 1991 recession and the stock market crash before that.
Nobody knows how long it will take to contain the COVID-19 virus. We do know that SARS lasted about 3 months and that with Australia’s strict quarantine and social distancing measures, the COVID-19 curve has been significantly reduced with talk of coronavirus restrictions slowly being lifted around mid-May.
Lenders remain open for business
Albeit with some changes to borrowing criteria depending on the applicant’s employment situation and industry.
The cost of borrowing is also lower than it’s ever been, giving households financial breathing room and the ability to pay off their loans sooner and invest.
It’s almost like a perfect property storm, with record low interest rates, improving borrowing capacity, reduced supply – as well as escalating interstate migration in places like Brisbane and Canberra – with coronavirus reducing prices a little bit in some locations.
A multitude of factors likely to support property markets
Improvements in housing affordability over recent years as well as reduced supply in many cities are some of the factors likely to support property markets over the months ahead.
In short, the classic supply and demand equation that drives price pressure indicates property price growth, not contraction – present economic uncertainty aside.
Good property markets have continued to rise over the decades, even though the world has experienced a number of different economic shocks, including a different coronavirus, SARS, in 2003.
The same is likely to happen this time around, too, however, some locations will fare better than others.
Look for the markets with strong fundamentals
The fundamentals are very strong for the medium- to long-term in certain Brisbane, Canberra and Adelaide sub-markets that we are currently recommending to clients.
We also believe the risk of COVID-19 pushing these markets backwards is quite low, especially if you’re picking up a bargain over the coming weeks.
The yields in these markets are 4.5 per cent to six per cent-plus for a well selected property, and with investor interest rates as low as 2.84 per cent, investors can be positive cash flow by about one to three per cent net of costs.
So, property values would need to go backwards more than this for you to lose money.
Of course, there is a risk of higher vacancy with job losses, however, these markets have already had substantially reducing vacancy in the years leading up to now.
Government stimulus to further reduce risk
With reduced supply and the government support packages, such as JobKeeper and JobSeeker, the risk of vacancy is further reduced – especially for Canberra.
Queensland also has four weeks of rent assistance for tenants that have lost their jobs due to the coronavirus and are suffering financial hardship.
Property managers we are talking with in Brisbane, Canberra and Adelaide say they are still renting good properties within a week or two of listing them.
We are expecting price growth of 60 to 80 per cent-plus over the next seven years for well-selected properties in these markets, with even bigger returns for our small-scale development projects.
The bottom line is that there are always good markets to buy in, you just need good research and advice to help identify which ones they are.