The good thing about 2020 is that it is going to finish with a Big Bang. The only positive that can be taken from the COVID-19 induced recession is that tens of billions of dollars of savings have been accumulated which are about to be unleashed in a boom covering all sectors.
There is unanimous agreement that the end of Government support in March is going to be the ultimate test that will dictate a theme through to the end of 2021. In between now and then you can expect exuberance to reign and the property market will not be excluded.
The property market is a dichotomy between the owner occupier versus the investor. Loan approvals for owner occupiers have shot up in the last few months but for investors has dropped by a like amount. To explain the owner occupier sector is easy, after all, when interest rates drop by 1.5% in 12 months borrowers can extend their buying capacity without increasing their servicing commitments. The investor market however is not easy to analyse when you consider that in Adelaide you can only negative gear at the very top end or the brand-new sector of the market. Any 30 – 40 year old 1 – 2 bedroom apartment cannot be negative geared and examples abound. The undertone must be that even though interest rates are low and cashflows are positive, this is not enough to offset the concerns that buyers might have that the capital values will not increase. If you asked an investor 20 years ago what would happen to the investment property market if interest rates went below 3.5%, their response would be ‘the market would be on fire’. Therein lies the answer. 20 years ago, Baby Boomers were buying residential investment properties with gusto, today they are no more. GONE. FOREVER!
In a low interest rate environment asset values rise. This is because the capitalisation method of valuation applies a lower capitalisation rate to passing rent that reflects the significantly lower risk-free 10 year Bond rate. A simple example is if the rent for a property is $10,000 and the old capitalisation rate was 10% then the value of the property is $100,000 but when the capitalisation rate drops to 5%, the capital value increases to $200,000 even if the rent doesn’t move from $10,000. This is basically what has happened in the commercial and industrial property market and has certainly happened in the share market. The P/E ratios that apply to dividend yields is seeing share markets throughout the world reaching record highs even though their economies are partially locked down. The question is, ‘will interest rates remain low’. The dictate of interest rates is inflation and if anyone can give a good reason as to why inflation will rise in the next few years then they stand at odds with the market that is saying it will not. We can expect interest rates to remain low and current capital values will be sustained in all asset classes.
A quick summary of the property market in Adelaide for the year to come is as follows. The rental market has not enjoyed significant movement for nearly 10 years and is well overdue for a catchup. We are at record low vacancies at the moment and our aim in the next 12 months is to increase rents significantly.
The second time homebuyer market, which has been holding up the index for the last 4 years, will continue to rise until there are more sellers than buyers. The supply to rectify this imbalance can only come from retired ‘Baby Boomers’ as they downsize into cheaper more secure low maintenance housing. The incentive to put up to $300,000 per spouse into Superannuation through the downgrade process must be extremely attractive to retirees who are seeing minimal income derived from low-risk investment plans. It might be during 2021 that this sector mobilises so that the second time homebuyer can have more choice and put an end to the ever-increasing prices for their ultimate family home purchase. That is when the index will be challenged and that is when the investment sector has to take over and start increasing in value because of the competitive returns and minimal risk.
The ‘Home Build’ Grant is putting a bomb under the vacant land sector. Land sales are booming and at the end of 2021 there will be a significantly less amount of vacant land available for new build homes and units because the take-up in this sector has been so responsive.
2021 is certainly going to be the year of recovery and our property markets are going to enjoy meaningful growth. Our International borders will remain restricted or even closed until there is a vaccine that works worldwide and unless that happens, we cannot expect a return to the normal. This is particularly relevant to the education and tourism sectors. The other bogey to business is in a word – China. Here is an example where if you put too many lobsters in the one pot you leave yourself exposed particularly with a country that has no shared values with ours. You can turn off the lights if they attack our iron ore sector but hopefully, they need us more than we need them on this one.
Currently there are so many balls in the air that if you are a juggler, you’d need 4 hands to manage. It will only be at the end of 2021 that I will be able to tell you whether it was a year to get in or a year to get out.
Celebrating Our 120th Year
2021 will recognise our 120th year as a real estate agency in Adelaide. To do that we have had to endure 2 World Wars, a Depression, many Recessions and now 2 Pandemics. I am very pleased to announce that we have working with us the grandson of the original founder, Alexander Jackman. Roger Bryson is the son of Bruce Bryson, past Director, who married Jackman’s daughter, Joy.
In 2001 I commissioned a book headed “Celebrating 100 Years of Real Estate”. In similar style this year I am going to produce another book which will include anecdotes of my career in real estate that now spans nearly 40 years. It will be headed ‘All In A Days Work’. It will be a light and humorous read and hopefully with give you an insight into what we have to deal with in this exciting industry called real estate.
We apologise sincerely that for the first time in 34 years, we have not held a Xmas Party Celebration. I have over the last few weeks rung many of our clients to wish them a Happy Xmas and a less stressful 2021. I now take this opportunity to do the same to you as a client of Jackman & Treloar or a reader of our blog.
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