UPDATE | Crossing the Bridge to 2021 & Beyond - Mosaic ...
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UPDATE | Crossing the
Bridge to 2021 & Beyond
Brook Monahan
Founder & Managing DIrector
Mosaic Property Group
May 5 2020
A month ago, I released an extensive and comprehensive report
outlining Mosaic’s collective views of the COVID-19 crisis and
the likely longer-term impacts on the property sector. This report
Crossing the Bridge to 2021 and Beyond – Rebounding
from COVID 19 Uncertainty took a broadly optimistic view,
laying out critical predictions based on historical and current
data and trends, along with anecdotal observations.
With the virus now under control in Australia and shutdown
measures starting to ease, many people have recently reached So where are we now, in our
out to ask whether my views from a month ago have altered.
Understandably, some thought the materials and views
opinion?
presented were overly optimistic at the time of writing, especially I think Australians can all be so proud of where we are now.
given the flood of negativity and doom we were being fed day in, We have worked together to rapidly and convincingly flatten
day out. That said, one vital lesson this experience has taught is the curve by following the social distancing measures and
how crucial it is to look beyond the headlines and “group think”, recommendations laid out by the National Cabinet.
trying to remove as much emotion as possible, and build a
pragmatic, carefully considered, and rational perspective based As a nation, we are leading the world on a testing per capita
on facts. basis. We are also at the front of the pack in developing a vaccine
to eradicate the virus. We should all feel fortunate to be in the
Of course, this is difficult when so much emotion drives the position we are in. As a country, there is no doubt that Australia is
narrative, but it is the facts that always present the real story. punching above its weight on a global leadership basis.
I want to firstly comment on the materials we have shared
You would recall our initial Report predicted the virus would peak
over the last six weeks. We do not for one moment, deem our
in early to mid-April, with a substantial flattening of the curve
thoughts superior to others. Nor do we believe we have an
remaining consistently under control during May. We forecast
innate ability to predict the future and the impact on property
shutdown measures to start easing in early June, with the
markets accurately. Further, we are certainly not blind to the
community mostly back to business under a “new normal” before
risks the current crisis poses to the economy, our industry and
the end of the third quarter of 2020.
business. We frame our opinions and views inside the prism of
our own bias, just like everyone else.
We believed pausing the economy for six months, as flagged by
Government, would be financially and socially catastrophic for the
This is why we do our utmost to test and challenge our
country. We were of the firm view that the proposed six-month
baseline views, ensuring we offer a well-researched,
national lockdown touted at the time by National Cabinet was
balanced and thoroughly challenged perspective about
never a realistic objective.
the facts we see in front of us.
Instead, we felt a one to two-month lockdown with ongoing
There is ample material that follows a very predictable path of
evaluation was a more reasonable, balanced approach to bring
socially fueled over-dramatisation. Those that can look beyond
the crisis under control. This was always dependent, of course,
this and keep a steady head are better placed to make sound
on being able to quickly control the spread and impact of the
decisions during the current uncertainty. It will also put them in
virus in the short-term, which Australia has been very successful
a much stronger position to prosper out the other side of this
in doing.
short-term crisis.
Looking at where we are now, if anything, we were The Federal Government is looking to implement
possibly slightly conservative with our initial outlook at the “Operation Kickstart” in the coming weeks to bring
peak of the crisis here in Australia. the economy out of hibernation well ahead of the six-
month timeframe initially set. Such a move will play a
For context, at the time we released our Report at the beginning fundamental role in reducing the financial exposure of lower-
of April, the virus caseload had increased nationally by 1,550 wage households, those living off JobKeeper payments, or those
in the preceding eight days – an ominous 36% increase over accruing mortgage arrears.
this short time frame. The outlook was grim, and the human toll
devastating. While the Federal Government also looks likely to target
tax system reform, we believe bringing forward major
Comparatively, over the seven days to Sunday May 3, we saw infrastructure and construction projects would create
just 94 cases reported across the country (six of which were in critically required jobs to accelerate economic momentum
Queensland). The number of active cases has now dipped below to super-charge recovery efforts. After all, the property
900 (or 13% of total cases) for the first time since mid-March. and construction sector is one of the largest employers in the
A remarkable turnaround in such a short timeframe (source: country. That is why it was declared an “essential” industry
covid19data.com.au). throughout the crisis – and why it will play a pivotal role in
steering us out of it.
Economically we are also standing head and shoulders above
other countries, thanks to the extensive stimulus packages
introduced by the Federal and State Governments. The RBA and What is the outlook for property?
the banking sector’s steps have also gone a long way to ease
financial pain and anxiety by ensuring the availability of funding Though some commentators continue to herald economic doom
and leniency on mortgages during a never-before-seen period of and gloom, I am still steadfastly optimistic about the long-term
economic lockdown and related job losses. upside, particularly for the property sector, and South East
Queensland.
