Boy oh boy, have things changed? Or have they?
In anticipation of coronavirus penetrating our borders and causing some temporary disruption, Propertyology produced a ‘Safe As Houses [COVID-19]’ video on 10 March.
The world then quickly closed in, having a much bigger impact on Australian life than most of us ever imagined. Sport at all levels was completely closed and, on 23 March, the federal government mandated that all pubs and restaurants were closed. We were told that the nation may be in complete lock-down for 6-months or more. Whoa!
Within just a few weeks, the minds of many suddenly were predicting that the arse would fall out of all property markets.
It never ceases to amaze me how quickly people can jump to conclusions. Some people will quickly latch on to ONE thing (almost always an anticipated negative trend) and then punch out a doom-and-gloom prediction.
It’s only a couple of months ago that Propertyology described property market fundamentals in Australia as the best they’ve been for more than a decade.
Subsequent to producing that research report, 8 out of 8 capital cities and an overwhelming majority of Australia’s non-capital locations produced an increase in median house price in the month of February while quarterly capital growth rates suggested that large parts of Australia were running at double-digit price growth. How easily some forget!
If there’s one thing I have learned as a professional property market analyst, it’s that the property market of each individual town or city is akin to a big jigsaw puzzle with numerous pieces. One must (calmly) bring together all of the pieces to (objectively) complete the full picture.
One such puzzle piece which has somewhat reshaped the picture is the closure of international borders for, who knows, maybe a year. The impact on property markets will be both direct (through reduced demand for shelter) and indirect (through the reduced revenue to Australian businesses). It will have different levels of intensity in different cities.
Globalisation, particularly post-GFC, produced a huge surge in demand for international residents visiting Australia for a variety of reasons.
Common purposes for visiting Australia include holidays, studying at our universities, catching up with family and friends who live here, doing business here, attending conferences and sporting events.
Of the 163 million individual passengers through Australian airports in the 2019 financial year, 42 million (or 26 per cent) were international passengers (inbound and outbound combined). Sydney and Melbourne account for a whopping 28.2 million international passengers.
As a percentage of their respective total inbound passenger volumes, the Australian airports that rely most on international passengers are Sydney (38 percent), Perth (35 percent), Melbourne (30 percent) and Brisbane (26 percent). Gold Coast (15 percent), Cairns and Adelaide (both 13 percent) also have some international popularity.
Hobart airport doesn’t currently offer a direct international link, but it does have a plan to commence international flights upon completion of a $100 million airport upgrade in December 2020 and double passenger volumes within a decade.
Over the last 10-years ending September 2019, Australia’s population increased by an average of 369,000 people per year, with 60 percent coming from net migration.
The potential that international borders might remain closed for (say) a year is all that some commentators need to conclude that those 220,000 migrants who don’t relocate here over the next 12-months is enough to cause property prices to tank.
220,000 people equates to demand for 85,000 dwellings. In a nation with more than 10.3 million dwellings, this is less than 1 percent – barely a drop in the ocean.
Population growth is a very long way down the list of biggest influences on property prices.
As illustrated in the above chart, 2002 to 2005 was the most prosperous era in Australian real estate, yet the nation’s population growth rate in those years was among our lowest.
Given that almost all overseas migrants rent property (as opposed to buy), it’s the rental market (as opposed to property values) that is likely to be more impacted by border closures. As for specifically where, the chart below highlights overseas migration’s contribution to population growth in our capital cities along with the biggest beneficiaries in regional locations last year.
Unquestionably, the industry with the biggest initial hit by COVID-19 was tourism.
Closing international borders means that the circa 400,000 monthly international tourists and conference-goers won’t be spending money in Australia.
Tourism Australia claims that international tourism contributes $39 billion annually, or 8 per cent of total exports. That’s enough coin (in just one year) to fund a collection of nation-building infrastructure projects that includes Melbourne Metro ($11B), the Inland Rail Project ($10B), Sydney’s new airport ($8B), Snowy Hydro 2.0 ($6B) and Brisbane’s Cross River Rail ($5B).
Information from Tourism Australia suggests that the most visited locations by internationals are Sydney (25 per cent), Melbourne (18 per cent), Brisbane (9 per cent), Gold Coast (7 per cent), and Perth (6 per cent). Less than 3 per cent of international tourists had Adelaide, Hobart, Canberra or Darwin as their main destination.
Some locations have a more diverse economy than others. When Propertyology reviewed how much international tourists spent in each location on a dollars-per-resident-population basis, the locations to be affected most by the (temporary) international tourism closure are Broome WA, Cairns QLD, Whitsundays QLD, South Coast NSW and the Great Ocean Road VIC regions.
The closure of international (and domestic) tourism has resulted in many of the circa 150,000 dwellings that were listed with Air BNB and Stayz now advertising in the conventional long-term rental market. But for how long?
