There has been a lot of talk by developer lobby groups about the need to unclog the planning system to assist economic recovery post COVID 19. And the NSW government is putting out media releases saying that rapid approvals are injecting billions of dollars into the state’s economy. Thinking that approvals are going to lead to injections into the state economy in the short and medium term is about as realistic as Donald Trump thinking disinfectant is a treatment strategy for COVID-19.
The main reason is the two large structural issues confronting the Australian property system. From where I sit, the two things that have driven the Australian property market over the past 10 years have been strong population growth and declining interest rates.
These two items are no longer present. Interest rates because we are at the bottom of the cycle and population because of COVID-19. Population might slowly return through permanent migration as people see Australia as a desirable place to live, but temporary migrants might be less enthusiastic given the way the national government has not provided them with any assistance.
I have borrowed an ABS figure from an ABS publication below: Next financial year current government forecasts are that the estimate in blue – overseas migration – will shrink by 85 per cent. Note that this is the major source of growth for both Sydney and Melbourne.
Sure, there will be some natural increase (births minus deaths) but this element of growth, especially in a recession, can be managed by some temporary arrangements in a dwelling or a renovation, rather than the need for a new dwelling. On top of this issue we have many dwellings which have formerly been in the short term rental market now becoming available for long term rentals in our cities. For example, there are about 10,000 AirBnB dwellings in Sydney and Melbourne that are rented as whole dwellings and are highly available– that is, they aren’t someone renting their house when they go on holiday.
This movement from the short term to the long term rental market is increasing rental vacancy rates, depressing rents, and compressing rental yields which are already at historical lows in many Australian cities. As a result, you could describe the investment environment as challenging.
Just to make things worse, we still have a lot of stock under construction. At the end of March 2020, Sydney had 236 residential cranes at apartment construction sites – Melbourne had 122.
Although much of this stock is likely to have been pre-sold, previous property recessions have shown that if prices correct significantly buyers are prone to walking away from these contracts
With no support from lower interest rates which we have had since about 2011, we aren’t going to get any double digit increases in prices that drove the high levels of investor activity in the middle of the decade.
My other point is that we aren’t simply going to get past the virus and things will go back to normal. We are talking about the biggest drop in national GDP since the Great Depression. The 1930s wasn’t a great decade for property.
If we get a vaccine in 2021 things will improve but that’s not a certainty. We are also looking at zero international tourism until a vaccine is available, so that could spell trouble for AirBnB and other short term rental investors.
The main opportunity in the short term would appear to be a recovery program focused on non-market housing such as social housing. There also might be some opportunities in the build-to-rent sector, if the government saw the opportunity grow this sector post-pandemic. Certainly one thing COVID19 has shown the small investor model isn’t an ideal arrangement for building a resilient housing system.
Peter Phibbs is director, Henry Halloran Trust, University of Sydney
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