2020 was the year that we had our first recession in 30 years, an end to 60 years of migration growth, interest rates touching 60-year lows and the highest growth in household savings due to the lockdowns. Government incentives commenced in March 2020 to offset the recession and to top off this over generous support a Home Builder Grant was applied at the end of the year. As much as 2020 was the year to forget, 2021 will be the year to remember.
Now that the Government has incentivised the property market into boom conditions the question is – how far and for how long.
Economic Fact #1 – ‘WHEN INTEREST RATES FALL, ASSET PRICES RISE’
There is a dichotomy in the market, family homes are on the rise and units and flats on the other behaving less so.
The major feature in the market is in the first homebuyer sector. In the post GFC period 1st HB participation dropped to under 20% after ranging between 20 – 30% for the 30 years prior but now their participation in the market has topped 50%
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Economic Fact #2 – ‘WHEN YIELDS ON PROPERTY EXCEED THE COST OF MONEY, TENANTS BECOME BUYERS’
35 years ago when the markets were at the dictate of the Baby Boomers, investment decisions were based on capital gains and tax deductions through negative gearing. Today the buyers are only conscious of the repayments rather than the size of debt. The attitude toward debt today is that as long as the servicing cost is less than the equivalent cost of renting then the debt will be dealt when the property is sold.
Two major shifts are about to occur within the residential property market – the downsizing in the Baby Boomer sector and decentralisation due to the ‘home office’ effect.
Baby Boomers will enjoy the recent rise in values for their homes and should be tempted to sell up and downsize into the apartment market. This transition will provide more stock to satisfy the under supplied second time homebuyer sector. Assuming that this property market has some time to go, the smart move for Baby Boomers will be to lock into a fixed price contract on an apartment whilst allowing their family home to increase in value whilst the apartment is being built. The massive property boom that the world enjoyed in the post war era from 1972 – 2008 was driven by Baby Boomers and accordingly as this sector transitions into retirement housing you can expect apartment prices will rise significantly.
The second event is decentralisation in the way people will be gravitating to cheaper housing accommodation as a result of the ‘home office’ experience in the pandemic. A house and land package in Roseworthy is only 30 minutes via the Expressway to Torrensville. This ease of access will allow workers to enjoy the benefits of home ownership without having to compete with the suburban property price market. Within the CBD, low grade offices will become redundant and their highest and future use will be in converting them to residential accommodation. The student accommodation market has a long way to go with accommodation towers only 20% occupied so a return to the ‘old days’ will need to re-fill this high vacancy rate before any further expansion into new build.
The recent announcement of President Biden’s US$2.1trillion Infrastructure Plan will be a benchmark and give guidance to the rest of the world in how to deal with the post pandemic period. Growth will be part of this story with jobs and prosperity resulting. Without doubt the economic revolution that is currently underway will be confirmed by the end of the decade. Real estate in all its forms is but a mere part of that.
So let’s refer to our opening paragraph.
Will there be another recession anytime soon – not likely.
Will interest rates rise significantly – not whilst inflation remains at around 2%.
Will the migration numbers revisit pre-pandemic levels – yes, once the borders re-open by mid-2022 and besides we have now confirmed that Australia, and specifically S.A., are the safest places to live in the world.
Is it a Bubble? – no. Is it a Boom? – for a while yet.
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