So That Was 2020

Traditionally I’ve always used my last few posts each year to review the previous 12 months, alongside predictions for the new year. Looking back at predictions made 12-months ago for residential property markets in 2020, only serves to highlight how exigent this year has been.

My first point of reflection is, how did 2020 actually unfold against those early predictions? Given the utter upheaval we’ve seen, that’s a brave question, but I’ll have a go anyway.

Appreciating that residential property impacts all our lives and has huge bearing on the economy, predictions made this time last year, were soon completely upended by COVID-19.

A statement issued by Greg Hunt, the Minister for Health on the 25th of January 2020, even as bushfires continued to rage, sounded the alarm that would ring out for all of 2020.

“First confirmed case of novel coronavirus in Australia. The first case of novel coronavirus (2019-nCoV) has been confirmed by Victoria Health Authorities this morning.”

As we were all recovering from the end of the holidays, how did this simple but alarming statement act to shatter the signposts that I’d suggested might be some of the big trends in the coming year? A quick review highlights the main points and as might be expected some predictions were subsequently impacted in both a negative and positive way.

Here’s a quick summary of the key predictions from December last year, many of these points were highlighted by clients and industry associates.

• Quality would be a central concern across individual projects, and also for developer and builder brands.
• Supply would fall in 2020.
• Rents were under pressure and that would continue.
• There was a strong desire for structural changes in taxation policy.
• Finance would have an ever-big control of the market.
• As supply fell there would be more demand for less red tape, in particular, focused on local councils.
• Immigration and population would become a hot topic.
• The environment & technology would demand more attention across the entire economy including property.
• Infrastructure would remain a key element of the economy and urban development.
• The property sector would reach the ‘bottom of the current cycle’.

However, in December 2019 as we looked towards 2020 it was my opinion that buyer sentiment would mainly be driven by quality, supply, finance, immigration and the environment.

Early in 2020 supply did start to become a very big issue, low levels of new construction slowed as tail-end stock was absorbed, and there was a big jump in demand for land, and we have seen land prices in popular locations racing ahead. This trend did see less site recycling and continued pressure for greenfield sites and new infrastructure.

Demand has also spilled over into regional areas, a point I will address in my next post. However, during the past 12-months activity among developers and investment funds looking to secure future supply changed somewhat as the market recovery predicted for 2020 shifted, becoming much more difficult to navigate.

Rents did as suggested, come under pressure and even more so in heavily developed areas, including inner-city locations. The take-up of new supply was disrupted as rentals were reduced and tenants moved about more freely chasing value and amenity. The work from home trend also added further complexity to demand.

However, rents did to some degree remain localised with popular areas, including regional areas doing better. As for potential recovery in the rental market, that’s a topic for 2021.

House prices in many locations did increase across 2020, but the trend was uneven. High-end markets did very well and so have some regions. However, the strength of prices overall was, given the complex circumstances surrounding 2020 very positive.

However, apartment prices including off-the-plan, are still lagging and investors are still suffering miserable returns. Very low interest rates have however, acted to support investors with cheap loans helping to cushion falling rents.

Low interest rates got a mention among my key trends, but the historically low rates are I suggest, exercising a much bigger and perhaps less visible impact on all areas of the market. There’s little doubt that across 2020 miserly interest rates are helping, along with government incentives to drive demand and prices. Low rates are also helping developers and investors but may be having a less positive impact on first time buyers.

However, the strength of the ASX was more robust across 2020 and this has provided less pressure to drive demand for property as an option to the very healthy stock market.

The final set of predictions for 2020 that I’d like to re-visit were somewhat optimistic suggestions impacting the residential market and concerned FIRB rules, a review of stamp duty and taxation policy.

While a review of foreign investment guidelines did happen, it was not directly focused on residential properties. However, earlier FIRB restrictions aimed at taking some heat out of the market, do appear to have had some (limited) impact.

Insights into foreign purchases and sales of residential real estate 2017/18 and 2018/19 show some trends which look modest:

• 2017/18 purchases totalled $8.5b and 81.4% were residential under $1m. Sales totalled $1.4b and again sales under $1m led with 80.5% of transactions.
• 2018/19 purchases totalled less $7.5b and 79.8% were residential under $1m. Sales also totalled less $990m and again sales under $1m led with 82.8% of transactions.

We might also see some relationship between the above results and the big debate around immigration, this is a very big topic looming for 2021.

Immigration is set to be a major hurdle for the housing market in 2021, focused on falling level of immigration, it’s a topic that always attracts strong debate both for and against. We’re all on stand-by for how this important topic unfolds.

However, the stand-out prediction (or wish) from last year was the suggestion that we would see major tax reforms and that included a review of stamp duty or at least see some long called for adjustment.

In NSW this has actually happened, and a detailed review is now underway, ‘the biggest change since Federation’ being one headline to announce the review. But we are still holding our breath for wider tax reform although as recovery post-covid takes place, tax reform might just become an essential in the face of big government debt. Next a look forward to 2021.