How will the 2020 pandemic pan out for property investors?
Two months in, the million-dollar question is what effect has the Coronavirus pandemic had on the Australian property market, and how will 2020 playout for property investors?
Here’s the broadly sweeping market update;
– Property volumes are low which has brought the market back to equilibrium.
– Property transactions are moving slower than pre-COVID-19 lockdown but prices haven’t drastically fallen.
The good news is, that when you’re negotiating for property now, you’re in a stronger position.
People selling property right now are typically selling to meet an immediate goal; such as they’re committed elsewhere and have another property lined up or perhaps they are building or might have an immediate need to release some cash or equity for non-property reasons.
In terms of discounts, there’s not a lot of this going on, or not to any significant level. We have seen some properties reduced from their pre-lockdown advertised price but overall property prices are pretty stable. As mentioned, this is largely due to stock volumes being low.
The current market is still fairly competitive for quality properties i.e. one’s that are in a great location or tick multiple boxes.
Whether the market comes into some difficulty down the track (once the Government support packages end in September and October) when businesses are back to standing on their own two feet and JobKeeper or JobSeeker payments cease, is yet to be seen.
My guess is that we will see a lot more buyers and a lot more sellers putting their properties on the market come Spring. The buyer volumes probably won’t spike as much as previous years but there might be a slight oversupply of property that puts some downward pressure on prices. But it’s difficult to say whether that is how the market will play out and if it does how significant a price fall might be.
Will buyers face tighter home lending criteria?
In terms of the bank’s reaction to COVID-19, financial institutions are still lending money for residential property – albeit with a slow application processing time, but that relates more to the processing departments being relocated offshore.
In light of the recent Financial Services Royal Commission, banks remain under the spotlight. Financial institutions need to be seen as improving their due-diligence during COVID-19.
The banks still remain cautious with their lending criteria. People working in hospitality or tourism are likely to face more scrutiny. Whereas people employed in professional services or construction and engineering, for example, may enjoy continued access to loans.
Some of the bigger banks have introduced new caveats on their finance offers. One clause we’ve seen allows the bank to call the borrowers employer as close as two days before settlement to confirm that they’re still employed and if not they will renege on the loan. The banks are putting this into their contracts, but whether they follow through is unknown.
In response to this new institutional clause, conveyancers are requesting that sales contracts free a purchaser should their bank renege on pre-approved finance, ensuring the purchaser can both cancel the property purchase and get their deposit back. It hasn’t been tested yet, but in reality, my advisors and I do not believe it’s going to cause a massive lending problem.
Will there be an increase in distressed property and fire sales?
There’s always a risk that people will be forced to sell if they remain unemployed for long periods of time or are over-leveraged and can’t service their debt – but the banks don’t want to put people out on the street if they can help it.
With lockdown restrictions being lifted the economy is now slowly starting to ramp up but it’s going to take at least three to six months before we are back to property market conditions pre-COVID-19.
With interest rates at an all-time low, mortgagors have a better chance to weather the storm this time around than during the GFC when interest rates were a lot higher. Interest rates, however, can’t be dropped much more and the Government can’t prop up industries indefinitely. So, ultimately, we’re going to come to a point where the market will need to adjust to the new supply and demand rules.
Deferred mortgage payments for owner-occupiers
Due to COVID-19 some banks are allowing owner-occupiers to defer mortgage interest payments for six months. Unfortunately, there’s no savings to be gained in doing this, only cashflow. Your mortgage interest continues to accrue so your underlying debt will increase over that six-month period.
Personally, I’ve not heard of any clients taking this option up, but it’s really there to help homeowners, rather than investors, who are really suffering in terms of short term cash to pay living expenses.
Cash bonuses for mortgage refinancing incentives
Whether you’re a property owner or investor there are some great deals available at present for refinancing your mortgage with another lender. Many financial institutions are offering cashback bonuses and switching incentives such as the removal of application, valuation and settlement fees, along with split loans and offset facilities.
If you’ve been converted to a principal and interest loan from an interest-only loan in recent years, you can now revert back to an interest-only mortgage with another lender. That’s usually pretty straightforward.
Real estate markets worth watching
If you’re considering purchasing a property in Sydney, Brisbane, Adelaide or major centres across regional Victoria, these are areas in which my team and I stay closely focused. I’ve watched the micro-market movements for many years and invest on behalf of many clients.
The best location for you will depend on what you’re trying to achieve, what your existing property portfolio looks like and your personal financial circumstances.
As a general overview; Sydney is starting to see some interesting opportunities appear. In Brisbane, even though prices have come back to normalised levels, there’s a number of pockets that continue to offer great scope for property investment. If you buy in the right location in regional Victoria (such as Bendigo and Ballarat) or across the country in Adelaide, you’ll find properties with strong yields, and in some cases an upside for future development.
Ultimately, it’s important to remember that the property investment fundamentals haven’t changed. If you focus on freestanding homes in major cities and look for opportunities that meet three key pillars; growth, cash flow and value-add potential, you can establish a strong performing property portfolio.
Once you have built up cash flow or equity that you can extract you can then move into advanced strategies beyond buy-to-let, such as purchasing unit blocks or finding sub-divisions, undertaking joint ventures or syndications, or looking into HMO boarding house strategies, commercial property or even overseas markets?
Ultimately it’s best to keep a qualified team in your arsenal and consult with a property specialist and your mortgage advisor to ensure you have their smarts on your side.
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