2020 promised to be an exciting year for property investors, and then we were hit with an unprecedented game-changer, COVID -19.
Property investors around Australia were quickly required to brace themselves as they immediately faced media headlines warning that property prices could crash 30% to 50%. In the months that have followed our property market has defied these extreme forecasts, even growing in value in many markets nationally.
Land Values And Our Regional Markets Are The ‘Big Winners’ So Far.
Whilst there is still a level of uncertainty around the effects COVID-19 will have on the Australian property market, the land is already clearly experiencing a positive boost. The recent HomeBuilder grant has resulted in a wave of land sales across the nation, particularly in our regional markets. Given that this government incentive focuses on new homes under $750,000, areas with residential land at values up to $300,000 have been inundated with buyer interest.
Land developers who had held off from developing further land due to our economic uncertainty, are now rapidly being stripped of any available land supplies creating upward pressure on land values. Many have reported record levels of land sales not seen since the last boom level peaks experienced in their local property market.
Properties That Could Be The ‘Biggest Losers’ From COVID-19
Unfortunately, we are already hearing the opposite news about a growing number of apartment markets. Suburbs that were heavily supplied with apartments over recent years are showing signs of being the most exposed to a significant negative price adjustment over the months ahead. Given the minimal land value contained within this property class, apartment values are more heavily exposed to market conditions.
When a suburb with a high percentage of apartments also experiences a negative economic impact, hundreds of similar properties can soon be competing to attract a buyer. This scenario can quickly escalate into an awareness that the buyer has a huge negotiation advantage. Any sales history detailing falling sale prices that are accepted by desperate sellers will only fuel this buyer confidence and force sale prices lower.
Urban Exodus Gaining Popularity
COVID-19 has also triggered a desire by many Australians to change their lifestyle habits. Remote working will become an accepted work practice giving families a chance to escape urban living, further playing into the hands of our bigger regional cities.
Businesses are expected to operate very differently post COVID-19. Large office spaces will be reduced, employees will become consultants who work from home, and new technology will automate and dominate emerging business practices. Workplace safety and subsequent insurance requirements will highlight the need to protect employees in ways we don’t yet understand. Hot desks, staff lunchrooms, employees per square meter of office space, and many other office practices could all potentially need to change.
It’s now expected that when businesses request staff return to city offices, it will be met with resistance. Until a COVID-19 vaccine is developed, and whilst there are any examples of virus hotspots, many workers will argue the need to put themselves in harm’s way. A delicate balance of business survival and the retention of valued employees will likely lead to a rapidly growing remote workforce around Australia, and the globe.
What Does This Mean For Property Investors?
It’s obviously still too early to forecast the effects that COVID-19 will have on the national property market, but what we do know gives great clues on where the best investment markets will emerge.
Our regional lifestyle cities were already gearing up for an influx of millions of baby boomers who will downsize over the coming years and relocate to more affordable markets. COVID-19 may delay these downsizers slightly, but nothing can stop the ageing process. Retirement for many baby boomers is already overdue, with up to a million homes in Sydney and Melbourne expected to be sold over the next few years alone.
Some investors will focus on purchasing distressed properties, such as the potential bargains available in sectors of the apartment market. The risk with this is that the banks will have a low appetite for this high-risk stock making finance harder to achieve. A high volume of vacant apartments in these postcodes will also potentially place a huge burden on your cash flow until market conditions improve, which could take years. And if capital growth is expected, you could also be faced with holding these poor cash flow properties for many years before you could even sell it for what you have paid (purchase price plus stamp duty, etc.).
Other investors, like me, will purchase directly in the pathway of growth. The major regional city markets already offer strong rental demand and positive cash flow, making them much easier to hold, and much more popular with the banks. Many of these highly affordable markets also have incredibly tight land supply due to restrictions around zoning requirements.
My tip would be to stick with regional cities that have major commercial airports, great hospitals and schools, a university if possible, and a large range of amenities that provide incredible lifestyle opportunities for families.