Throughout modern history, society’s biggest moments of adversity have become the catalyst of major behavioural changes for life on planet earth. Right here, right now, we are all part of history in the making; arguably the world’s biggest structural change since World War II.
Depending on who you choose to believe, a vaccine for the coronavirus may be available within 6-months or never. And there is always the possibility of future health pandemics during our lifetimes. The only certainty is that it is completely uncertain, and that the disruption already caused by the coronavirus has been big enough and lasted long enough for Australian real estate to have changed forever.
As someone with a professional interest in trying to identify future property market trends, from the moment that COVID-19 first impacted Australia, I made a conscious effort to actively observe the broader impacts, to step through a series of probable stakeholder responses, and to anticipate future trends.
Given the intense restraints on lifestyles and earning capacities, I suspect that hundreds of thousands of Australians are in the midst of redefining what’s really important to them and how they can minimise the risk of major future disruption caused by this germ.
This is the start of a new era. One in which society will prioritise life’s most simple pleasures and people will be prepared to make major life changes to realise those simple pleasures, including relocating.
The ‘internet-of-things’ will support a new and improved way of living in this new era.
Whereas, over the last decade, some blamed smashed avocado for housing being unaffordable, scrambled eggs will become part of a real estate trend in this next decade.
The Fried Egg Is About To Get Scrambled
With a doubling of populations over the last 50-years, cities all over the world have followed a ‘fried egg’ town planning model. City centres have been filled with large volumes of office towers surrounded by retail businesses and high-density residential apartments. The yellow yolk resembles a city’s CBD while the white of the egg resembles suburbia.
A large portion of CBD and inner-city office workers have retained their job throughout the pandemic but, to comply with social distancing regulations, switched to working from home (WFH). Propertyology was among them. Cloud-based computing enabled daily work tasks to still be completed. Work colleagues remained connected through Microsoft Teams and Facetime. Conferences and training courses were quickly converted to webinars. Zoom and Skype were used for client meetings. Ditto for business trips.
During a coffee catch up with my 2IC in June, I enquired about his personal experience of working from home. He immediately smiled and said that he had calculated a savings of 12-hours per week from not having to commute to and from the office each day.
That’s more than an extra day per week for family and personal life. Thank you, Covid!
What started out as a COVID-enforced temporary adjustment has recently become a permanent arrangement for Propertyology, largely because of the significant improvements in productivity and work-life-balance. We won’t be the only professional services business in Australia to do this!
Finance and insurance workers, engineers, lawyers, accountants, IT, journalists and other knowledge-based employees and their support team have already had long enough to test and measure the WFH model. It won’t suit everyone, but if just an extra 5 percent of Australia’s workforce adopts WFH as their new norm that’s 650,000 people.
In doing so, some of the former demand for goods and services within CBD’s will diminish. There will be a transference of demand for cafés, hairdressers, clothing and apparel stores, and retailers in general to metropolitan suburbs and to regional locations.
That traditional ‘fried egg’ town planning model will progressively become scrambled as people disburse in a different pattern. Some of that yellow yolk will blend into the egg white. So begins a new era and a structural change for Australian real estate!
Changing Economies
Globally, I’m anticipating that populations will disperse like never before. There will be people from all over the world who won’t be prepared to risk again having to live through long periods of lifestyle restrictions, reduced income, health risks and intense emotions. Once able to cross international borders, some will be eager to migrate to perceived ‘safe havens’ (like Australia) to start a new life.
Indeed, the availability of a vaccine may well trigger the start of a ‘Roaring Twenties’ era of celebration and significant economic prosperity. Boom times!
That said, international borders may remain closed for a few years.
Where one works (and how much one earns) arguably has the biggest influence on where one lives. The impact of the scrambled egg property economics will affect a big enough critical mass to influence future property market performance.
ABS data confirms a reduction of 822,000 (or 6 percent) in jobs from February (pre-Covid) to May, and I note that 600,000 were in the two lowest skill level 4 and 5 ranges (sales assistants, waiters, kitchen hands, labourers, theatre assistants, taxi drivers, etc). Skill levels 1, 2 and 3 had produced a more-mild 3 percent reduction in jobs.
It is completely inappropriate for anyone to draw broad-brush conclusions of property market impacts. Real estate has never been a one-fits-all index.
As always, there will be property market winners and losers amid a plethora of ill-informed generalisations.
There are significant challenges ahead for those working within the tertiary education sector. Approximately 40 percent of Australia’s 250,000 to 300,000 annual overseas migration intake are international students. Most of them rent inner-city apartments (the yolk of the egg).
Lots of jobs within the residential construction sector also depend on overseas migration.
The locations to be most affected by overseas migration are Sydney (1.4 percent population growth in 2018/19 just from overseas migration), Melbourne (1.5 percent), Adelaide, Wollongong and Newcastle (1 percent each) and Gold Coast (0.9 percent).
The future is also uncertain for workers in hotels, restaurants and hospitality that normally service international visitors and tourists along with the airline industry. This is another stroke of the fork through the yellow yolk of the egg.
On the flip side, growing industries will include health, information technology, public administration, defence, agriculture, food manufacturing, mining and renewable energy.
I also anticipate that Australia will begin to manufacture more products locally. Warehousing and freight logistics will be beneficiaries of an expanding manufacturing sector.
While state border controls will continue to have an influence, logic suggests that domestic tourism will be a big winner from not being able to travel overseas for quite some time.
Changes To How People Live
Humans generally are very habitual and quite resistant to change, but a refusal to try different things is usually to one’s own detriment. A silver lining to come from COVID-19 taking various civil liberties away from us is that we’ve all been forced to try alternatives and to re-evaluate one’s own priorities.
