Is this the time to buy property?
While housing has taken a hit from the pandemic, there are always opportunities for astute buyers
The economic damage and uncertainty resulting from the coronavirus has derailed the property plans of thousands of Australians. Or has it? Experts can’t agree. Research released in early May from comparison website Finder shows that 24 of 42 economists and finance experts (57%) believe now is not a good a time to buy. Twenty-five economists felt that house prices in capital cities could drop between 6.4% and 10.5% by 2021.
While there are differing views about the short-term future, there’s also evidence to suggest not all is lost for those wanting to buy a home.
Glenn Wealands, head of client experience at Rabobank, says that for people who were ready to buy a home pre Covid-19, or were looking to buy in the next six to 12 months, those dreams haven’t been dashed.
“When looking at 10 years of data from our Financial Health Barometer, the 2020 results show that a record number of Aussies were planning to purchase a home in the next two years – stronger than in 2016,” he says.
While buyer sentiment was strong before we reached peak Covid-19, predictions on the property market can be akin to using a crystal ball. There will always be opportunities and challenges for people looking to buy.
So is now the time to follow Warren Buffett’s mantra to “be fearful when others are greedy and to be greedy only when others are fearful”?
Population growth slows
Property is likely to experience a double hit from the economic slowdown and the need to socially distance. With incomes and jobs lost, people previously in a position to buy a home will need to reassess.
Unlike other asset classes, buying property is a tangible experience of seeing and feeling as much as it is a number crunching exercise. Government measures to prevent the spread of the virus have made this process harder, but not impossible. At the time of writing, restrictions on open inspections were lifting in some states, but private or virtual inspections were still available; and public auctions were returning after being run online during the peak of the crisis.
Despite a decline in overall market activity and consumer sentiment, housing values have remained relatively stable. While most regions recorded a rise in April, the national monthly pace of growth has more than halved from 0.7% in March to 0.3% in April. The big capitals may have the biggest downside risk.
“Sydney and Melbourne arguably show a higher risk profile relative to other markets due to their large exposure to overseas migration as a source of housing demand, along with greater exposure to the downturn in foreign students, stretched housing affordability and already low rental yields that are likely to reduce further on the back of rising vacancy rates and lower rents,” says Tim Lawless , CoreLogic’s head of research.
Trent Wiltshire, economist at Domain, says buyers are worried about their finances, and this is affecting the housing market. Coupled with this is the long-term effect of low population growth.
“There are the travel bans and fewer students, so expect to see the lowest population growth since World War II, and that will weigh on demand for new housing,” he says.
“Developers may also hold off building new projects. It looked like the construction cycle had started to turn after bottoming out in 2019, however it’s a forwardlooking market, so supply conditions will likely be subdued for some time.”
Nerida Cole, managing director and head of advice at Dixon Advisory, is more optimistic and says while the housing market may fall in the short term, “when social distancing restrictions are fully lifted it could turn quite quickly, so keeping your options open and having accessible cash will be important for buyers”.
Many of the areas badly affected by Covid-19 rely on tourism and hospitality. “The Gold Coast market will take one of the biggest hits,” says Terry Ryder, from Ryder Property Research. But there are other areas that may outperform.
“Regional markets where the economy is based on agriculture and viticulture – and are not drought-affected – will do pretty well,” he says.
“In NSW, regional centres like Orange, Mudgee and Griffith may do well. And economies where the resources sector is strong will surge, because I expect a resources boom to follow the shutdown, driven in part by China.”
Property opportunities are available, but finding them is the tricky part.
Ben Kingsley, chief executive of Empower Wealth, says if you’re in a secure financial position with job security, and you’re thinking long term, you can potentially move on property when you have a motivated seller. But this comes with a caveat.
“They’ll be a lot of junk stock in marketplaces where properties are cheap because they are oversupplied, and they’ll remain cheap because they wouldn’t be investment grade,” he says. “Though there are fewer buyers, there’s less stock, so finding a good asset in the current market is difficult.”
He also questions whether prices will fall significantly over the long term due to rising unemployment. “According to data released by NAB, 33% of their clients have reserves that will cover their mortgage for two years or greater. There’ll still be a price correction, but it will be 5% to 10% and that will be lower-quality stock. That will hit the median price, but the good properties won’t lose value.
