It’s an under-statement, but none the less true that the residential property market is dynamic and driven by so many variables, that’s what makes it such a gripping topic.
Understanding that residential property impacts so many lives, all our lives actually, and that single fact alone creates so much curiosity plus, we have the sheer volume and value of transactions and the huge impact on the wider economy.
These observations are relevant because of the conditions we experienced in 2019, perhaps more so than any other recent time. We saw exactly how fragile the market has become in its relationship to the wider economy and the role of buyer confidence in driving demand and prices.
There were a number of common factors highlighted by a cross-section of industry leaders that I spoke with, some of which I’ve covered over the past few weeks. This content has been used to frame a brief and useful overview of this year’s market, along with some pointers to conditions in 2020.
The Big Trends 2019-2020
There was a long-list of trends to explore and I’ve contained my comments to what I think are possibly among the main take-outs from 2019 and how they might impact or not in 2020.
To finish the year, I’m also suggesting some ideas that might just come happen in 2020! But, first let’s look at those points that have generally been soundly acknowledged as importance for the residential market. And these include quality, supply, finance & taxation, immigration, the environment and infrastructure.
Quality (Brand Property):
As quality extends to every aspect of the market this is a complex topic. Building problems have thrown a very bright light on built-quality and in 2020 there are bound to be more concerns surface as solutions to the problems are sorted-out.
Quality, however, can also be linked to greater maturity being evident in the apartment market, and this is leading to improvements in building design, and construction. But, there’s also the perspective that planning delays and frustrations are possibly holding back innovation and quality.
However, in coming to terms with Sydney’s construction issues and quality in general, there’s little support for greater controls for developers and builders, although some legislation is on its way. Perhaps responding to recent events some second-tier local and off-shore developers have vacated the market. It’s also clear that the majors like cBus, Stockland, Lend Lease, Mirvac, Frasers and Meriton along with a handful of quality builders will dominate apartment markets, and their brands have become more important than ever, as buyers look for quality.
Supply is falling:
Since mid-2019 there’s been clear evidence of falling residential construction impacting the supply of both individual homes and apartments, and it’s a trend that is set to accelerate into 2020/2021. Combined with the fact that 2020 will see far fewer settlements of apartments, supply numbers will be more stable, and from mid-2020 supply will start to become restricted, as supply goes into reverse.
Creating new supply can also excite local opposition. For example, in some regions of Melbourne, concerns were raised about “Construction and development having little or no regard to the existing local (suburban) setting.” And this was leading to inappropriate development, however as we exhaust brownfield sites and as greenfield sites also have their limits, options to better manage density need to be explored.
As all developments are price-driven, greenfield options are required in part to help deliver affordable housing, an even more critical factor when supply comes under pressure.
Rents under pressure:
In most markets across the whole of 2019 we’ve seen very big increases in the supply of new apartments completed and coming onto the market, many as investments, and this has put some downward pressure on rents.
When considering rents, we should keep in mind that many new first-time buyers will be vacating existing rental accommodation and this adds to the supply, alongside new stock.
However, despite earlier predictions, in a majority of developments, settlements have taken place in an orderly fashion with very few and mostly no contract de-faults at all. This is a positive sign for the market and may also be a reasonable indication that investors are under less financial pressure and so better positioned to sustain lower rentals until demand and supply catch-up. This may well happen sooner than expected in 2020.
Structural taxation change:
Without exception talking with every college and clients in the residential market, property-related taxation always hits a raw nerve. Not only with respect of the tax ‘burden’ but also, how for example some aspects of taxation are adversely impacting the ability of the industry to tackle housing affordability or the wider development (in some states) of build to rent projects.
The Taxation debate too often focuses on the same old issues of negative gearing and capital gains and does not address wider concerns about the total ‘tax-take’ from the property sector.
Some sensitive areas would also include a logical review of foreign investment restrictions & charges. While despite successive governments ignoring the topic, stamp duty must change beyond some of the very marginal changes seen in NSW. It’s often argued that the tax system can better value the economic contribution of the entire property sector and a constructive and deliberate conversations about the level of taxation and property are well over-due.
Finance controls the market.
Access to finance controls every aspect of the residential market, the links are obvious and basis however, 2020 will confront some related issues never previously seen in Australia, headed by super-low, even negative interest rates.
This will be un-chartered territory for us all and may more directly impact SMSF and as a result stimulate demand for investment property. It is also reasonable to expect that despite some recent relaxation of lending rules, the banks will still be conservative in their lending policies. A more restrictive lending environment will directly impact market confidence.
