Originally published on Smart Property Investment
Residential real estate has long been a gold mine for Australia, but the unprecedented COVID-19 outbreak saw the economy weaken, ultimately affecting the property market. How will Australian property fare in the near future?
After over three decades of continuous economic growth, 2020 saw Australia’s national economy weaken as the country deals with the effects of the pandemic.
Still, home owners and investors alike have retained their enthusiasm for the brick and mortar, according to a recent report by McGrath Estate Agents, who described the phenomenon as having “converted homes and investment temporarily from gold mines to safe houses, providing flexibility to help owners navigate a tough economy ahead”.
According to McGrath, since the onset of the virus, some owners such as Generation X have been refinancing to withdraw equity, taking advantage of the lowest interest rates in history to renovate their homes and upgrade their lifestyles.
Moreover, ABS figures showed external refinancing (refinancing with another lender) surged from $5.7 billion worth of new refinanced loans in May 2019 to $10 billion in May 2020 – the highest value ever logged since records began in July 2002. Before the pandemic, it was $6.3 billion in February 2020.
On the other hand, internal refinancing (replacing mortgage with a larger loan to access equity) steadily rose over the first few months of the pandemic from $4.3 billion in February 2020 to $5.3 billion in May 2020.
“Some borrowers might use this equity to cover loan repayments while their incomes are compromised. Others might renovate or buy more property while prices are softer,” the report said.
Research also revealed that 9 per cent of owners are considering downsizing to a smaller home on less debt, while younger home owners might consider ‘rentvesting’, where they move out of their first home and lease it to create rental income and reduce outgoings while moving somewhere cheaper themselves.
Others, such as Baby Boomers, are selling up in metropolitan areas and relocating to lifestyle locations, enjoying the same style of home with residual cash to save.
“The magnificent resilience of our national market has meant prices have softened only slightly, despite the impact of a once-in-a-century pandemic and the recession it has caused.
“This has enabled home owners and investors to sell, if they like, often without too much compromise on price and sometimes for well above reserve at auction, depending on the type and location of the home,” the report highlighted.
First home buyers are also as enthusiastic for the Great Australian Dream of owning a house, possibly with a new appreciation for the security of bricks and mortar as an “essential cornerstone asset”.
The COVID-induced change in our economic climate undeniably has many people worried, with one in four Australians concerned about their ability to pay bills, 84 per cent worried about the local economy, 85 per cent fretting about the global economy, and 29 per cent concerned about job security.
Once stimulus is pulled back and mortgage deferrals end, McGrath expects Australians to instinctively want to hold on to their assets.
“In the first few months of recession, our main counteractive move was to rein in spending and pay off debt. We also found different ways to use our cornerstone asset to support any change in circumstances or lifestyle.”
However, this will not deter market activity. Some 9 per cent of Australians were already considering buying an investment before the virus. By August 2020, 14 per cent were thinking about doing so within the next 12 months.
First home buyer activity across Australia was at a 10-year high at the end of 2019, and this trend continued in early 2020, encouraged by the federal government’s First Home Loan Deposit Scheme, stamp duty concessions and First Home Owner Grants.
Ultimately, despite doomsday predictions, history paints a glowing picture of property price resilience in Australia, McGrath said.
House prices have rebounded after every recession or downturn in the past 50 years, including the early 1990s recession and the global financial crisis. Based on this, house price falls are unlikely to be sustained for a prolonged period.
According to McGrath Estate Agents’ founder and executive director, John McGrath: “Surely a global pandemic is cause for a material re-adjustment in home values and the highly publicised ‘major correction to Australian prices’ that the doomsayers have been erroneously predicting for 40 years? Well, my prediction is in the opposite direction.”
“I think there’s every chance that a small, short-term correction might land for six to 12 months –something in the order of 5 per cent. But the most in-demand markets that offer people what they want are about to take off again.”
“With interest rates approaching zero and many owners having deleveraged in the past few years, I envisage increases in well-located prime residential real estate in major cities and regional lifestyle areas – that is, anywhere near surf, waterways or lots of trees within 90 minutes of the big East Coast cities.”
As Australia navigates the worst economic downturn since the 1930s, property owners have indeed found a new and deeper appreciation for the true value of bricks and mortar as assets, particularly in tough times, McGrath concluded.
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