“Compare this to the 1990 recession – unemployment was 10% for an extended period, and that’s where we saw property prices drop significantly.”
Jarrod McCabe, from Wakelin Property Advisory, says investors should look for properties that have multi-faceted demand and are not reliant on one buyer profile. This means properties that can service first home buyers, investors and downsizers.
“If you’ve got multi-faceted demand, a downturn in one group will be offset by sustained demand in another,” he says. “In Melbourne, the sub-$1.5 million
First home buyers are in a good position to take advantage of the down market
mark is quite strong, and these properties meet those multi-faceted markets – for example, the more established properties like cottages and terrace houses – because they work well for all those buyer profiles, including strong tenant demand.”
What to avoid
At the other end of the spectrum, McCabe suggests buyers avoid high rise, off the plan and modern estates on the city fringes where there’s a significant supply.
Similarly, Kingsley warns against high-density rental apartments due to over-representation among investors. “These kinds of properties will also suffer a downturn in rental demand as young millennials who were employed in hospitality and discretionary sectors will move into a share-house or move home, so we do anticipate that vacancy rates will be going higher over the short term,” says Kingsley.
By the same token, he says buyers should look for house and land.
“Land is king,” he says. “Land in diversified economic locations, such as the larger capital cities, is the good stock to be looking at – closer to these cities in areas where there isn’t a lot of oversupply.”
Ryder says first home buyers are in a good position to take advantage of the down market. “Most people will sit on the fence and wait for a signal that markets are rising again, which means they’ll miss the best opportunities to buy well,” he says.
“First home buyers in particular will find good opportunities because prices won’t be rising, there will be little competition from other buyers, interest rates are ultra-low and there’s plenty of government support at both federal and state levels.”
Lenders tighten belts
Of course, intending to buy a property and getting finance are two separate things.
Money is cheap at the moment, with the cash rate at an all-time low of 0.25%. However, being approved is a more difficult task.
Morgan Stanley analyst Richard Wiles forecasts cumulative losses for the big four banks of $35.4 billion over the next three years, and this means lending criteria will tighten.
“We’re talking to mortgage brokers – pre-approval is a very low priority for banks,” he says. “There are certain industries from an employment perspective that are being outright rejected, even if you have a genuine income from it.”
Banks may also request extra security to achieve a lower loan to value ratio (LVR), such as a higher deposit or more equity. Many banks have also wound back or eliminated higher-risk loans such, as debt consolidation or those with higher LVR ratios.
Moreover, ING has introduced more rigorous serviceability for those who are casual employees, contractors or self-employed, meaning you will be subject to tougher requirements.
“Lending conditions are challenging,” says Kingsley. “There’s far more scrutiny in terms of checking job security. Prior to Covid-19, a payslip was enough, but with a spike in short- term unemployment materialising, the banks are being more prudent about lending to people who can pay them back.”
Nerida Cole says if you were ready to buy pre-Covid-19 but have decided to wait, you should consider moving your savings to cash.
“Cash over shares should be your first choice if you’ve got a deposit ready to go or aim to purchase within the next five years. This will allow you to seize any opportunities that arise,” she says.
“If you think you will buy in the next six months, look at high-interest savings accounts. If you’re looking at waiting for more than six months, term deposit rates are also worth checking out.”
Refine your buying plan
Nerida Cole, managing director and head of advice at Dixon Advisory, says Covid-19 presents an opportunity for you to re-evaluate your path to ownership, or come up with a plan B if the pandemic changes your circumstances. This would include:
Don’t be tempted to take a larger loan than you can afford.
Aim for the golden rule of a 20% deposit – stick to at least that in this market.
Make sure you have access to some of your deposit or additional savings of three to six months of living expenses in cash, in case of an emergency or drop in income.
Be honest about your personal job security. If you feel there is low security for your industry or role, you should defer taking on a big financial commitment.
Show how you can still make repayments if something does happen. For example, look at the loan set up with your bank: can you draw on your bigger than 20% deposit to make repayments? Or taking on a flatmate may boost your income and rebuild your rainy-day savings account – but don’t bank on this as rental demand is down in the current market.
Check that your personal insurance, such as income protection, is up to date. Be aware these policies cover you for serious illness and disability – not job loss or redundancy. And always remember that lenders mortgage insurance (LMI) protects the lender, not you.