All things considered, 2020 closed on a high. House prices are showing a mild increase month-on-month in metropolitan and regional locations, which provides some comfort to consumers as Australia embarks upon a long-term economic recovery.
In an unusual but appropriate move for the times, the Reserve Bank has confirmed interest rates will remain low for the next few years, which is important peace of mind for buyers as they consider their future accommodation needs.
However, there remains a lack of choice for people looking to buy property. Supply remains constrained and schemes like HomeBuilder, while important, do not make a material difference to the supply side.
Taxation, whether it be in the form of stamp duty, property tax or any other model, remains a major disincentive for people to move, and this constrains the level of upgrading and downsizing activity we would otherwise see.
The NSW Government has proposed changes to the tax regime for property and the outcome of the consultation process will have widespread implications. Nevertheless, as we’ve seen from the level of activity leading up to Christmas 2020, buyers remain out in force regardless.
The price growth which returned in the second half of 2020, combined with the ongoing supply shortage amid continued strong demand, should see prices remain on course to climb steadily through 2021.
First home buyers
First home buyers were active in 2020 with government incentives playing a part. This should continue in 2021 though some changes on the horizon may introduce challenges for those looking to enter the market.
Low interest rates, the extension of HomeBuilder and stamp duty concessions for lower-priced properties will continue to fuel demand among first home buyers.
A rising price environment would typically disadvantage this segment, but this is balanced against the affordable finance accessible to most buyers, which should keep first home buyers in a position to compete with investors for entry-level stock.
Though the supply shortage remains a significant issue for the state’s housing market, the pace of new development and levels of approvals slowed only slightly during the pandemic.
As the recovery continues, developers can be expected to target first home buyers as part of a broader cross-section of buyers to increase the viability of their projects.
For new-builds, product diversity is key, and this means accounting for the needs of first home buyers, many of whom are more willing to embrace apartment living as a preference.
The rebound in the second half of 2020 underlined the value people see in bricks and mortar and in terms of stability as an asset class, at the outset of a prolonged economic recovery, we expect young people to continue to view property favourably, particularly if the employment market remains resilient.
Expect investors to mobilise in force in 2021. Prices are on the way up but the consensus is that the growth cycle has another few years to play out.
Many investors will be looking to identify capital growth opportunities and introduce an additional element of competition for first home buyers, who were particularly active in 2020.
With cheap finance, investors are in a strong position to compete in a tight market in short supply.
It could mean some investors who would traditionally avoid regional markets will look to expand their geographic search, in recognition of the broader decentralisation trend that the pandemic appears to have exacerbated.
It follows that more developers, even major ones, could increasingly seek regional sites as opposed to fringe sites on the outskirts of metropolitan Sydney.
Either way, investors represent a critical target market for new projects as part of a diverse cross-section of buyers developers need to tap into.
Upgraders and downsizers
The lack of available properties aside, the outlook is positive for upgraders. Prices are trending up but only slightly, and people will likely be able to secure a good price for their existing home to set the platform for a move.
Families looking to secure a larger home can have confidence in the strength of demand for their existing property, as well as a favourable interest rate environment, if they’re taking on additional finance.
Regional markets may be the beneficiary of upgraders taking a broader view of their preferred location with working from home now a long-term reality for many people.
Existing property owners and mortgage holders are a section of the market often missed by government stimulus measures and incentives. It’s also the segment of the market with the most potential to level the supply–demand imbalance.
Stamp duty has been the prevailing barrier to downsizers making the decision to move, which would create new options for upgraders.
Unfortunately, the proposal to offer a choice between stamp duty and an ongoing property tax is of comparatively little positive consequence for upgraders and downsizers.
It’s time to reconsider the tax regime for property owners, potentially including capital gains tax, to encourage more people to move to more appropriate accommodation and create more choice for others.
Rents and rental vacancy
Overall, vacancy rates are on the way down, however the pandemic has created a fragmented rental market and 2021 begins with significant discrepancies in vacancies across different markets.
In select Sydney markets such as the northern beaches, as well as in key regional areas, the rental market is extremely tight and upward pressure on rentals is likely to occur in 2021.
On the other hand, true-CBD markets and those relying on a local student population have been affected, with vacancies up and pressure on rents down.
In 2021, properties in these markets which can offer access to transport and amenities can be expected to rebound.
With the first international students now back in Darwin, it is hoped they will make their way back to Sydney by the end of the first semester, meaning landlords have cause for optimism that 2020 was an aberration with the potential to be repaired in time.
Houses vs apartments
Across the board, we see dwelling prices maintaining a steady increase in 2021 in a continuation of the rebound which emerged in the second half of 2020.
Some forecasters have tipped Sydney price rises could approach the 10 per cent mark in 2021, which we think is bullish, however the fundamentals do suggest a meaningful uplift is possible.
Recent landmark top end sales and various new suburban records may have skewed recent median price figures but also reinforce the value people place in property.
Supply of new apartments slowed in 2020 though for some postcodes which have been the subject of new developments and increased density in recent times, there is still scope for further absorption. In these locations, off-the-plan sales may be subdued and prices could remain stagnant until this supply is taken up.
It will be important for developers to focus on creating a diverse product which appeals to a broad buyer mix instead of simply attempting to maximise yield in terms of the number of apartments they can squeeze into a site.