While the timeframe of this (and future) health pandemic is uncertain, what is certain is that the contagion spreads most in population density. It is therefore completely logical that the scrambling of the fried egg will extend beyond metropolitan suburbs and through to regional locations.
Governments and businesses have already been forced to adopt an it-is-what-it-is attitude and pivot to remain viable. Before too long, many households will make life changing decisions that include a preparedness to relocate. A life filled with uncertainty and intense restrictions on lifestyles and earning capacities is not a desirable life – living and enjoying life or merely existing?
The coronavirus may be the elbow in the ribs that Australia needs for it to implement a serious decentralisation policy.
In response to the coronavirus impact on earning capacities, there will be a pursuit for smaller mortgages. This next stroke of the fork through the yolk will be people selling one home to buy a comparable quality one at a more affordable price somewhere else. It makes complete sense, especially for those in an occupation with scope to WFH.
I also think there is a distinct possibility that we will end up with a two-tier workforce – the genuinely motivated (those who are prepared to pivot to keep moving forward) and a bigger portion of rusted-on unemployed. Either way, they will all need to live somewhere (owner-occupiers or renters).
While a virus does not diminish Australia’s demand for dwellings – shelter is an essential commodity – there will be a transference of housing demand from some locations to others. Australians are currently at the very start of an era of structural change.
We will see reduced competition for properties in expensive locations, while affordable locations will have increased appeal.
Rental demand will accelerate (dominated by the skill level 4 and 5 demographic). And we know that large parts of Australia already have a significant under-supply of rental accommodation [here’s the facts].
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I anticipate that society will become more frugal with discretionary spending, purchase less luxury items, actively look for ways to reduce financial waste and prioritise support for local suppliers.
There will be greater appreciation for living in locations that support outdoor exercise (quality tracks to walk-cycle around and national parks) and some households will rethink their need for a second car.
The type of holidays that each of us take will be heavily influenced by the Covid cooped-up affect, reduced household budgets (for some), state border controls and people’s perceived concern about contamination. This spells a greater connection with nature and open spaces, wineries, camping, mountain biking, fishing, caravanning, regional escapes will be more popular than the bright lights of big cities, and Air BNB more so than hotels.
Meaningful Apartment Price Growth Is An Eternity Away
This time ten years ago, there was a big shift towards inner-city living. People were prepared to trade ‘space’ for ‘place’ and there were valid reasons for assuming that apartment asset appreciation would be strong.
Oh, how things change!
The construction industry stuffed those anticipations well before COVID-19 with a combination of over-supply, mass-production of same-same dwellings, and deplorable quality controls.
We already have a plethora of pre-COVID evidence that confirms that inner-city apartments, relative to nearby detached houses, are enormous financial duds in respect to capital growth. Bang!
There is also sizeable structural integrity risks associated with any Australian apartment built within the last 20-years. Bang bang!
Up to now, the primary driver for those wanting to live inner-city was that they worked there. Given the shift towards WFT, skill level 4 and 5 job losses, and a desire to be close to open spaces, it is blatantly obvious that demand for inner-city apartments will wane.
Covid-19 is the final nail in the coffin for apartments. Yes, there will always be some people who want to live in and / or buy apartments. That’s not the point. The price that they are prepared to pay is. From a financial performance perspective, high density apartments are dead and buried!
A Big Shift With Where People Live
A suitable history-book term to describe the structural changes and broad behavioural changes from this new era is ‘Regionalisation!’
Think about it: Which Australian locations provide people with the lowest risk of future Covid lockdowns, of restricted lifestyles and aren’t so densely populated? Which locations have an economic profile with an industry mix that is conducive to this new world, thereby providing greater household income certainty?
Where can one buy a good quality detached house in a location that offers plentiful open space and a manageable mortgage?
Already, the population of Australia’s eight capital cities declined by 53,000 through net internal migration over the 3-years ending June 2019. I won’t be at all surprised if this pushes past 100,000 people over the next 3-years. Transference of housing demand!
Blind Freddy can see that property markets in Melbourne and Sydney will be the biggest losers in this history shaping era.
Renters living in expensive cities like this and have been consistently disgruntled about the cost of housing will be well advised to think laterally. Get out of town!
There will be oodles of location winners from Regionalisation.
I have found the regional property market commentary during this Covid period to be particularly amusing.
Those who consider the recent increased interest in a region relocation to be a short-term fad clearly aren’t aware of the official data that confirms a capital city exodus began years before Covid.
Others who think being a big city has anything at all to do with property market performance clearly are not aware of the abundance of evidence working against what their own confirmation bias wants to believe. Just check out the actual results of the last 5-years.
Propertyology has identified five (5) key demographics behind a ‘transference of housing demand’:
- Suburban shift (from living and working inner-city to moving to the more affordable outer suburbs)
- WFH relocation (reducing the risk of future lockdown restrictions by a region relocation)
- Early retirees (Covid-related job losses bringing forward retirement plans that require a relocation to somewhere more affordable)
- Job takers (proactively chasing new employment opportunities, even if it means a region relocation)
- Personal connection (moving back to the roots of where one grew up, relocating to somewhere with a family connection or a location that one has enjoyed good holiday experiences)
Over the last 10-years, lifestyle was the driving force for Byron Bay being Australia’s best-performed property market. I anticipate that this new era of Regionalisation will produce twenty or more great low-density towns and cities that become beneficiaries of significant internal migration.
For future government infrastructure investment, for town planners, immigration policy, housing affordability, for a lifestyle where basic civil liberties can be appreciated with reduced risk of restriction, for economic growth potential, for affordable housing and manageable mortgages, for capital growth and for strong rental yields… all roads lead to Regionalisation!
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