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COVID-19 Implications for the Residential MarketJune 2020

| COVID 19 - Implications on Resdential Market

Demand

Population growth in Australia has been relatively consistent, ranging from 1.1% to 2.1% per annum since June 1999. This steady growth was a contributing factor in Australia avoiding recession during the GFC and major housing markets experiencing good growth over the years.

The chart on the right shows forecasts for the key components of population growth. Following the announcement of the COVID-19 pandemic, borders were closed and net interstate and overseas migration forecasts were significantly impacted. As a result of the pandemic, the following forecasts have been adopted in our analysis:

» Migration from May until October 2020 significantly slows. Government forecasts 30% fall in FY2020

» Significant slow down post FY2020, with a fall of 85% in FY2021, compared to FY 2019

» The recovery is unlikely to be immediate after State borders open due to underlying employment conditions, which will take time to return to normality

» Net migration is forecast to improve, returning to levels achieved pre COVID-19 in July 2021.

Applying the same assumptions to the States, the expected population growth rates by State change substantially for FY2020 and FY2021. For the year to June 2021, the Australian Capital Territory tops the forecast annual population growth with Victoria traditionally having been the highest growth State.

2018-2019 2019-2020 2020-2021 2021 - 2022

Australian Capital Territory (ACT) 5,008 3,506 751 4,767

Victoria (VIC) 105,335 73,735 15,800 94,028

Queensland (QLD) 54,294 38,006 8,144 53,200

New South Wales (NSW) 88,081 61,657 13,212 78,638

Western Australia (WA) 7,131 4,992 1,070 17,236

South Australia (SA) 6,143 4,300 921 7,581

Australia is forecast to see overall population growth of 207,000 people during year

to June 2021 a reduction of 220,000 people in

comparison to pre COVID-19 forecasts.

Key Demand Driver- Population Growth

Total Net Migration (Persons)

OverviewThere are many factors impacting supply and demand for residential property at current. With government announcements changing daily, the direction of supply and demand is difficult to predict. We expect low population growth, high unemployment rates and government safety and stimulus initiatives, to have an impact on all residential indicators. Based on our expectations for these indicators and assuming we avoid a second wave of the virus as state borders re-open, we have forecast the supply-demand gaps and median prices for the major markets.

Supply Residential dwelling supply will depend mainly on policies, planning and market conditions within each State. Key factors influencing supply across the States at current include:

» Projects delivered over the next 12 months from supply approved prior to

COVID-19

» Short-stay property owners converting premises to long-term accommodation

» Planning applications fast-tracked to stimulate state economies and provide

employment opportunities

» Supply chain issues which could extend building times for some projects

» Difficulties to fund projects due to soft presale markets and increased cost of

capital

» The longevity of the medical/economic crisis.

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Victorai

New South Wales

Demand in NSW is likely to match supply by mid-

2021 and start to outstrip supply from early 2022.

Given reduced migration over 2020 and early-2021,

and economic uncertainty, demand is set to remain

lower than dwelling supply in these years. The 2022

and 2023 financial years are forecast to witness

undersupply levels accelerate. However, the NSW

Government’s Planning System Acceleration Program

is now likely to see this undersupply reduced. The

Government Program includes fast-tracking of over

50 major projects in stage one and two that can be

approved and underway in six months. Stage one will

contain more than 5,400 dwellings and tranche two

over 3,600 new homes.

Victoria

Victoria is expected to continue to be undersupplied

over the next three years with the demand-supply

gap likely to start reducing by mid-2021 before

widening again from early 2022 when we begin

to see the population growth returning back to

previous forecasts. Given the reduced migration

forecast over the remainder of 2020 and early-2021,

demand is set to decline. The 2022 and 2023

financial years are forecast to witness undersupply

levels accelerate.

