The last two years have been without precedent. While we collectively grappled with COVID-19, the real estate market went from subdued to steadily, and then relentlessly, climbing to a new peak.
The last two years have been without precedent. While we collectively grappled with COVID-19, the real estate market went from subdued to steadily, and then relentlessly, climbing to a new peak. Then, more recently, prices cooled again. There has been nothing typical about 2020 and 2021 but could 2022 return the market back to something resembling normal? And what is ‘normal’ for investors now anyway?
The end of lockdown and cooling prices appears to be rousing investors who have watched the market play out in recent times from the sidelines.
ABS data from October 2021 shows new investor loan commitments are moving towards record highs nationally, while commitments for owner-occupied housing are falling. In New South Wales, loans to investors were up 1.3% for the month.
As investors weigh up their options in 2022, the major factors remain delicately poised. In terms of prices, rents, vacancies and finance, there’s reason for optimism. But forecasting is foolhardy, so let’s simply look at the state of play for each as we bid farewell to a year we’ll never forget.
Supply, demand and shortfalls
The end of lockdown saw a surge of new properties come onto the market. Vendors waiting for restrictions to ease acted somewhat in unison, and the effect was to offer buyers more choice, easing competition for available properties and subsequently cooling price growth.
And yet, demand continues to outweigh supply, and the extent of the imbalance is substantial. Apartments have accounted for about two-thirds of the new housing market in the Greater Sydney region over the last decade but the boom in new apartment construction ended in late 2019. The halt to immigration forced by COVID-19 actually prevented the worst-case scenario impacts of the supply shortfall from coming to fruition. But the reprieve is probably temporary.
According to November 2021 research from the Urban Development Institute of Australia (NSW), “Prior to the pandemic, the new apartment market was facing a significant reduction in apartment completions, falling from 32,000 in 2018 to 27,000 in 2019, and continuing to fall to 23,300 new units in 2020.”
Then this: “During the first 18 months of the pandemic, the new apartment market continued its rapid downward trend with apartment completions estimated by UDIA NSW to be down to 6,800 completed dwellings in FY22.”
As the borders re-open, international students resume their studies, and people are attracted once again to city-living, the shortfall in new apartment supply could potentially be exacerbated further.
Prices and rents
Should the shortfall in apartment supply snowball, we will likely see both apartment prices and rents increasingly face upward pressure as the re-emergence of demand factors have an influence.
We all know price growth has cooled on account of the supply surge. Buyers are feeling empowered by choice and are unwilling to pay a premium, and vendors are having to adjust their expectations. Most, remember, will have enjoyed about a 30% value increase over the course of the pandemic.
Against this background, across the board, REINSW members report that apartments are generally faring slightly better in terms of buyers and vendors finding a middle ground. Should stock levels normalise in the new year, which is a distinct possibility, we see price growth resuming at a sustainable, subdued rate.
Through the pandemic, regional markets have experienced a major spike in popularity and many regional rental markets are effectively full. Meanwhile, the outlook for vacancy rates in metropolitan markets differs by locale, but the demand factors of immigration, returning international students and potentially, an influx of people returning to city living and the CBD office could see vacancy tighten further.
Many investors in inner-city apartment markets have endured a difficult couple of years. In 2022, there are positive signs on the horizon.
The Reserve Bank continues to work to its stated plan, maintaining that a rise in the official cash rate in 2024 remains the likely case, taking into account inflation, employment and the many other variables it weighs up.
Should those variables force the RBA’s hand earlier remains to be seen. Either way, a rate rise seems a way off yet. And while the banks have already began adjusting their lending terms out of synch with official interest rates, the fact remains that the cost of borrowing is still historically low.
It’s how much investors can borrow that has changed and will likely change further. APRA’s increase in the serviceability buffer has had a mild impact, as designed, however at a Federal level the Treasurer has signalled that more adjustments are coming.
Implemented under the guise of improving affordability, limiting an investor’s borrowing capacity impacts the price they’re able to pay for a property, but does not necessarily change their underlying plans to buy.
We therefore don’t see the increasing appetite to purchase among investors being derailed by such macroprudential measures. On the other hand, for affordability, a national solution is required and inevitably, we come back to supply.