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While predictions for the property market for the next year or two have ranged from optimistic to dire, what many investors are wondering is what we can expect down the track once COVID-19 is mostly behind us, writes David Hancock.
Will this current period of uncertainty have long-term impacts or create structural changes to the Australian property market?
The Australian property market is surprisingly resilient
Investors should remember that the Australian property market is extraordinarily resilient. When we’ve experienced similar economic and political shocks to the system such as the GFC, Y2K, 9/11 or the banking royal commission, the Sydney, Melbourne and Brisbane markets, as an example, have experienced only small dips and recovered relatively quickly.
Those commentators who were predicting severe 20–30 per cent drops in the property market this year are now largely walking back those forecasts. AMP Capital chief economist Shane Oliver was forecasting falls of 20 per cent and has now revised that to falls of 5–10 per cent.
Many markets across Australia continue to have low supply which has prevented property prices from falling significantly. According to CoreLogic, in May, property prices only fell by 0.42 of a percentage point in Sydney and 0.91 of a percentage point in Melbourne compared to April. Property prices actually grew in Brisbane, Adelaide, Canberra and Hobart in the same period.
During times of uncertainty, a drop in buyers is typically matched with a decrease in supply, which allows property values to hold firm. That means any drop in prices is likely to be minor and short-lived. In any event, property transactions will continue as people buy their first home, upsize, downsize or look for ways to invest outside of the sharemarket.
One property type that does tend to suffer in more difficult times are those properties predominantly aimed at the investor market. Typically, these are the oversupplied apartment developments in locations around the country where supply outpaces demand. In this instance, both the property values and the rental returns will come under pressure as investor demand falls.
What if foreign investment from China slows?
In the short term, demand from China has reduced, with less Chinese students coming to Australia and Chinese investors not travelling to Australia to research the market as a result of the travel ban. In the short to medium term, we may also see the Chinese government clamp down again on money flowing out of China to bolster the Chinese economy or as part of a political move.
The reality, however, is that the Australian property market is less propped up by Chinese investors than many think, and there are plenty of other foreign investors who are just as interested in Australian property. In fact, Chinese real estate investment into Australia was already down by 50 per cent in 2018–19 compared to the year prior, without making any significant impact to the market.
In the same period, Hong Kong real estate investment into Australia tripled, and there were steep increases in investment by Singapore and Japan as well.
Australia will be attractive to foreign investors and migrants
With Australia faring much better than many countries when it comes to managing the COVID-19 pandemic, and with even the most dire economic forecasts predicting a recovery as soon as next year, Australia will be an attractive and stable economy in which to invest and a secure and safe place to live.
This is likely to lead to an influx of migrants and foreign investors from all over the world. We can expect growing migration from places like the UK, the US or South Africa. The recent unrest in Hong Kong is also likely to see people leave the country in droves, with Australia a likely option to relocate.
What will this mean for the property market?
It is unlikely that the Australian property market will sustain any long-term falls due to a combination of migration, foreign investment and government intervention. Many markets across Australia also have low supply, with demand likely to continue to grow.
Even if globally things change significantly, such as the decline of China’s investment into Australia, we’re still likely to see consistent long-term demand for Australian property, both domestically and internationally.
By David Hancock, managing director, Binnari Property
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