Market is doom and gloom
Both the residential and commercial property sectors are going through a gloomy moment.
We have seen retail property market declining in general since 2015 due to the change of business models and more customers going online. The Covid-19 certainly has put further pressure on this sector. The hotel and hospitality property markets have been hit the hardest. However, we do expect businesses to come back post covid-19. The office property sector is now in the centre of this turmoil, as more people will be working from home, even permanently. This reduced the demand for large office spaces. Many might need to reconfigure to meet the work safe requirements. The industrial properties might be the first to bounce back among the commercial property sectors, as more and more businesses are leaning towards the “factory/warehouse + logistics + online marketing” model. Number of transactions for all commercial property sectors have declined significantly.
The residential property market has almost been paused due to the restrictions on the movement of people despite real estate agencies trying new online technologies. We have seen decline in both transaction volume and price.
What is to come
The worst is yet to come. Buyers sentiment has been lower than any time in the past 5 years. Unemployment rate is on the rise (Figure 1). Loan commitment fell sharply in May and might drop further. Household wealth has been harmed by Covid-19. We have seen significant drops in production in most of the industries (Figure 2). Population growth from immigration has almost stopped.
Considering these factors, the house price drop from peak to trough is expected to be more than the last correction between 2017 and early 2019. Using the last correction as a base scenario, the drop is expected to be more than 10% but less than 20% for Sydney and Melbourne, likely to be between 10% and 15% depends on government policy. Price drop for commercial property sectors will vary. Retail and office properties may see the biggest price cut in the mid to long term.
Property is still a good investment option
The impact of Covid-19 is global and comprehensive. Not only the property market is heavily dampened, but also the overall economy. Even though there are certain businesses received a boost from Covid-19, most have reported negative impact.
On a scale of 10 years, the growth of property price (Figure 3) is still better than the performance of ASX200 (Figure 4). Further considering property investment leverage, the performance of property investment is better than investing in most of the stocks in ASX 200.
Like ASX 200, different property types have sparse investment returns. A professionally structured property portfolio can generate considerable returns while minimising risks.
Government needs to do better
The recovery of the property market and the overall economy is tightly related to how well the Government contains Covid-19.
In one of our previous posts (http://www.realestatelogic.com.au/blog/post/australia-will-prove-to-be-the-lucky-country-again), we emphasized that the Government needs to
1. roll out a nationwide screening strategy.
2. roll out a nationwide preventive public health strategy against coronavirus.
After the first wave, the government relaxed restrictions on movement of people before good strategies were rolled out. Seeing the second wave in Victoria, the strategies are still not preventive enough. A thorough elaborate preventive national strategy will guard the recovery of the economy.