House prices are tipped to fall by 11 per cent over the next three years as the COVID-related economic downturn bites, and for one group of Australian homeowners, it could not come at a worse time.
There are an estimated 730,000 investors, many of whom are self-funded retirees or people planning for retirement, who have taken out interest-only bank loans in the belief property was a safe bet.
Coronavirus has already delivered challenges, including rent arrears and the prospect of losing their tenants altogether.
But now these private landlords are facing big hikes in their monthly bank repayments as they switch from interest-only to paying off the principal of their loans as well.
Max Green is one of many who has been trying to negotiate with the banks for an extension to the interest-only period of his loans.
The 69-year-old and his partner have bought two properties — one in Brisbane, the other in Perth — in the past 10 years to help fund their retirement.
But the value of the Brisbane property has flatlined and the Perth property, a unit in the city’s outer suburbs, has plummeted from $425,000 in 2016 to $300,000 today, according to a recent valuation.
“The intent was … to provide us with some equity growth in the properties, which would then assist us in the future once I had retired,” Mr Green said.
“We had been advised that we would be able to extend the interest-only period.”
Instead, the couple face paying an additional $1,900 a month from July as they begin to pay off both the principal and interest on their loans.
Mr Green said he still enjoyed his work as a project manager at WA’s Water Corporation, but conceded his retirement ambitions had not gone to plan.
He said he would now be forced to either keep working beyond 70, dip into the couple’s superannuation to pay the banks, or sell at a loss.
Investors brace for massive losses
Others with similar investment plans have already decided to cut their losses and are now facing negative equity as a result — where their home is worth less than the amount they owe.
Wayne Grimes, 50, said he couldn’t help but laugh when he considered the price he would likely now get for his luxury investment unit.
“I’m laughing because it is just ridiculous,” he said.
This article is republished from www.abc.net.au under a Creative Commons license. Read the original article.
Unit oversupply remains an issue in Brisbane CBD: RiskWise’s Doron Peleg
The inner-city Brisbane unit market, already hit hard by unit oversupply, continues to remain a huge danger zone for investors since the advent of COVID-19.
Not only is equity risk the major issue for investors, increased vacancy rates and risk to cash flow are also heavily impacting the market.
According to RiskWise Property Research CEO Doron Peleg, things have not improved in the market since the pandemic hit and, if anything, have become worse.
“RiskWise reported in July 2018 that there were 14,813 units in the pipeline in inner-city Brisbane for the next 24 months, being an addition of 20.1 per cent of the current stock,” Mr Peleg said.
“Two years later and there is still a very high level of supply with 5,431 units in the pipeline, making up an addition of 5.9 per cent of the current stock.”
Pete Wargent, co-founder of Buyers Buyers, a national marketplace now offering affordable buyer’s agent services to all Australians, said that rental demand had been weak for CBD apartments for some time.
“The trend has been exacerbated by the pandemic, and CBD rents have been very soft” Mr Wargent added.
Analysis by RiskWise in 2018 showed unit over-supply in inner-city Brisbane had created weakness in the market leading to an elevated level of risk for investors and, therefore, lower valuations and rising defaults on settlements.
“The issue of oversupply is not a new problem and has been there for a few years and the continuous weakness of the unit market in inner-city Brisbane should raise red flags for developers and lenders,” Mr Peleg said.
“Defaults have been rising and will continue to do so.
“One of the key factors has been developers’ lack of foresight regarding unit oversupply as well as the impact of lending restrictions introduced from 2014. It seems there has been no methodological and structured risk-management approach including identification, assessment, and mitigating action plans to address those risks.
“This takes us back to the feasibility stage which includes the assessment of the projected fair market value and the likelihood of defaults and their potential consequences. Developers and lenders must find the right balance between taking risk and making profit.
“COVID-19 has only served to increase the risk. Currently, there are many high-rise properties being offered to a smaller number of investors. This is because there are less investors in the market due to the pandemic.