Difficulties in access to finance clearly impacted development activity and sales over the last 12 months, it was the biggest negative, one direct result has been a much longer and more difficult lead-time in completing sales. In some respects, the restrictive nature of finance may have gone too far, helping to drive new funding sources, to fill the gap of traditional bank funding.
Red Tape (Local Councils)
Market conditions during 2019 have fuelled a robust conversation around how the property sectors professions can work better together across all aspects of development, and that includes local councils. While, at the Federal level it was suggested that the housing crisis might be mitigated by more progressive zoning policies to help increasing housing supply, and affordability and also lower rents.
However, at the community level NIMBY (the not in my backyard) that at times can oppose and slow new development because of concerns over “neighborhood character,” decrease availability of parking, or lower property values requires more positive industry engagement. The trend towards greater urban density is going to remain and become an even more sensitive issue in 2020. However, there is stated willingness among developers to find ways to constructively address planning issues.
Immigration, population levels and growth are easily among the biggest factors in the housing market. Immigration and population growth are the fuels of urban development, but population policy has become a political issue and that’s a possible negative.
As I was recently quoted: Immigration is by far the biggest driver of the property market as additional population creates demand for all manner of property products from homes to shops to offices. For instance, every 10,000 people creates demand for a new shopping centre and approximately 3,000 homes. The creation of these assets involves the investment of significant sums of capital which has a multiplier effect through many sectors, the most obvious of which is employment. In 2020 however, environmental concerns will become more intertwined with population growth and that may create some new friction.
The Environment & Technology:
There’s a continued national debate about housing affordability that will continue into 2020, it’s a policy debate that’s linked to both the environment and technology.
Regions of Australia are experiencing a severe shortage of affordable housing, and efforts are on-going to solve this problem and part of that solution may well involve the application of technology. New higher-density projects are increasingly addressing environmental concerns in how they are designed and built. It’s also suggested that greater density can be kinder to the environment and technology is being engaged to help this process. In 2020 both elements well further combine, helping to cut housing costs and also increase the housing supply.
The delivery of infrastructure is central to a healthy residential property market no matter the city or individual location. Urban based buyers are anxious about transport and schools and the same applies to buyers in new regional greenfield locations.
The main challenge in 2020 is to bridge the big-delays and rising costs associated with the delivery of new housing in-line with key infrastructure. The current pattern developing new homes or apartments and then services, in particular when schools and public transport follow, at times many years later is not working and creates frustration. Calls to boost infrastructure spending will gain pace and urgency next year.
The Bottom of the Cycle
Residential property markets are very local, and yet media headlines concerning particular trends can often be over simplistic and even in conflict. This can make it difficult to focus discussion on where markets sit on the traditional property cycle.
Have we passed the bottom, is there an immediate up-turn or are markets still bouncing around? To answer this question there are a number of factors we need to consider. Following a big rates of completion in 2019, tail stock is being absorbed and supply looks weak beyond 2020, however given already high prices does the market have the capacity to support higher prices.
- Timing of release (Randwick Cbus)
The market has been ‘tough’ over the past 12-18 months after a very negative start to 2019, in 2020 the timing and location of new releases will be very finely focused to match the prevailing demographics.
2020 in Brief
As we look towards 2020 in my view these factors will dominate the market while the consensus from many in the industry is that markets will be driven by quality, supply, finance, immigration and the environment.
- Supply will start to become a very big issues, low levels of new supply looks certain as construction slows and tail stock is absorbed, this will impact demand and prices, with popular locations racing ahead.
- Site re-cycling has stopped and there will be continued pressure for greenfield sites and new infrastructure.
- Developers and investment funds are now chasing available sites as they see future supply falling and the need to secure locations as the market recovery gathers pace across 2020.
- Rents are under-pressure; new supply has been settling through 2019. However, rents will remain localised with popular areas doing well and over-supplied markets still under downward pressure.
- House prices are already heading up and set to increase even more in 2020, that will also influence apartment prices, attracting investors partly because of the miserable returns in other areas.
- Low interest rates will help drive demand for property as an option to the stock market.
This is my final blog for the year in January Project Agenda will return and start of the years with a market review of Sydney, Melbourne, Brisbane, Canberra and regional markets.
PS: Some Left of Field Notions:
Taking a somewhat optimistic ‘birds-eye’ view of the residential market, and without any particular motivation could 2020 see any of the following?
- A review of foreign investment guidelines and taxes relating to residential properties of all kinds across both Federal and State jurisdictions to be made more liberal. The restrictions all came at the worst possible time and some relaxation might just help our slowing economy.
- Stamp Duty review with a view to remove duty or at the very least adjust (further adjust) rates.
- There will at last be a constructive and immediate review of taxation policies.