AMP Capital looks at what the coronavirus outbreak means for Australian rental property investors
Australians love property. From beach houses to city apartments, suburban blocks to trendy townhouses, our continuing love affair with real estate shows no sign of fading, particularly when it comes to investing in rental property.
But the coronavirus has thrown property investors a curveball that no-one saw coming. So, whether you own a rental property or you’re looking to invest sometime soon, how will COVID-19 affect you?
Supply and demand
It’s fair to say we’re living in unusual times. Let’s remind ourselves of how the rental property market usually functions in less turbulent periods.
Rental prices and vacancy rates are affected by a number of economic and societal factors.
AMP Capital Senior Economist Diana Mousina says wages growth and consumer confidence have less of an impact than you might think.
“Wages growth has been pretty slow across Australia at around 2% compared with the usual 3% but wages aren’t a big factor in driving the housing market. Similarly, consumer confidence hasn’t been that phenomenal over the past few years but it hasn’t dented Australians’ enthusiasm for property based on total volume of sales.”
More of an influence on the rental housing market are the push and pull factors affecting supply and demand - like interest rates, immigration levels and building construction.
Diana says, “One of the biggest drivers of housing demand is population growth and net overseas migration provides 60% or more of population growth.”
BC (before coronavirus)…
Before the full impact of the coronavirus became clear, the rental property market appeared to be bouncing back from a softer period caused by “a very significant rise in new building construction,” according to Diana, with the Domain Rent Report stating record rent rises across capital cities for the first quarter of 20201.
And Diana says the impact of population growth can be seen when you compare Sydney and Melbourne property markets.
“The Sydney vacancy rate of 3.4% for December 2019 was higher than the long-term average but in Melbourne it’s closer to the long-term average, because Melbourne’s population growth has been extremely strong at over 2% annually compared with around 1.5% in rest of Australia.
“Across the rest of Australia, even though we’ve had a huge increase in construction we haven’t seen such the increase in vacancy rates you’d usually expect because of strong population growth adding to demand, as well as students and short-term holiday rentals.”
…and AC (after coronavirus)
Everything changed when the extent of the coronavirus outbreak became clear. Social distancing put auctions on hold and travel restrictions meant demand for rental housing plummeted.
Diana says lower demand for housing will lead to “higher rental vacancy rates and lower rental growth.
“National rental growth has already slowed to its weakest pace on record, even lower than during the last recession in 1991 and will go negative due to rental reductions and payment holidays. National vacancy rates are around 2.6%, which is in line with the historical average.”
Big cities bearing the brunt
With Sydney and Melbourne on their own making up more than 40% of Australia’s population, it’s not surprising they would experience the greatest impact from a rental downturn.
Diana says, “It’s a bit early to tell exactly how the downturn is going to play out but metro regions are likely to be affected more as that’s where tourists stay and people live when they migrate”.
AMP Chief Economist Shane Oliver agrees: “The Sydney market is most at risk given higher debt to income ratios and a greater supply overhang.”
Jobs and migration to drag the market down
The bad news for rental property owners is that travel uncertainty combined with a rise in unemployment is likely to pause any hopes of a rapid recovery.
“While there’s always going to be a fundamental demand for housing, you really want to know when migration and tourism will start to come back,” Diana says.
“Without that increase in population it’s difficult to see a fast turnaround in rental growth and overseas migration is 60% of our population growth.
“Lower levels of migration over the next 6-12 months given international travel bans and a collapse in global travel will keep demand lower which might also mean higher rental vacancy rates and lower rental growth, which has already been running at a slower pace recently.
“Also, at AMP Capital, we project the unemployment rate to remain pretty high, peaking at 10% and then ending the year at 8%. And when you do have such a high unemployment rate it’s difficult to see the housing market picking up.”
Diana says home building activity is likely to slow as “demand for residential and non-residential construction halts given the hit to consumer incomes and business cash flows and as many construction projects will get put on hold.”
Buckle up, it’s going to be a bumpy ride
The worst could be yet to come for the broader Australian real estate market.
“Property sales are likely to slow to a crawl in the months ahead and property prices are likely to fall as the coronavirus shutdowns hit the property market and the economy,” Shane says.
“Sellers and buyers are likely to put property transactions on the back burner to avoid catching the virus and in order to comply with social distancing requirements. More significantly prices are likely to fall as unemployment rises triggering debt servicing problems for some against the backdrop of very high household debt levels and high house prices in Australia and depressing property demand even for a while after the shutdowns are relaxed.”
“Hopefully the Federal Government’s wage subsidy program will keep the rise in unemployment to below 10% and this combined with various income support measures and bank mortgage payment holidays will serve to keep forced property selling to a minimum and price declines modest at around 5%, that we are forecasting” Shane says.
“However, a long and deep coronavirus driven downturn in the economy that pushes unemployment well above 10% and sees it decline only gradually long after the six monthly wage subsidy and mortgage payment holidays end, combining with a significant increase in financial stress for stretched landlords as tenants struggle to pay rents, would point to a deeper property price downturn of 20% or so over the next 12 months.”
Support is available
AMP’s dedicated COVID-19 support hub may provide you with some help through these challenging times with financial and property insights and tips, including ways to access support if you’re affected by COVID-19.
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