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How will COVID-19 impact WA’s residential property market?

Monday, 23rd Mar 2020
Categories: COVID-19, Market News

RELEASED ON 23/03/20:

While Perth’s property market recorded a strong start to 2020 with strengthening rental market conditions and consecutive months of price growth indicating signs of a more sustained recovery, recent events have added new uncertainty as to what will happen within WA’s housing sector and economy.

Although at this stage property activity remains higher than the same time last year (there were 603 sales recorded in the latest weekly REIWA data compared to 469 in the same period of 2019), the potential social and economic repercussions of COVID-19 are understandably leaving existing and aspiring investors with a number of questions.

What’s the impact of the Coronavirus (COVID-19) on residential property?

The coronavirus pandemic will inevitably have short-term impacts for WA – likely in the form of a significant slowdown in the State’s domestic economy (which up to this point had recorded four consecutive quarters of accelerated growth), and a delay to the housing market recovery as buyer/seller activity reduces in the nearer-term.

We expect to see a stagnation of rents for the rest of the year, compared to our earlier optimism of good rental growth in 2020. In the short term, some tenants may find themselves less able or unable to pay rent due to job losses or redundancies which may pose some challenges for landlords. However, the government has confirmed they are working on a rental assistance package to support tenants whose income has been affected, with details anticipated to be released shortly.

Due to current uncertainties, we expect transactions to also slow down, meaning there will be fewer buyers in the market. However, at the same time there will be fewer sellers bringing properties to market, which should help to somewhat offset this.

While the repercussions will be short and sharp, these effects are unlikely to impact the long-term fundamentals that remain in favour for WA’s property market, and we remain confident of the market’s longer-term performance. Given the current shortage of stock for sale and properties for lease in Perth’s market, we anticipate that the current environment will delay activity, but not change the underlying demand for housing.

Property has historically shown long-term resilience

Over the past few decades, Australia’s economy and property markets have been exposed to challenges with events such as the SARS outbreak in 2002 and the Global Financial Crisis of 2008. While this event is clearly larger, it has also been met with a significant government response, with $189 billion in support already being offered to businesses and consumers. While these previous events triggered a drop in activity in the immediate term, the negative effects were short-lived, with property showing long-term resilience, and ultimately continuing its growth in value.

In short, the immediate fluctuations didn’t impact where we are now. In fact, on a national level, analysis has shown that those who bought during the GFC continued to record high levels of growth in the years that followed, supported in turn by government stimulus and falling interest rates.

Indeed, during events such as these, property has consistently shown itself to be one of the more resilient asset classes, with less exposure to real-time data and its relative illiquidity protecting it from the same volatilities as we are currently seeing in the financial markets.

What about WA compared to the rest of Australia?

From a property-specific perspective, we expect WA’s property market to remain more shielded from the effects of coronavirus than the markets in Sydney and Melbourne, where high levels of investor participation and (in the case of Sydney in particular) oversupply could increase susceptibility to price fluctuations.

Our demand from investors was only just starting to return prior to this. And with modest transaction activity currently, we are likely to see a lower drop in activity than other major markets.

While we will very likely see a reduction in sales and leasing transactions as people deal with the current uncertainties, and hence a deferral of projected demand, the long-term fundamentals we are seeing in terms of tightening supply, increased mining investment and lack of oncoming stock remain in place and set the market in strong stead to resume its recovery once certainty is restored.

What’s ahead?

The Australian government has already set out a number of initiatives to soften the economic impact of the coronavirus pandemic, with the announcement of a $189 billion stimulus package set to provide support to Australia’s key industries.

Shortly after news of the outbreak developed, the Reserve Bank of Australia cut official interest rates by 25 basis points, with a further emergency cut taking the official cash rate to a record low of 0.25%.

While these initiatives will help to quell some of the initial impact, they also hold longer-term benefits for property investors by helping to boost access to credit and lowering borrowing costs.

In fact, it’s highly likely in the longer-term that we will see greater levels of interest in property as an investment vehicle, with those who previously participated in more volatile assets such as shares looking to invest capital into more resilient, secure alternatives – something that will help to further bolster the recovery when it comes.

What does it mean for aspiring buyers?

While the coronavirus outbreak is undoubtedly going to trigger a short-term decline in buying activity, for those with high levels of income security, the reduced buyer competition and weaker market conditions are likely to actually improve their buying position.

With the latest interest rate cuts further enhancing accessibility to credit, aspiring buyers have the opportunity to secure more favourable rates on home loans, placing them in a strong financial position when the market recovery resumes.

What does it mean for sellers?

With the coronavirus outbreak inevitably weakening market conditions in the shorter-term, people looking to sell their properties will need to consider any decision in the context of a longer-term outlook.

Given the historic short-term nature of such fluctuations, those with the flexibility to do so should look to defer immediate sales decisions.

What does it mean for existing investors?

With the anticipated decline in leasing transactions and job losses amongst some tenants, rental demand will most likely reduce in the shorter-term. However, given the uncertainties of the current environment, existing tenants will be more inclined to renew and extend leases that are nearing expiry, which (combined with interest rate cuts) will offset some of this initial impact.

Investors with strong financial security may also find themselves in a better position to buy, with easing credit conditions providing opportunities for portfolio expansion.

In addition to rate cuts, several lenders have already begun announcing assistance packages for borrowers affected by the coronavirus outbreak, and are encouraging borrowers to review their credit options with their advisors to prepare for the changing economic environment.

What should I do now?

Evaluate your credit options

As the government announces new measures to stabilise the economy and ensure continuing availability of credit to borrowers, we advise borrowers to be working with a mortgage broker in reviewing their credit options to ensure they are in a strong financial position for the months ahead and remain informed of the opportunities available to them as they arise. All borrowers should consider:

  • Evaluating the opportunities available in the low interest rate environment, especially as easing credit conditions and lender flexibility make potential options more accessible.
  • Negotiating lower rates with existing banks or refinancing to save money on repayments.
  • Reviewing existing lending solutions and assessing availability of offset accounts to store 3-6 months of loan repayments.
  • Evaluating potential to access available equity as emergency cash buffer.

If you’d like to speak to our mortgage broking team, please message your existing broker or contact our Finance Team Leader Caylum Merrick at caylumm@momentumwealth.com.au

Keep up-to-date with market opportunities

With competition reducing, there will likely be some strong buying opportunities in the next six months for those who have been considering getting into the market or expanding their portfolio. If you are one of those investors, our advice is to keep up-to-date with market trends in conjunction with your property team to ensure you are selecting areas and properties with the right demand, supply and growth fundamentals in place to support a strong performance when activity picks up.

Stay in touch with your advisors

As times remain challenging and uncertain, we encourage all investors to continue to seek professional advice from their accountants, brokers, buyer’s agents and other relevant parties so they can continue to maintain, strengthen and protect their investment position.