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The Changes Coming to Australia’s Residential Property Market ‘After’ the Virus
National Head of Research
The COVID-19 virus has taken a hammer to many of the ideas we have about what is normal.
It is obvious now that many things will never be the same.
COVID-19 follows a period of significant change for Australia’s residential property market.
The market has been transformed in recent decades with a range of economic, demographic, technology and other trends driving significant changes.
The market today is very different from what it was five or ten years ago let alone at the turn of the century.
While non-residential property markets and all industries will be endlessly analysed, given the impact of the global pandemic on the economy, a review of the residential property market is especially important.
In addition to residential property’s traditional role as a ‘safe haven’ and shelter being upgraded due to COVID‑19, the sector is likely to experience many significant changes beyond 2020 that will reverberate for decades, if not generations, to come.
Importantly, residential property is the nation’s largest asset class - hence a key source of wealth and economic security for Australians - and has important system-wide financial stability, banking and other implications.
Undoubtedly, it is still early to fully catalogue what the long-term implications will be for the market and how we live.
However - as an industry, a society and a nation – we have to begin thinking critically about the implications of COVID-19 and other possible pandemics on our cities, towns, suburbs and regions.
This analysis is critical to better understanding and successfully navigating the immediate challenges posed by COVID-19 while also preparing for a future which will, no doubt, continue to present many of the same risks and challenges.
The COVID-19 challenge has been all-pervasive with no segment of our nation, society or economy unaffected.
And it is difficult, if not impossible, to imagine a future without a similar risk or threat – especially in our increasingly internationalised and connected world.
This is underscored by the most recent outbreak of the virus and subsequent lockdowns and restrictions in Victoria.
On the cusp of declaring victory in one of the many ongoing battles against COVID-19 – the war is, as yet, unwinnable without a vaccine or treatment – Victorians were forced to take a step back and repeat the difficult restrictions and lockdowns previously implemented across the nation.
Now, then, is as good time to begin answering the question - what will tomorrow look like for the residential property market?
Given the scale and complexity of COVID-19 and its impact on so many areas, the question is a difficult one and any attempt to answer is ambitious. However, responses, even in this early stage, can help provide a base on which further thinking and analysis can be done.
Perhaps the simplest way to answer the question is to focus on the range of specific areas which have been (and could be) affected by COVID-19 in a direct sense (‘first-order’ effects).
Although consideration of indirect (‘second-order’ effects) are as important (if not more so perhaps in some instances) any reasonable initial attempt must first focus on the simple and obvious impacts.
Here, then, are some thoughts on how COVID-19 might impact the residential property market across four key themes:
Geography - the Return of Suburbs and Regions
Contrary to the prevailing trend of centralisation, COVID-19 can be expected to spur a renewed-wave of decentralisation as policymakers and businesses seek to minimise risks arising from COVID‑19 and pandemics.
The ‘social-distancing’ we have now become accustomed to could be translated to the residential living sphere (‘residential distancing’).
As property buyers, owner-occupiers and renters better understand the changes we are living through, we can expect that several key locations could see increased demand including suburbs (especially in outer metropolitan area) and regional locations (especially regional centres).
This does not mean that the long-standing trend towards ever-increasing centralisation (and urbanisation) will be reversed.
Centralisation has been a longstanding trend and driven by very powerful economic, social and other forces. These include internationalisation/globalisation and the desire by businesses to cluster and reap the benefits of agglomeration.
In terms of specific locations, in Victoria, for example, a renewed decentralisation push could mean large regional centres (for example Geelong, Ballarat, Warragul), peri-urban locations (for example Bacchus Marsh) and smaller towns (for example Kyneton) attracting greater interest than before.
Indeed, many of these locations had been experiencing increasing demand before COVID-19.
In addition, decentralisation might also mean some locations, which traditionally had not received significant attention, could now also see greater interest.
These locations include smaller towns and settlements near already popular metropolitan and regional centres. Locations with good transport infrastructure (to employment, amenities) are especially well-placed.
In Victoria, this could include several locations in municipalities within one to two hours’ drive from Melbourne (for example the Baw Baw, La Trobe, Greater Geelong, Surf Coast municipalities).
On a national basis, we could also see greater interest in less populated states and territories thereby slowing, in part, the long-standing trend of strong population growth in Sydney and Melbourne.
Already, our two largest cities have a combined population of around 10.5 million people and account for over 40% of the nation’s population. COVID-19 could see a more even distribution of Australia’s population.
Smaller capital cities and other locations with already sizeable populations that offer employment, housing and other opportunities - such as Adelaide, Perth and Canberra – could be amongst the greatest beneficiaries of this shift.