Queensland

After peaking during FY2017, the number of

dwellings supplied per year in Queensland has

steadily reduced. The slowdown is forecast to

continue until FY2021, before projects approved

start to increase the level of supply again. With

demand falling over FY2020 and FY2021 due

to reduced population growth and economic

uncertainty, dwelling supply is likely to exceed

demand over the following two fiscal years. An

uplift in demand is projected to ensue in FY2022 as

migration levels revert to normality and confidence

returns in a low interest rate environment.

QueenslandFinancial

YearUnder/

Over Supply

2020 + 3,496

2021 + 14,263

2022 - 124

2023 - 10,327

Australian Capital TerritoryFinancial

YearUnder/

Over Supply

2020 +22,952

2021 +60,364

2022 - 26,781

2023 - 91,710

Western Australia

Financial Year

Under/ Over Supply

2020 + 17,454

2021 + 21,840

2022 + 6,562

2023 - 3,335

South AustraliaFinancial

YearUnder/

Over Supply

2020 -1,923

2021 +1,317

2022 +1,022

2023 +751

VictoriaFinancial

YearUnder/

Over Supply

2020 - 26,833

2021 - 7,391

2022 - 30,562

2023 - 56,706

New South Wales

Financial Year

Under/ Over Supply

2020 + 31,949

2021 + 28,934

2022 -1,988

2023 -16,957

South Australia

SA is set to remain in a state of undersupply in FY2020,

before supply outstrips demand in FY2021 due to

reduced population growth, resulting from declines

in overseas migration estimates. A minor state of

oversupply will remain through FY2022 and FY2023

as the market absorbs the excess supply of stock that

entered the market over the previous year. However,

increased population growth over this period (2022–

2023), together with the average number of people per

household trending downwards, is likely to support

healthy demand levels.

Western Australia

WA has witnessed a long period of oversupply

brought about by reduced demand following the

mining boom. Demand caught-up to supply in

FY2019, and while oversupply remained, it was

starting to be absorbed from the second half of 2019

to March quarter 2020. Reduced population growth

is forecast to result in an oversupply of dwellings

now until FY2022 in WA. Demand is then likely to

start rising again, absorbing the excess supply and

leading to undersupply over FY2023.

Australian Capital Territory

Undersupply is likely to generally continue in the

ACT over FY2020 as the Government controls most

of the land supply and land is released according to

expected population growth. Further, with forecast

population growth within the ACT likely to be higher

than the other states over FY2021 and expected

stimulus through government employment,

demand should continue in the Territory, albeit

tracking slightly below supply. A very slight

oversupply is, therefore, forecast for FY2021 due

to migration slowing population growth compared

to pre-COVID-19 expectations and some of the

employment created during the crisis being scaled

back in that year.

Demand Supply Gap

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Year to

New South Wales Victoria Queensland South Australia Western AustraliaAustralian Capital

Territory

June - 2020 9% to 11% 10% to 12% 0 to 3% 0% to 3% -1% to 1% -1% to 1%

June - 2021 -6% to-9% -5% to -10% -3% to -5% -5% to 0% -3% to -5% -2% to -4%

June - 2022 1% to 3% 0% to 3% 1% to 3% 0% to 3% 1% to 3% 1% to 2%

June - 2023 6% to 8% 4% to 7% 4% to 6% 0% to 3% 3% to 5% 5% to 7%

Median House Price Growth (Mar-2015 to Mar-2020)

27.87% 43.84% 20.73% 13.74% -12.05% 30.06%

Outlook

Period of Weak Market Conditions 12 - 18 months 12 - 18 months 12 - 18 months 6 - 12 months 12 - 18 months 6 - 12 months

Median Prices Recovery End of 2021 End of 2021 End of 2021 End of 2021 End of 2021 End of 2021

Demand Exceeds Supply FY 2023 FY 2021 * FY 2023 FY 2020 FY 2023 FY 2023

*Demand supply gap shrinks

» With supply being pushed forward by the NSW government and demand flat, FY2021 is likely to see an oversupply driven decline in median dwelling prices in Sydney.

