Rethinking property investment in the wake of COVID-19

Sep 29, 2020

By Matthew Hyder, CEO Legacy Property
5 minute read

There is no doubting the monumental impact COVID-19 is having. The economic and social effects are huge and will continue to be felt for years to come. And like pretty much every other sector, the property market here in Australia is changing in response to the crisis.

One of the biggest shifts we are starting to see – and which I believe is going to continue for the foreseeable future – is a growing preference amongst buyers for larger dwellings with outdoor space rather than apartments.

This change won’t just play out amongst owner occupiers, but also for investors as they seek to adjust their investment strategies to reflect the changing preferences of tenants.

Whilst the data on this shift is only just starting to emerge, there are four key insights that convince me this has the potential to be a deep and long-lasting structural pivot in the Australian property market.

  • People will want larger dwellings as they are spending more time at home and will be happy to live further from the city as they spend less time commuting
  • Health pandemics are increasing in frequency and may become our new normal
  • Australian millennials will enter the family formation zone over the coming 10 years creating more demand for larger houses

Traditional models of property investment that focus on inner city areas may shift to suburban strategies

Insight 1: People want more space as they’re spending more time at home

This one is a no brainer. With people spending more time at home, for both work and school, new value is being placed on space. According to research from Roy Morgan, 32% of working Australians – or more than 4.3 million people – have been working from home during the COVID-19 shut downs[1].

All of a sudden people are spending a lot of time in their homes, living, working and studying with their partners, children or house-mates. Against this backdrop, it’s only natural that people might start seeking homes with a little more space to offer.

Interestingly, recent keyword search data from realestate.com.au shows a big jump in demand for property features that support working from home. For example, there was a 41% increase in people searching for ‘outdoor space’, a 37% increase in demand for a ‘home gym’, followed by ‘balconies’ (up 36%) and ‘studies’ (up 31%)[1].

Insight 2: People can live further from the CBD as they’re commuting less

Our work drives a lot of our decisions in life. Before COVID-19, employers largely expected staff to be in the office which meant people wanted to be closer to the city and, as a result, were happy to live in smaller accommodation.

But, with many employers encouraging their staff to work from home due to COVID – and with growing acceptance that this shift may be here to stay – people are realising that physical proximity to a workplace is less important than it used to be.

All of a sudden, life in a larger home in the suburbs is more appealing. It’s also more affordable than trying to buy a bigger house close to the city, because you get more house for the same price. That means more space for the family to work, study and play together and fewer trips commuting into the office.

The shift to suburban living is supported by comments in an article by the ABC earlier in the year by Julian Bolleter, co-director of the Australian Urban Design Research Centre, who said he was anticipating a shift back to suburban living. “I think from this will emerge a greater appreciation of suburban living,” he said[2].

One of the other reasons I think outer suburbs and also regional areas will grow in appeal with buyers is the lower density and larger, open community spaces. In the wake of a global health pandemic, there is something to be said for less people and more fresh air.

Insight 3: People will start to accept health pandemics as our new normal

If COVID-19 were a temporary bump in the way we live our lives, it would be overblown to suggest that property buying habits are going to fundamentally change. It would be reasonable to assume that people would revert back to previous preferences once a vaccine is found and the virus brought under control.

But data analysis reveals that COVID-19 is part of a growing trend in global health pandemics. As the chart below, compiled by Bernard Salt from the Demographics Group, reveals there has been an increasing rate of health pandemics over the past 20 years with SARS, Swine flu, MERS, Ebola and now COVID-19 causing their fair share of chaos and anguish.

This is not a black swan moment. With the world’s increasing population and high volume of international flights, we need to get used to more airborne related disease. It stands to reason that as people begin to understand and accept this fact, it will continue to drive the preference for larger dwellings further from built-up urban areas.

Insight 4: Australian millennials are getting ready to start families

As all of this is happening, there is also a big change about to take place in Australia from a demographic point of view. Right now in 2020, the largest age group in our population are those in their late 20s and early 30s. Over the next decade, these millennials are going to be moving into what’s called ‘family formation’ as they partner up, settle down and start to have kids.

Like every generation before them, the shift into parenthood and the family stage of life is often accompanied by a desire to live in a larger home with outdoor space. I think this is a big trend that is going to add further fuel to the shift away from inner city apartments.

This natural change in demand for houses over apartments will be compounded by the recent experience of millennials who have lived through COVID lockdown. Having witnessed how their friends, siblings and co-workers with children have fared through the crisis, they may start to see suburban houses with backyards away from the congested city in a new and much more appealing light.

The fallout for property investors

To think that we can continue to invest with the same principles in place does not recognise the gravity or permanency of this changing landscape and the adjustments taking place in the minds of renters and buyers alike.

Historically, many investors have favoured the strategy of buying apartments in inner city or urban areas close to public transports links. And, for the most part, this strategy has been a very successful one as the demand for these locations has exceeded that of suburban locations.

But, in my opinion, the shifts being brought about by COVID-19 will not just affect home owners. It is reasonable to assume that renters will also favour larger houses further from the CBD.

Does this mean that property investors should consider detached three or four bedroom houses with backyards in areas offering more space and outdoor facilities? I think so. It is of course too early to tell for certain, but I believe astute investors will benefit from pondering this closely as they consider their next property purchase.

Sources

  1. http://www.roymorgan.com/findings/8451-roy-morgan-working-from-home-june-2020-202006290638
  2. https://www.realestate.com.au/news/the-home-buyer-must-haves-post-covid-19/
  3. https://www.abc.net.au/news/2020-04-11/how-coronavirus-could-forever-change-our-cities-and-suburbs/12137122
  4. Bernard Salt from the Demographics Group

 

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