“The point is that if developers and lenders had put more proper risk-management practices in place, this could all have been avoided.”
Mr Peleg said it must also be remembered the value of off-the-plan property could decrease between the original contract date and settlement resulting in capital loss, as the equity in the home could be reduced, and this was well known in inner-city Brisbane.
He also stressed that investors buying rental apartments unsuitable for families were taking an enormous gamble, with both equity and cash flow risk expected to materially increase. Serviceability is also a major factor for investors who rely on a stable rental income to cover the costs associated with property and particularly the mortgage.
Mr Wargent of Buyers Buyers said houses for investors often carried significantly lower risk for those with the right budget because renters, especially in the more established suburbs, included families and, in many cases, those with permanent full-time jobs. They were also more likely to deliver good medium and long-term capital growth.
Additionally, as rental properties are not fully substitute products with owner-occupied dwellings, there is inherent risk associated with them as they do not appeal to families looking for three bedrooms, with outdoor space, close to schools, transport, and employment hubs.
This article is republished from https://www.propertyobserver.com.au/ under a Creative Commons license. Read the original article
Vacancy Rates Reflect Shift From Cities to Regions
Major improvements have been made on national vacancy rates, with levels tightened to below or close to pre-Covid-19 rates across most capital cities in Australia.
The residential vacancy rate dropped from 2.2 per cent to 2 per cent compared to August 2019 and 2.1 per cent in July, according to the latest report by SQM Research.
Perth, Brisbane and Darwin made the biggest improvements compared to last year, while Sydney and Hobart were slightly worse-off.
Melbourne was the outlier, which again recorded an increase from 3.1 per cent in July to 3.4 per cent, this was up from a 2 per cent vacancy rate in 2019.
Residential vacancy rate
|City||August 2020||August 2020||July 2020||August 2019|
The SQM Research also shows most regional locations have recorded falls in vacancy rates, with Sydney’s Blue Mountains and Melbourne’s Mornington Peninsula dropping to 0.7 per cent, while just outside Brisbane, in Ipswich, rates fell to 0.9 per cent.
Asking rents levels painted a different picture: despite being up nationally for houses at 4.5 per cent and units 1.4 per cent compared to 2019, across capital cities houses rent prices were down 2.8 per cent for houses and down 5.5 per cent for units.
The worst-affected cities were Sydney, down 8 per cent on last year, Melbourne down 1 per cent for houses and 6 per cent for units, and Brisbane was marginally down 0.4 per cent for houses and 0.2 per cent for units.
Rents were up for both houses and units in Adelaide, Perth, Canberra, and houses only in Darwin compared to last year.
SQM Research managing director Louis Christopher said population shifts were a driving force in this data.
“The shift towards regional living continues at pace, largely at the expense of higher inner-city rental vacancy rates, I suspect there will have to be a high point in this move soon.
“However, I also suspect there will be a degree of permanency with the massive population shift,” Christopher said.
“Meanwhile, Sydney and Melbourne rents continue to fall providing leasing opportunities for tenants who have chosen to stay in town.”
International arrivals impact Sydney, Melbourne
Immigration has also had an impact on vacancy rates with the low levels of arrivals and returning residents recorded in the Australian Bureau of Statistics August data.
Arrivals dropped in August down 15.5 per cent on July and down 99.1 per cent on 2019.
According to ABS visa group data there were 2,670 people arriving on permanent visas and 2,880 on temporary visas last month compared to 119,990 permanent visas and 680,190 temporary visitors in August last year.
Charter Keck Cramer national director of research and strategy Rob Burgess said overseas migration has fallen off a cliff, impacting the residential market.
“In the last nine or 10 years of course NSW and Victoria—Sydney and Melbourne—have been the main beneficiaries of overseas migration,” Burgess said at The Urban Developer’s The Housing Demand Dilemma webinar.