» Strong median price growth is expected in FY2023 as vacancy declines.

» With demand supply gap increasing again, FY2022 is forecast to be a recovery year in Victoria, with dwelling prices expected to remain stable or have minimal growth.

» Price growth is expected when the undersupply expands again in FY2023.

» Most of the decline in median prices is expected in FY2021 when the bulk of potentially distressed properties come onto the market.

» By FY2022, the economic recovery should be underway; and unemployment rates are likely to be falling, resulting in a favourable market, stronger growth in dwelling prices is expected over the following year.

» The impact of COVID-19 is expected to be more restrained in SA when compared to the eastern states.

» SA markets have historically been less volatile, and while it has not witnessed the strong gains in values over recent years, it is also unlikely that it will experience strong falls over the forecast period.

» After four years of oversupply, dwelling prices finally started to recover over the second half of 2019. The rise was cut short due to COVID-19.

» The rebalancing of supply should produce a return to growth in median dwelling prices over FY2022, before strengthening in FY2023.

» Canberra usually has relatively moderate cycles due to the considered release of land for development.

» However, the unexpected events over 2020 are likely to result in development land having been released based on expected larger population growth.

Median Dwelling Prices Dwelling prices in May reflected a decline of -0.4% according to Core Logic’s house value index, however, this is based on early COVID-19 data with true impacts yet to materialise in the indicators. Interest rates are low and Australian Banks are trying to assist mortgage holders over the COVID-19 crisis period, which will result in less distressed properties coming to market in the short-term. However, once mortgage breaks end and unemployment impacts are known, dwellings may start to be offered to the market at discounted prices, it negatively impacting prices. The length of the crisis is going to determine the depth of the downturn.

Conclusions

• NSW, QLD and WA are forecast to be in oversupply in FY2020.

By FY2021 all states, are likely to be oversupplied, except

Victoria, which will be in undersupply.

• Demand is likely to be weak in FY2021 due to economic

uncertainty resulting in many people putting investment and

house purchasing decisions on hold.

• The residential property market will be impacted by COVID–19

for the balance of 2020 and the first half of 2021. During this time,

we anticipate residential prices will decrease, with a recovery

not occurring until the latter half of 2021. This recovery will be

impacted by the high level of unemployment, however, in part

will be offset by improving population growth. Once market

confidence is restored, we anticipate slow recovery. Growth is

not expected until mid to late 2022 and is forecast to accelerate

in FY2023.

DISCLAIMER © m3property Australia. Liability limited by a scheme approved under Professional Standards Legislation. This report is for information purposes only and has been derived, in part, from sources other than m3property Strategists and does not constitute advice. In passing on this information, m3property Strategists makes no representation that any information or assumption contained in this material is accurate or complete. To the extent that this material contains any statement as to the future, it is simply an estimate or opinion based on information available to m3property Strategists at that time and contains assumptions, which may be incorrect. m3property makes no representation that any such statements are, or will be, accurate. Any unauthorised use or redistribution of part, or all, of this report is prohibited.

Key Contacts

m3property.com.au /m3property

Ben Toole NSW | Director

+61 2 8234 8105 [email protected]

Kym Dreyer SA | Managing Director

+61 8 7099 [email protected]

Stephen Linanne QLD | Senior Valuer

+61 7 3620 [email protected]

Zoe HaskettSA | Research Manager +61 8 7099 1807 [email protected]

Lani RogersSA |Senior Valuer +61 8 7099 1819 [email protected]

Casey RobinsonQLD | Research Director +61 7 3620 7906 [email protected]

Luana Kenny Vic | Managing Director+61 3 9605 [email protected]

Josh JohnstonVic | Associate Director


Robyn CowieVic | Associate Director


Jarrod Morgan NSW | Director


Amita MehraVIC | Research Director +61 3 9605 1075 [email protected]

Key Contacts

Jennifer WilliamsNSW | National Director +61 2 8234 8116 [email protected]

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