After two years of a bearish property market, the last quarter of 2019 and early 2020 saw a resurgence in property sales and prices. Now the industry is in virtual lockdown with on-site auctions banned along with open for inspections to the masses. So how will this play out in the coming months for the property market?
As a company aligned to the property market that experienced the lows of the GFC, we expect to see similar declines occurring in the months ahead. During the GFC, we saw a decline in the number of property transactions and we expect that to re-occur now and for prices to decline.
However, what is different to the GFC is that with COVID-19, the government is actively closing industries in an effort to minimise the effects of the virus. The critical factor will be how long those closures will continue for. You don’t need to be a Nobel prize winning economist to predict the longer it is, the worse the broader effects will be and the more protracted the recovery will be.
With predictions of 10 per cent unemployment and the economy to contract by around 4 per cent, the federal government’s unprecedented measures will help ease the blow for many. Most households with mortgage debt have a reasonable equity buffer with mortgage pre-payments equating to around three months according to the RBA.
However, there is a group that have less than one month of prepayments and these are the most vulnerable particularly if they are employed in those industries where shutdown is likely to be prolonged and therefore recovery more protracted.
The danger lies for those borrowers who have minimal equity, such as a 90 per cent mortgage, because -with declining property prices - the incidence of negative equity will rise. The key for those borrowers is weathering the storm. You only realise a loss if you sell, so if you can remain in your property, with the longer term prognosis of a ‘V’ shaped recovery could mean those households could recover their paper loss moving into 2021 and beyond.
Recently there has been reports of lenders withdrawing loan approvals that borrowers have relied upon to unconditionally commit to purchasing a property. The implications of this is that borrowers not only lose their deposit but are also exposed to potential litigation from the vendor for non-completion.
We saw this occur during the GFC, along with a spike in claims during that period. We imagine there is the potential for this to occur in our industry again, in the months ahead. In fact, to mitigate our risk we have already tightened our ‘home equity’ criteria to raise the qualifying bar as well as implementing further checks in our online system protocols.
Whilst the property market will decline in both turnover and price in the months ahead, there is a silver lining.
During the GFC, property transactions were still occurring, lenders were still lending. Likewise,now - whilst some sectors and people have been affected, other people will not be. With prices declining, there will be opportunities and there will be people willing and able to take advantage of a softer property market.
A good portion of property demand, particularly for investors, is driven by overseas migration. Currently that is frozen but once it re-opens, the demand will be there to drive the market recovery in 2021.
Grant Bailey is the general manager of Deposit Power, Australia’s longest-standing deposit bond provider.
Established in 1989, Deposit Power has assisted over one million buyers and sellers in the property sale process. Deposit bonds are widely accepted as a means of securing a property purchase and are utilised by first home buyers, up-sizers, downsizers and investors alike for auction, off-the-plan or existing home purchases.