Once isolation measures relax, there’s a good chance that domestic tourism may experience a boom. Think about it, would you rather remain cooped up at home or having a relaxing holiday in beautiful Cairns or Tasmania?
To get the national and state economies pumping again, I’d love to see the biggest portion of future government stimulus packages invested in tourism-related initiatives.
The estimated 650,000 international students that have chosen to learn their craft at one of our universities are a significant portion of Australia’s 2.4 million temporary visa holders.
The industry contributes $40 billion to the national economy – big bikkies!
It looks highly likely that Australia will miss out on international students spending their pay packets in our university cities for the entire 2020 calendar year.
The same applies to lost revenue through their family and friends visiting the Land Down Under.
While many international students live on campus, there will always be a portion who prefer to rent a conventional dwelling, predominantly an inner-city apartment.
This would partly explain the big spike in rental listings in locations highlighted in the above chart. Sydney and Melbourne are again heavily impacted!
Locations that had low residential vacancy rates immediately prior to COVID-19 are best placed to absorb reduced rental demand from the international student market and some increased supply through Air BNB.
Sydney is the biggest worry here. It entered the COVID-19 isolation period after reaching an all-time record high vacancy rate late last year.
Conversely, Adelaide, Canberra and Hobart along with large parts of regional Australia had incredibly low vacancy rates prior to the arrival of the germ.
The Big Picture
There’s no question that Australia will be dealing with significant economic challenges caused by COVID-19 for several years to come. But I have a contrarian opinion to the majority of commentators who have a doomsday forecast for national property markets.
From a property market perspective, COVID-19 is a short-term attack on household incomes.
There will be some property market casualties. The most vulnerable to the germ are the locations with the highest mortgages to service and / or the highest rents to pay.
Other layers of vulnerability to evaluate include localised exposures to overseas migration, international tourism and international students.
Yes, there have been up to 50 percent of Australian households who have taken a significant hit to the household budget. But the Job Seeker, Job Keeper and other support packages will be sufficient for the majority of tenants and property owners in affordable locations to ride out this temporary (albeit incredibly unsettling) inconvenience.
Those who really want to know what lies ahead for property markets must first stop thinking about broad-brush national commentary.
There are always numerous factors that influence the supply and the demand side of the property equation. The collective sum of all of these factors will be very different in each of the 185 individual Australian towns and cities.
Instead of focusing on what’s happening right now, my focus is on the probable community response as isolation measures progressively relax, along with an expectation that international border closures aren’t permanent!
I can’t emphasise enough how important it is to have a clear understanding of what the property market fundamentals looked like in each town and city immediately prior to the arrival of COVID-19 [see here].
Those who do so in an unbiased manner will understand why Sydney and Melbourne were already several years away from their next growth cycle – the contents of this report adds another layer of challenges for those two cities.
Large parts of Australia, while it won’t feel like it in the emotion of this moment, still have an exciting property market outlook.
To help reboot economies across the country, out the other side of our cocoons will be another series of targeted stimulus packages.
Health, education and professional services will always be staples of an economy. Agriculture, domestic tourism, natural resources, defence and parts of Australia’s manufacturing sector have opportunities ahead of them.
Having been forced to work from home for weeks on end, many Australians will be re-evaluating their priorities and questioning whether they really need to live in a congested city, with long commute times each day and a high mortgage to pay. This will define a new trend in housing demand.
Beat The Seagulls
As jobs and our civil liberties progressively return during the coming weeks and months, real estate activity from buyers and renters will quickly increase.
Active participants will be greeted by all-time record low interest rates, first home buyer initiatives and rental incomes which are higher than interest expenses. Exciting stuff!
As clearly illustrated in the above chart, the very low volume of properties listed for sale before the arrival COVID-19 is now even lower. Much lower!
For me, the demand side response combined with the incredibly low supply makes it obvious that there will be instant pressure on real estate prices in several towns and cities across Australia. Price growth is likely to occur quickly and strongly.
In addition to record low supply of properties listed for sale nationally, the evidence also confirms a sharp reduction in the volume of new dwelling supply (above).
Finally, don’t be fooled by the current rental market commentary. Many of the locations that have shown signs of softening during April are temporary.
At a macro level, the evidence below clearly highlights tight national rental supply.
Propertyology’s buyer’s agents are in daily contact with property managers in various parts of Australia. At an individual town and city level, there’s a considerable amount of pressure on rents and we haven’t experienced any insurmountable challenges with tenants.
We are excited by the prospect of helping everyday Aussie property investors to take advantage of this unique opportunity to plant a seed for their future before the seagulls arrive and start forcing prices higher.
Propertyology is Australia’s premier property market analyst and award-winning buyer’s agency. Every capital city, every non-capital city, we analyse fundamentals in every market, every day. We use this valuable research to help everyday Aussies to invest in strategically-chosen locations (literally) all over Australia. Like to know more? Contact us here.