State of the market - property investment opportunities amidst uncertainty

Amidst a period of increased uncertainty we look at the state of the property market and the opportunities for investors.

The Australian property market continues to face uncertainty as the first quarter of 2022 draws to a close, due to a range of developments including the ongoing COVID pandemic, flooding in eastern Australia, and inflation that could drive rising interest rates.

Strong opportunities still exist for savvy property investors however, particularly when it comes to investing in property development project loans that can be readily accessed by marketplace lending platforms such as CrowdProperty.

Australian property sector continues strong performance in 2022

Australian housing prices continued to see robust growth since the start of the year, despite a protracted boom since the end of 2020 which has led to a severe worsening of affordability.

The combined value of Australia’s residential real estate stood at $9.8 trillion at the end of February, up from $9.7 trillion the previous month, according to data from CoreLogic.

While there is also around $2 trillion in Australian property debt, it accounts for just slightly over 20 percent of the value of the asset class as a whole.

Dwelling values in Australia were 20.6 percent higher over the preceding 12 months, down from 22.4 percent in the 12 months to January.

Concerns over housing supply shortages increase

Concern has grown over an unresolved shortage of housing supply, which is driving worsening affordability levels.

These housing supply woes have prompted the Real Estate Institute of Australia (REIA) to call for government to take concerted action.

“We need to increase social and affordable housing stock and increase private stock with up to 1.6 million new homes needing to be built by 2030,” said REIA in March.

In February the National Housing Finance and Investment Corporation (NHFIC) said that Australia is set to face an ongoing shortfall of housing in the future as a result of supply chain problems.

Supply will see some relent in the next few years, as new home builds outpace household formation in 2022 by over 115,000 and 35,000 in 2023, according to NHFIC’s State of the Nation report.

Once net overseas migration recovers to pre-pandemic levels, household formation will outpace new housing supply. By 2024 - 2025, NHFIC expects household formation and demand for vacant dwellings to outpace construction activity - a situation set to continue until the end of the decade.

According to NHFIC, interruptions to global supply chains are constraining housing supply by restricting access to construction materials, driving costs high and delaying building starts.

These supply chain issues will be further exacerbated by the conflict between Russia and Ukraine, with sanctions interrupting trade relations and ramping up scarcity of key commodities.

Demand to receive a boost from the resumption of international travel

On the opposite side of the equation, demand for housing in Australia is expected to rise sharply, as COVID-19 travel restrictions are lifted and inbound migration resumes.

At the end of February, Australia opened its border to double-vaccinated foreign nations, and granted concessions to skilled visa holders in a bid to encourage them to remain in the country for longer.

Eliza Owen, head of research at CoreLogic, expects the return of overseas visitors and migrants to Australia to have a profound impact on the property sector.

Owen points out that the rental segment of the property market has been the worst affected by COVID-related travel restrictions.

The winding back of these restrictions will lead to a surge in demand for rental accommodation - as well as social housing options such as boarding and co-living houses. This will especially be the case in key migration hubs such as Sydney, Melbourne and Brisbane.

In years to come, demand for permanent housing will also receive a boost from the resumption of inbound travel, as migrants to Australia move further along the tenure cycle and transition from renter to owner-occupants.

Investors should still be aware of uncertainty in relation to the pace of travel restriction removal, given the COVID-19 pandemic has not yet fully abated.

Russia-Ukraine conflict could drive interest rates higher

The Russia-Ukraine conflict could have a major impact upon the Australian property sector by further exacerbating the supply chain and inflation problems created by COVID-19.

Surging inflation is one of the chief factors influencing the interest rate adjustments made by central banks, which in turn affects the cost of credit for borrowers in the real estate market.

In Australia the spectre of rampant inflation appears to have already led to a shift in the monetary policy stance of the Reserve Bank of Australia (RBA).

RBA governor Philip Lowe had previously committed to keeping the target interest rate at the record low of 0.1percent, as part of efforts to keep the Australian economy afloat during the COVID-19 pandemic.

In early March however, Lowe expressed concerns the Ukraine-Russia conflict could further exacerbate inflation beyond acceptable levels for the RBA.

“The war in Ukraine and the sanctions against Russia have created a new supply shock that is pushing up prices, especially for commodities,” Lowe said at the AFR business summit on 9 March.

“This new supply shock will extend the period of inflation being above central banks’ targets.”

Lowe said that higher inflation could be particularly severe in advanced economies given the general population has a “low-inflation psychology”, and that dealing with the problem would require a “larger monetary policy response”.

Investors should be well aware of the possibility that the RBA could adopt far stronger policy measures than recently anticipated, which will have a profound impact on the property market.

Floods to severely impact housing prices in affected areas

Multiple parts of eastern Australia have suffered from severe flooding since the start of 2022, leading to extensive property destruction and evacuations of residents.

These events are bound to have an extremely adverse impact upon housing prices in affected areas, particularly those which are vulnerable to future flooding events as climate conditions change.

A study from the University of Technology found that the 2011 floods in Brisbane led to a decline in the median house prices of low-value flood affected suburbs of 22.7 percent in the three months immediately after the disaster.

The study also found a general decline in median house prices for all sectors in the Brisbane housing market in 12 months after the flood.

Flood affected high-value suburbs saw a plunge in median home prices of 15.94 percent, while flood free high-value suburbs posted a decline of 7.11 percent. Investors should be keenly aware of the potential impact of climate change on real estate in areas vulnerable to flooding as well as bushfires.

Where do the opportunities lie for Australian investors?

Even amidst the uncertainty created by local and global events, there are still excellent opportunities for Australian property investors.

David Ingram, CEO and co-founder of CrowdProperty Australia, says an area of opportunity lies in emerging forms of residential property that help with supply shortages and worsening affordability.

“One thing we’re very interested in at CrowdProperty is making more affordable housing available,” Ingram said.

CrowdProperty focuses on providing finance to the redevelopment of existing housing stock, new builds of townhouses and duplexes. This includes the creation of more affordable housing, by means of co-living arrangements and houses in multiple occupation (HMO).

According to Ingram, these alternative forms of affordable housing can provide good yields for property investors of seven to eight percent per annum, as compared to two to three percent for traditional apartments.

Marketplace lending platforms like CrowdProperty can provide investors with ready access to a range of opportunities including affordable housing. They also possess specialist expertise in assessing the viability and value of social housing developments such as co-living.

“There are a number of marketplace lenders out there, but where we differentiate ourselves is having that in-house property capability,” Ingram said.

“Traditional banks are not as focused on property development lending, but our founders are all property experts.”

This level of specialisation helps not just in due diligence, but throughout the course of projects, ensuring the highest likelihood that investors get paid back at the end of the investment term.

“This makes a difference in terms of the project selection — making sure we only pick the best projects with the aim of seeing the projects through to a successful conclusion and maintaining the track record set in the UK of 100percent capital paid back for our investors,” Ingram said.

To capitalise on current opportunities, learn more about CrowdProperty.