With the effects of COVID-19 being felt across the world’s economies, the question for those in the property market is “what’s going to be happening in the current financial climate and how is the market going to return, if it does?”
By Ian Ugarte | urban.com.au | June 3, 2020
Before COVID -19 hit Australia, we were already seeing a number of different jurisdictions in different states around the country making changes to their residential tenancy act, and some of them are still in that process right now. These changes are weighing in favour of the tenant rather than the landlord.
A number of these agencies, councils and legislation changes basically advised landlords and residents that “they are currently in an embargo situation and need to work with each other to create an agreeable outcome.”
Of course this ‘work it out yourselves’ approach has both good and bad outcomes for people on both sides of the property fence. One positive of this is that for the first time, many people who sat on the left side of society, the socialists, who have previously viewed landlords as capitalists who are just out to make money from them, have suddenly realised that this is not the case at all. The majority of property investors in Australia, only own one or maybe two properties, and those landlords are the ‘mum and dad’ investors who own these properties in an attempt to put their family in a better financial position.
The outcome of that is the realisation is that really, we are all the same.
In various stages and circumstances of life, we are all renters at one time or another. We are all landlords at other times, and we’re all homeowners in yet other moments of life. When it all boils down, there’s not much that will change among us.
What has been startling during these times of lockdown, job losses and property uncertainty is the research that showed only 30% of people have enough money to live on a week to week basis. But what does that really mean? Well, it means that in the property market, we need to ensure that we can get an outcome that has a positive benefit for everyone.
At this point in the economy, we are in a position of having a ‘V’ shaped drop, and we are only halfway through. From the beginning of the announcements of Covid-19, before there were discussions or decisions about a social lockdown, I suggested that what we were going to see was a decrease in property prices, a decrease in the sentiment of the market and then a very quick return of market sentiment as well. So, to put it simply, in a V-shaped economy return there is a sharp drop and a sharp increase. This is similar to when the political landscape prepares for an election. When an election is announced six weeks out, there is a stall in the property market and the only properties that sell before an election are those where people are desperate to sell, giving rise to a buyer’s market.
In a buyer’s marketplace, the properties sell for a low price point or with conditions that are not in favour of the seller, which means as an overall median, we witness a drop in the marketplace. Then, as soon as an election is over and the results are announced, within a six-week period, there is a return of confidence in the marketplace, the sales go back into place and then we generally have things turn into a sellers’ market.
It isn’t possible to be 100% correct with predictions but, if we look at 18-year property cycles and the movements in Australia during 1960, 1972, 1989, 2004, 2008, 2015, experienced investors are able to see a pattern. If we experience a second wave of the pandemic, we will see what is called a ‘W’ in financial and property markets. This means a sharp drop, in the three months and if there is a second run at COVID-19, it will drop again and then go up again.
I believe that one of the last things that the Australian government wants to see is for landlords to go under financially. Politicians don’t want to experience an economic landscape where there is no investment and no growth. To avoid this situation, the governments are going to be working towards ensuring that you, as an investor, have a better outcome moving forward, because if your tenant stopped paying rent, if you went broke, generally there would be a run for the banks. If you are mortgaged, they would have to foreclose on you and nobody wants that, especially not the government.
The banks wouldn’t have enough money because the funds that they lent you actually came from the savings of those people who need it the most. Those are the ones that are most likely renting where they live and it’s their savings that are lent out to you as an investor. And so, it would be a catastrophic event if mortgages had to be foreclosed because with that run to the banks, they would remove that money out of the marketplace.
Coming from many years of property investing experience, my opinion is that we will witness a fast return to a very strong marketplace. It is an opportunity to begin looking at those areas where you can buy right now for the prices that you could buy 10 years ago. The suggestion here is not buying new houses and land packages but about purchasing properties that have the potential for you to do something more to them. During this current period there is only one state in Australia where it is possible to buy properties at the prices you would find back in 2004. These are properties that are 15 years and older where you have the ability to buy, create cash-flow and ride the capital growth.
Sitting on capital growth and hoping things are going to work for you isn’t the best way forward. By researching marketplaces, looking at the 18-year cycle, and working out where you think the market is in that cycle, you can see if you can get the capital growth, and, more importantly, how you can manufacture growth.
The way to get manual growth on the property is by doing something to increase your return from that property. You may think this means ‘just renovating’, but using the flipping strategy is not the best approach here. The wealth creation that you are going to see in your lifetime is from holding onto property, not by buying it, doing something to it and then selling it. But for you to be able to hold it, you need cash-flow. Creating that cash-flow from the actual property itself is much more than renovations. By looking at the possibilities that property can offer, you may be able to do a subdivision. Some questions to consider might include:
- Is there potential for a secondary dwelling or can you have a duplex on that block?
- Can you create a duplex secondary dwelling or a type of house that has more potential?
- Can you use the unused and unknown policies around the country that allow you to transform those properties into micro-apartments that give people their own self-contained areas, their own kitchen, sitting area, lounge-room and bedroom and involve themselves in one communal area of the house?
Depending on which Australian state you’re in, this may be a kitchen, a living room or a lounge room. It could be a number of different aspects that create one communal area. When you think about this as an investor, you will realise it’s not a ratio return. If you compare the rents of a one, two, and four-bedroom house, if the one-bedroom house rents for $100, the two-bedroom doesn’t rent for $200 and the four-bedroom for $400. It’s much closer. Research from the Department of Health and Human Services shows that a four-bedroom medium-priced house across the metropolitan area for rent is $415 and a two-bedroom house is $400 so it’s only a small difference. So, if you know you can create smaller micro-apartments in larger houses, you get a better outcome, and a way to create additional revenue for yourself.
If you can purchase property and cover your cash flow, you have a good outcome for the future and the financial ups and downs won’t impact you as greatly as if you had to find money to make up the shortfall each and every month. If you can hold a property in Australia for longer than 10 years, you can double your equity and wealth. For example, if you bought in the peak of the last 50 years, around 1988 to ’89 and kept that property with positive cash flow, by 2004 it would have tripled its value.
Right now, it’s the same. The property market is where you get cash flow and your wealth creation happens over a period of many years. Cash flow gives you your lifestyle. Equity gives you your wealth and an ability to leave your job and know that when you retire, you will have plenty of wealth in your name.