“This translates directly into the demand for residential dwellings moving forward, and will fundamentally impact the demand and supply equation for the national residential market.
“It’s almost a halving of dwelling demand otherwise required in Sydney and Melbourne [in the next five years].
“Interestingly, Brisbane is far less impacted and clearly that’s a reflection of the fact that the housing market is much less reliant and dependent on overseas migration, including international students.”
National property prices to rebound strongly after 6 per cent fall: CBA
Commonwealth Bank says Australian property prices have held up better than expected and should rebound strongly in the second half of 2021.
CBA said in a research paper last week that prices outside Victoria had avoided the massive falls predicted in March and April, as most governments had lifted restrictions earlier than anticipated.
And it expects this trend to continue.
It predicted a national peak-to-trough fall of 10 per cent in April, but now it predicts a fall of 6 per cent and for prices to hit rock bottom in the first quarter of 2021.
Though not in Melbourne.
There, prices are expected to suffer a peak-to-trough fall of 12 per cent, as a result of the city’s strict second lockdown.
“Unemployment has not yet peaked in Victoria and rising unemployment is a clear headwind for property prices,” said Gareth Aird, head of Australian economics at Commonwealth Bank.
“In addition, the household perception of the national market is consistent with a further softening in prices and the demand impulse from net overseas migration is non-existent.”
The collapse in migration is more acutely felt in Melbourne and Sydney, where CoreLogic data shows prices fell by 4.3 per cent and 2.6 per cent respectively between April and August.
Meanwhile, prices fell by 2.2 per cent in Perth, 0.9 per cent in Brisbane, and 0.7 per cent in Darwin.
And they rose by 0.3 per cent in Adelaide, 1.0 per cent in Hobart, and 1.8 per cent in the ACT.
“In the context of an extraordinary negative economic shock, the fall in national dwelling prices is modest,” Mr Aird said.
Change in national dwelling values in August
But where to now?
In addition to forecasting a national peak-to-trough fall of 6 per cent, CBA’s modelling points to a rapid recovery in the second half of 2021.
Its central scenario is for prices to rise 3 per cent over six months “as the economic recovery gains traction and incredibly low interest rates once again become the dominant influence on dwelling prices”.
“The RBA cuts to the cash rate in 2019 and 2020 that took mortgage rates to record lows are the main reason why dwelling prices nationally have not fallen all that much considering the huge negative shock to the economy,” Mr Aird said.
“The RBA has tended to play down the influence of monetary policy decisions on dwelling prices. But we believe that changes in interest rates are the single most important driver of real property prices over the longer run.”
This is partly because buyers can service higher debts when interest rates are low, enabling them to bid up prices, and partly because rate cuts increase the attractiveness of property relative to term deposits and savings accounts.
But record-low rates will struggle to prop up prices if there’s another wave of infections.
Mr Aird said: “Any imposition of restrictions would likely see prices fall more than our central scenario, which is based on no further lockdowns and a recovery in national economic activity from Q4 2020.”
The research comes as banks start asking customers who deferred home loans in March to resume making payments.
‘Slow burn’ as mortgage holidays end
Data released by the Australian Banking Association reveals that 13 per cent of home owners who took up mortgage holidays had resumed repayments by the end of July, while another 100,000 people resumed repayments in August.
BIS Oxford Economics chief economist Dr Sarah Hunter said the data supported her forecast of a peak-to-trough fall of 10 per cent and showed parts of the economy were already recovering.
Asked whether the price falls would speed up as deferrals came to an end, Dr Hunter said she expected more of a “slow burn”.
“You’d need a situation where lots of owners or investors decided to sell all at once within a very short timeframe to see multiple percentage point declines over the space of a few months,” she told The New Daily.
“That’s not likely.
“It’s likely to be more of a slow burn not too dissimilar to the current pace, as people take time to decide for their own personal position that they need to sell.”
This article is republished from https://thenewdaily.com.au/ under a Creative Commons license. Read the original article.
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