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Why aren't property prices falling?

Updated: Aug 20, 2020

CV19 has had a tsunami-like impact on daily life! We explore how the era of social distancing has affected Sydney property.

On 31 December 2019, the World Health Organisation's China Office learnt of an unknown pneumonia in Wuhan. By mid-February 2020, CV19 had claimed 2,000 Chinese lives, yet beyond China, the world appeared unconcerned about any possible fall-out; notably, stock markets were booming!

But, by late February, stock markets began a three-week correction shedding 1/3 of value. On March 11, WHO declared a pandemic. Within a fortnight, most nations began to restrict travel, shut borders, implement social distancing and / or lock-down cities. Overnight, schools and businesses closed and people were asked to stay home unless critical to leave. Unemployment dramatically increased.

In late March, state and federal governments imposed temporary changes to a few areas of daily life, which fundamentally impacted property transactions...

  1. Social Distancing: home inspections went from open homes; to private appointments: at first, one person per 4sqm; then members of a single household; then a single visitor;

  2. Travel restrictions & border closures; and

  3. Freezing / deferring of rents and mortgages. During this time, landlords are prevented from evicting tenants and banks are prevented from foreclosing.

Leasing has been turned upside-down

Business closures have eroded profit, forcing many employers to lay-off staff or reduce hours. To counter this, the government forbid landlords from evicting tenants AND forced them to be flexible on rent collection. This has forced the majority of commercial property landlords and a minority of residential property landlords to accept reduced rents or defer rents. Most tenants have approached this process in good faith... sadly, some have simply tried to rort the new rules for personal gain.

“This has forced the majority of commercial property landlords and a minority of residential property landlords to accept reduced rents or defer rents”

We have also seen a significant lift in vacancy rates. Some businesses have already decided they cannot continue to trade. Some residential tenants (SINKs / DINKs returning to the family home) have either broken or not renewed their lease. And, with travel restrictions in place, AIRBNB (and other short-term lettings) have been converted into long-term rents.

As a result, rents have fallen - by approx. 5-15% depending upon the suburb and the property. In the case of commercial property, the impact is greater.

Yet in contrast...

Sales have quietly slipped into semi-hibernation

During the shut-down period, buyers became distracted, stressed and cautious. Working and schooling at home; concern about future income; and speculation that the market would fall dramatically in coming months, prompted many buyers to suspend their property search.

Further, inspecting properties became harder. Replacing open homes with private appointments added logistical challenges and forced buyers to 'prove their qualification and interest' ahead of inspection; making many buyers feel uncomfortable.

Additionally, closing borders meant that international buyers were mostly shut-out of the process. True, some buyers buy sight-unseen, but rarely for family homes and almost never in a market filled with uncertainty!

Finally, cancelling Live auctions essentially killed the method of sale preferred by both sellers and buyers.

“In the month of April 2020, there were ONLY eight sales above $3m across the entire North Shore... which last happened in the Keating Administration!”

Buyers who remained fell into two groups. Some were genuine - patiently searching for their long-term home; others became opportunistic - looking to take advantage of distressed sales.

Similarly, all but seriously motivated vendors elected to either hold-off listing or hold-off selling in the absence of a great offer; preferring to wait-and-see what happens to the market!

As a result, sales volumes slowed in late March and by early May had virtually stopped. In the month of April, there were eight sales above $3m across the entire North Shore... which last happened in the Keating Administration!

Some sales in late March or early April showed signs of market weakness. However, the majority of sales prices have been surprisingly stable! In specific cases, I'd argue they reflected absolute market peak prices.

Interestingly, whilst the Australian stock market was volatile during the time of lock-down, in net terms, it was largely unmoved during this period - ASX 200 hovered around 5,500.

Despite continued international fallout, by early May, governments were outlining how and when Australian restrictions would lift. On 9 May, NSW was again able to run property Open Homes. Early signs were (and continue to strengthen) that buyers are back and motivated to buy.

So, whilst CV19 has had a huge impact on daily life and on Property Leasing, the impact on Property Sales has mostly been to slow sales to a trickle. The impact to prices has been modest or imperceptible.

The big question is, "what comes next?"

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