AMP chief economist Shane Oliver believes the ‘golden years’ of property investment are over, and that a much darker future faces Australia’s army of negatively geared landlords:
“The chronic lack of supply relative to very strong demand for housing over the last 15 years, at a time of high levels of immigration, has paid off in spades for landlords, but this is not the case in today’s market”…
“There’s a high probability, particularly if immigration doesn’t return in strong numbers and we continue to see excess stock in the rental market, that prices and rent will fall and stay weak for a very long time.
“Politically it will be difficult for the government to simply put immigration levels back to previous levels, because we have higher unemployment, which means a long period of much slower demand for housing”.
BIS Oxford Economics executive director Robert Mellor agrees:
“I don’t think another investor-led housing boom is around the corner and a key reason is investors will be sitting on the sidelines for a while given falling rents and, for now, falling prices”…
It’s hard to fault their logic.
Immigration will be far lower this decade owing to the COVID-19 pandemic, alongside chronic labour market weakness. This will remove a key demand-driver for the housing market, especially across Sydney and Melbourne, which will place downward pressure on both property prices and rents – a pincer for property investors.
Mortgage rates have also hit their lower bound, which means the long 30-year tailwind of falling interest rates has ended, thus removing another key driver of property price rises.
So, with mortgage rates already at rock bottom, future property price growth will need to come from rising household incomes. But income growth was already very soft before COVID-19 hit, and we are likely to experience even weaker nominal growth in the decade ahead owing to the COVID-19 depression.
The big risk is that loss-making landlords, experiencing both falling property prices and rents and minimal upside, will pull the pin and sell in significant enough numbers to push property values lower, potentially leading to a feedback loop of falling prices and forced sales.
