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How will COVID-19 impact the value of your home?

There are many speculations on how the COVID-19 pandemic will affect property prices in Australia. In modern times, the world has literally never been hit by this kind of situation. In this article we want to break down what we think will happen to property prices both short and long term.

Property prices will likely go down slightly, at least in the short term. However you look at it, an economic and social lockdown, rapidly increasing unemployment levels and dropping stock indices have negative effects on property prices. The extent of a drop will depend heavily on how successful the government’s stimulus packages on the health of the economy are. Historically low interest rates, quantitative easing measures, financial aid to businesses will definitely help in easing the drop in prices but to what extent is still to be seen.

The property market in Australia has already seen a drop in rental prices. Uncertainty about income, influx of short-term rental homes (AirBnb properties) being put on market for long term lease has created oversupply and consequently affected the rental market. Even after the lockdown is lifted, tourism will not instantly recover and people who lost their jobs won’t instantly get back to the same level of income they had before so it is reasonable to think lower rental prices are here to stay for at least a year. 

Will a drop in rent prices push down property values? The answer to this question is – not necessarily. From an investment perspective, property values are dependent on rental prices and rental yields. If we know that rental prices are going down, we need to predict what will happen to rental yields to know whether property prices will drop. Low interest rates and quantitative easing that the Australian government is pushing now, at least in theory, should lower mortgage rates. If mortgage rates are lower, it means yields will go down as well as these two measures are highly correlated. So in an event when rent prices go down 20% or 30% but yields go down by the same amount, which is somewhat expected, property prices, at least from an investment perspective, should not be affected that much.

For people who do not measure their property value based on rental income, heightened mortgage stress might be an issue as quite a lot of people are losing jobs or at least some parts of their income. However, if mortgage rates go down it could counteract that, at least to some extent. Whether we see a lot more foreclosures will heavily depend on how long the lockdown and economic slowdown lasts. Economists predict that Australia’s GDP will fall around -6,5% this year (mainly due to a weak second quarter), which obviously will influence the property market. However, it is also expected that we will see a strong rebound of around 6% growth next year, which would likely put things back to normal. By simply estimating property value changes based on GDP growth predictions (note: GDP growth is one of better historical predictors of changes in property values), you could reasonably assume there will be a short lasting drop in prices for the remainder of this year with a rebound going into 2021. Of course we may see property prices lagging behind GDP growth but because the economy, property and financial sectors are not fundamentally broken, a drop and a quick rebound for both the GDP and property prices should be the more likely scenario.

Another important thing to analyze here is consumer confidence which, based on data, is falling quite quickly. According to the Westpac consumer survey: “time to buy a dwelling” index dropped by 26.6% – the largest monthly decline recorded in 47 years. However at 82 points, it is still above 67.1 where it was during the Global Financial Crisis of 2008. The price expectation index dropped by 50.8% to 69.7 points in April, a fall about four times greater  than the largest monthly decline since Westpac began surveying for it in 2009. 

In times of heavy uncertainty this is quite natural as it is human nature to act conservatively when there are a lot of unknowns. In the property market this drop in consumer confidence is clearly visible by simply looking at auction clearance results. According to Domain.com.au, auction clearance rates in NSW were 69% on the 14th of March and only 36% on the 18th of April. Of course this is not only due to lower consumer confidence but also because of the ban that was placed on live auctions to support social distancing measures. Overall, this drop in consumer confidence will clearly lower property prices in the short term, especially with less buyers in the market as more and more people are postponing the purchase of a property. Moreover, people who do have savings are slowly entering the market, searching for great investment deals and low-balling desperate sellers, which consequently amplifies the sentiment of dropping property prices.

However, when lockdown regulations are lifted, buyers who had postponed their purchase will come back to the market. In turn, this pent-up demand should gradually lift property prices back to similar levels as to what we saw before the virus, especially given the low mortgage rate environment. This scenario is now playing out in China where homebuyers came back right after the quarantine. When looking at data for second-hand residences in China, which are mostly free of government intervention, a small decrease in property prices throughout the month of February was followed by similar growth in March. The same situation could easily repeat itself in Australia as well.

 

To conclude, COVID-19 has transformed the property market from a sellers market to a buyers market seemingly overnight. However, while the majority of buyers will try to get discounts, not all of them will because some are just looking for a home. Furthermore, if you are selling to buy your next home then most market changes shouldn’t impact your situation anyway.

We constantly talk about how important it is to have a B.A.T.N.A. and prepare yourself for a longer home selling campaign in any market. As a seller, as long as you don’t have to sell quickly, you’re in the driver’s seat. Now, more than ever, home sellers will see the value in how strategic preparation before selling helps to maximize price.

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