Are residential property investors about to make a comeback in 2021? This possibility is indicated by the recent statement by Phil Lowe, Governor of the Reserve Bank of Australia (RBA), that the official cash rate of 0.10% is unlikely to change before 2024. The stronger presence of investors is also supported by research from ME Bank (see below).
According to data from the Australian Bureau of Statistics (ABS), in December 2020, investors represented 25% of all residential loans, down from 29% in February 2020, and well down on the peak of 45% plus in 2014 and 2015. Activity by First Home Buyers continued to rise in December 2020 to 27% (up from a low of 11% in early 2017), driven by various incentives, including the HomeBuilder program (extended to March 2021). Investor activity rose nationally by 13% in the month of December 2020 to its highest level since mid-2018.
Inner City Vacancies and Rents
There are good reasons for investors to be cautious, notably the impact of COVID-19 on Australia?s inner cities. However, vacancy rates are largely declining, even in the Central Business Districts (CBDs), for example:
· 7.8% in the Sydney CBD in December 2020, down from 16.2% in May 2020;
· 9.1% in the Brisbane CBD, down from 14.0% in June 2020; and
· 8.7% in the Melbourne CBD, down from 10.8% in September 2020 (Melbourne recovery delayed by the second wave lockdown).
A few localities associated with Universities still had vacancies rising, for example, North Melbourne, which reached 9.0% in December 2020, up from 2.0% in March 2020. The vacancy at Docklands was still high at 16.0%, although down from 18.8% in May 2020 (source: SQM Research).
Graph 1 shows the impact of higher vacancy rates on median rents for two bedroom flats/units in two inner Brisbane postcode areas: the Brisbane CBD and Fortitude Valley/Newstead (a December 2020 vacancy of 5.3%, down from 7.9% in June 2020). Both areas saw the median rent fall to $460/week, the Brisbane CBD down by 16.3% on the year before; and Fortitude Valley/Newstead down by 9.8% on the March Quarter 2020 - source: Residential Tenancies Authority (RTA). The Fortitude Valley/Newstead rate had been rising, probably due to the introduction of new stock and reducing supply (refer to our October 2020 news article).
That news article also outlined the shift to regional locations since the pandemic. The Gold Coast has been a key beneficiary, despite the severe impact of the loss of international visitors and students and extended closure of the Queensland border. This is highlighted by the overall December 2020 residential vacancy rates now being below 1%, down from 3.2% to 5.0% earlier in 2020. Even Surfers Paradise saw its vacancy rate fall to 1.1%, down from 10.0% in May 2020.
Graph 1 shows that in the northern corridor postcode area of Coomera/Pimpama, the median rent for four bedroom houses had been quite stable in 2019, but rose by 4.4% to $470/week in the second half of 2020. It is possible that potential investors will now be considering middle and outer ring metropolitan areas and regional markets, rather than traditionally favoured inner city apartment markets, certainly in the immediate future.
As workers return to the CBDs and vaccines permit some return of international visitors and students, apartments may well be on investors? radars.
RBA Governor?s Outlook
In the wake of the RBA Governor?s statements at the National Press Club on 3 February 2021, various commentators have expressed concern about the impact of prolonged low interest rates and continued bond purchases on creating asset bubbles (for example in the Australian Financial Review, 4 and 5 February 2021). Both equities and housing were identified as potential problem areas, as retirees experience reduced incomes from safer investments like term deposits.
In accordance with the IMF?s recently released outlook for an upgraded recovery from the pandemic, Phil Lowe highlighted Australia?s response to COVID-19 resulting in a faster recovery here than the RBA had expected (his expectation now is for 3.5% GDP growth in 2021 and 2022). However he pointed to spare capacity in the labour market. As at December 2020, the unemployment rate was 6.6% and the underemployment rate was 8.5%, bringing the total underutilisation rate to 15%, well above pre-pandemic levels.
The RBA Governor?s expectation for the Australian unemployment rate is for a fall to 6.0% by late 2021, to 5.5% in late 2022 and to 5.25% by mid-2023 (central or baseline scenario ? refer to RBA graph below).
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Phil Lowe has indicated he is not concerned about the possibility of asset bubbles. He indicated the national housing price index is only around the level reached four years ago; and said that there would be a role for regulatory intervention if there was a deterioration in lending standards.
The Governor?s outlook for wages growth, and hence returning to the RBA?s inflation target range of 2% to 3%, is sobering. As at December 2020, the wage price index grew by 1.4% for the year (see RBA graph below).
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This was well down on wages index growth of 3% to 4% in earlier years (at least partly driven by the resources investment boom).
Phil Lowe indicated that wages growth is determined by supply and demand in the labour market and that it could be some years before it could exceed 2% per annum. It would require a very tight labour market to stimulate wages growth. Factors influencing weak wages growth include structural issues, such as globalisation, technology, the reduced power of labour versus employers (think food delivery contractors) and weak productivity (source: the Australian Financial Review, 4 February 2021). It would require more than the lifting of wage freezes to address such issues.
It should be noted that over the past year, the RBA has overestimated the depth of the economic downturn and underestimated the strength of the recovery.
Houses and Regional Areas Benefit from Rising Prices
Once incentives such as the HomeBuilder program end, weak wages growth has implications for housing affordability, especially in the light of rising prices. Table 2 highlights the higher levels of recent price growth for houses and for both houses and apartments in regional areas.