Finally, smaller cities and towns which have remained relatively unscathed by COVID-19, but which also offer employment, housing, retail, social opportunities while also having unique locational competitive advantages could also see renewed interest. Hobart is a prime example of this type of city.
Design - Density and Space Reimagined
The long-standing trend towards greater density is also likely to be reconsidered consistent with the need for more space and ‘social distancing’.
Again, as with centralisation/decentralisation, this does not mean that the trend towards increasing density will be reversed.
In major capital cities and regional centres, a given urban footprint (despite the occasional adjustment) largely means we must accommodate an ever-increasing number of people and, hence, densities will continue to increase.
However, we can expect some notable shifts.
The first shift is that some buyers could be drawn to larger dwellings which offer more living space.
Detached houses, townhouses and larger apartments might all become relatively more popular given our time in lockdowns (and the possibility that lockdowns and other restrictions could happen again).
We can also expect several design changes for some new dwellings. These include more garden/outdoor space and the inclusion of a home study/office (reflecting the need and desire to work increasingly from home).
Second, apartment and high-density living could be reimagined with a range of new design, technological and design innovations poised to reshape apartment living (especially for large multi-storey apartment buildings). Of key concern will be ensuring the risks of any future pandemic are minimised.
Residential living facilities for older persons and our elderly (retirement villages, aged care facilities, over 55s mobile home estates etc) are also likely to face intense review.
Lifestyle - Work/Life Reimagined and Technology
Recent months has highlighted the power of the Internet and other information and community technologies to ensure that work and commerce can continue when physical offices and other places of employment are not accessible.
While web and video conferencing has been steadily growing in use, especially with ongoing improvements in technology, working from home has remained less common.
After our experience with COVID-19 in 2020, we can expect that both working from home and the use of web and video conferencing will see renewed interest and adoption.
Indeed, working from home could become the ‘new normal’ for some workers and sectors of the economy.
Over the medium to long term, we can expect a range of factors will add impetus to the working from home trend.
One set of factors (‘push’ drivers) include higher traffic congestion costs and decreasing affordability (affecting especially the inner and middle suburbs of our cities).
Another set of factors (‘pull’ drivers) includes the entry of new workers into the workforce more familiar with new technology (the ‘digital natives’).
These workers can be expected to fill the vacancies created by the exit and retirement of older workers less familiar with new technology (the ‘digital immigrants’).
Economy - Structural Change, Back to the Future
Recent decades have seen services rise as a share of economic output while manufacturing has declined.
While this trend is common to many countries, Australia remains well behind many developed economies with sizeable (and advanced) manufacturing capabilities.
COVID-19 might well lead to a broader rethink of our economy, its structure and future potential.
Importantly, COVID-19 has highlighted the vulnerabilities faced by some local industries to pandemics and other threat.
The virus has also highlighted opportunities for other local industries and areas of activity which have faced challenging conditions in the past but remain below their full potential.
Examples of the first type include service sectors with a high-degrees of international exposure and person-to-person contact (for example international education, hospitality, tourism, retail etc).
An example of the second type is manufacturing.
In addition to personal protective equipment (PPE), policymakers are now rediscovering opportunities for the domestic production of pharmaceuticals, medical, health and other key items.
Affordability and Home Ownership
The virus can also be expected to have long-lasting impacts on two key residential market parameters - affordability and homeownership.
Although perhaps counterintuitive, we could see an improvement in affordability and homeownership for some households opting to live in regional centres and other affordable locations.
However, many households are likely to experience major affordability and homeownership challenges due to the economic, labour market and other impacts of the virus.
It is now several months since COVID-19 was first detected in late 2019 and the virus continues to have a significant impact on the global economy affecting the employment, wealth and lifestyles of billions of people.
Australia’s economy and workforce continue to be affected in unprecedented ways and the economic damage will be significant and long-term.
In terms of the property market, a range of purchaser groups have been significantly affected and are likely to see their dream of home ownership delayed.
This will mean that many current and future property owners will pay off their mortgages later further adding to mortgage stress.
Those looking to enter the market and those looking to retire in the short-medium term are expected to be just two of the groups affected.
In some cases, COVID-19 will mean the end of the great Australian dream of homeownership for many of our fellow citizens.
The points raised in this piece represent an initial attempt to understand the first-round impacts of COVID-19 on the residential property market.
While considerable uncertainty remains and there is much to be understood it is now clear with every passing day that the Australian residential property market, like so many other aspects of our lives, has entered a new and very different era.