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???????????????????A supply shortage of listed properties for sale is one factor driving price growth. Nationally and on the Gold Coast, recent auction results have seen clearance rates in excess of 80%. This is also likely to fuel increased investor activity.
At the Ray White Prestige auction on 28 January 2021, an original beachfront cottage at 3517 Main Beach Parade, Main Beach sold under the hammer for $7.236 million ? see photograph below. It achieved a record price for a Gold Coast beachfront property with redevelopment potential: $18,000/square metre, based on land value for the 10.1 metre frontage block of 402 square metres.
Nearby, apartment 6 in the boutique Sea Main Beach building sold by private treaty in December 2020 for $6.3 million. This was 14.5% above a resale price achieved in May 2020, a sign of the rising price environment for upmarket properties (refer also to our news article of October 2020 on $1 million plus Gold Coast properties).
Net Internal Migration Trends
Ray White Surfers Paradise has reported record levels of interest in their Event auction this year. More than 25% of inspections were from interstate buyers, looking to relocate or ?have a safe haven? for the future. This finding is supported by provisional internal migration figures from the ABS, illustrated in Graph 2. It compares the September Quarter 2019, when Queensland had net internal migration of 5,470 persons (67% to Greater Brisbane and 33% to Regional Queensland), with the September Quarter 2020.
The more recent quarter total of 7,237 net internal migrants for Queensland was 32% higher (56% to Regional Queensland and 44% to Greater Brisbane). This occurred when the Queensland border was closed to Victorians and to Sydneysiders, with anecdotal evidence of interstate enquiry for Gold Coast and other coastal Queensland properties increasing in more recent months.
In the year to June 2020, Queensland?s net interstate migration of 25,348 persons was 7.8% above the long-term average of around 23,500 persons. It was the highest level since the mid-2000s (source: ABS Cat No 3101.0).
The graph shows that both Greater Sydney and Greater Melbourne lost significant numbers in the September Quarter 2020, but regional areas gained higher numbers than in the September Quarter 2019, with Regional New South Wales (NSW) numbers more than doubling.
Victoria?s extended lockdown saw its September 2019 net internal migration total of 2,030 persons decline to a net loss of 3,749 persons in the September Quarter 2020. However net internal migration to Regional Victoria rose by 23%.
ME Bank Survey
The ME Bank, owned by Australian industry superannuation funds, has conducted quarterly property sentiment surveys since early 2019. The January 2021 survey included around 1,000 Australian adults in the property market across various geographical and age segments (48% owner occupiers, 30% investment property owners and 22% first home buyers). It recorded the highest level of positive sentiment since the survey began (49% of respondents were positive, compared with the pandemic low point in the June Quarter 2020 of 29%).
Other key findings included:
· Both investors and owner occupiers had the highest proportions with a positive sentiment towards property (each 58%). Investors with a positive feeling about the property market increased from 43% in the December Quarter 2020 and from a low of 34% in the June Quarter 2020. Investors with a negative perception fell to 10%, down from 23% in the second half of 2020 and 30% in the June Quarter 2020;
· Owner occupiers? perceptions also rose, from 41% in the December Quarter 2020 and from a low of 26% in the June Quarter 2020;
· In contrast, the proportion of first home buyers feeling positive about property fell in January 2021 to 27%, down from around 30%-32% throughout 2020. This correlates with a lower proportion of first home buyers planning to buy a property (43%, down from 53% in the December Quarter 2020);
· It also correlates with 55% of all respondents who were worried about property becoming unaffordable, close to the level in the March Quarter 2020, but above the pandemic levels of around 48%. In the most recent survey, only 7% of respondents were expecting prices to go down over the next 12 months, compared with 41% in the June Quarter 2020. Overall, 77% expected prices to bounce back this year;
· In the January 2021 survey, 34% of respondents planned to buy property in the next 12 months, including 37% of investors. This was fairly stable over the period of the survey, except for a downturn in intentions in the June Quarter 2020. Overall 75% felt more confident about buying or selling property, as COVID-19 restrictions had eased; and
· Most respondents intended to hold their property (around 60% in most surveys). Of those planning to buy and/or sell a property in the January 2021 survey, 47% intended to do so as soon as possible (including investors). This was higher for those intending to buy and/or sell an apartment (53%).
In summary, the findings of the ME Bank survey tend to support the likelihood of Australian property markets seeing increased participation by investors. This trend is expected to be driven by the ongoing low interest environment. Potential easing of responsible lending standards by the Federal Government may also influence the trend.
© Copyright Colleen Coyne Property Research Pty Ltd, 2021. Reproduction of information in this newsletter only permitted with written permission and acknowledgement of Colleen Coyne Property Research Pty Ltd as the source.
The information in this report is provided in good faith, but is not intended to be comprehensive or to render advice. It does not take into account individual objectives, financial circumstances or needs. This includes changes in property market conditions as a result of changes in the economy due to the performance of the local, state, national or international economies, and/or due to the impact of natural phenomena or manmade events. Colleen Coyne Property Research Pty Ltd does not accept any form of liability for its content. Readers should undertake independent inquiries to satisfy themselves of the correctness of any statement and the appropriateness of any actions to their circumstances.