In the Report, I noted a clear narrative shift by the Prime Minister
and industry leaders that the quest to preserving livelihoods The fundamentals remain strong. Remember that when we
was just as vital as the obvious need to save lives. It has been a entered the crisis, South East Queensland was on an uptick
significant driver in steering States towards the more balanced in the cycle. For Mosaic, late 2019 to the end of March
recommendations laid out by the National Cabinet. This 2020 were record-breaking in terms of volume of enquiry,
momentum is growing daily at present as some States look to contracts issued, and contracts unconditional. This was
jumpstart their economies as soon as possible in the days and seen right across the core SEQ markets where we have a strong
weeks ahead. footprint and pipeline of ‘A-grade’ residential projects.
Where to from here? Yes, the crisis naturally resulted in leads slowing down across
the board from mid-March. Still, by mid-April, they started to
As the Government starts to ease restrictions, life would appear pick up again, albeit off a low base. With the pandemic flow-on
to be “normalising” much sooner than anticipated. That said, delaying or shelving many projects, astute investors realise the
this “new normal” means we must maintain a careful approach acute impact on supply in a market already starved of premium-
to social distancing to avoid a second wave of the virus and to grade residential property.
ensure we can continue on the vital path of kick-starting the This flight to quality has been evidenced by the substantial
economic recovery as quickly as possible. After all, who knows
pick up in enquiry and transactions in the last fortnight
how long we may have to live with the virus given there is still no
alone.
vaccine available yet.
CORELOGIC HOME VALUE INDEX - ANNUAL GROWTH RATE
We still hold the
view that we will
enter a steady
period of price
growth from late
2021 through to
2024.
Black Monday Australia’s Asian ‘Dot-com’ Global China 30% lending
stock market early 90s financial bubble Financial steel glut cap on IO
crash recession crisis burst Crisis home loans
Respected commentators alike are referring to the market This is not, at all, the same scenario playing out around
momentum before the crisis now carrying us through to a sharp the world today. Australia’s banks are in a much stronger
rebound, with capital gains over this cycle of up to 30 per position than ten years ago, hence their ability to offer lengthy
cent. Corelogic’s latest research shows national dwelling price mortgage holidays and willingness to continue lending to their
growth has remained in positive territory right through the crisis. customers. The tighter lending standards introduced and
During March, home values increased across every capital city further reined in with the banking Royal Commission in 2018,
except for Hobart. In fact, the median dwelling value in Brisbane substantially curtailed a lot of further real estate speculation
rose to a record high of $506,553. during our most recent cycle (particularly so in South East
Queensland). Such behaviour by banks has never preceded a
Even more impressive, the Corelogic Home Values Index shows real estate crash at any point in history.
positive price growth of 0.4% in the 28 days ending April 21.
Rentals have also seen growth, recording a 0.3% increase
While a sharp fall in sentiment, employment, and overseas
nationally for March, taking quarterly growth to 1.2%.
migration will create headwinds for Australian real estate in the
immediate term (most notably for Sydney and Melbourne), these
These are incredibly positive and encouraging figures. That said,
inhibitors to growth will eventually subside.
as I noted in the Report, history has shown that despite
global crises such as the GFC, 1991 recession, 1987 stock
market crash and outbreaks of illness such as SARS, the When they do, South East Queensland will still boast its powerful
Australian property market remained resilient. base fundamentals. Cheap capital will be easily accessible in a
market starved of quality residential property, and at a time when
Things might have been very different if we were entering the interstate migration is expected to grow at an even greater pace.
crisis in a downturn. But as Corelogic’s Director of Research, This will create unprecedented demand for ‘A-grade’ real
Tim Lawless, observes “Brisbane housing values were estate.
well into a growth phase prior to COVID-19”. The underlying
This does not mean that some sectors of the residential property
market fundamentals driving this resurgence remain in place.
market will not experience some price declines in the next 6-12
Infrastructure investment in the region is at record levels and only
months and we still hold the view as outlined in our initial Report
likely to increase through additional government expenditure to
that certain property types in certain areas could easily see price
pull forward key projects to underpin the jobs market. Interest
declines of up to 10%.
rates are at an all-time low and unlikely to increase anytime
soon. That said, we suspect these falls will not be widespread and
more concentred in areas of oversupply, particulary areas of
Reserve Bank Governor, Phillip Lowe also recently offered supply that are not as directly supported by local demand from
that, if we continue to contain the virus, the economy could owner occupiers (i.e. investor grade housing), with certain
be expected to grow very strongly next year via a V-shaped areas of Sydney and Melbourne most at risk. This is particularly
recovery. exacerbated in the short to medium term until overseas
migration numbers return to previous annual intake numbers,
Why won’t real estate prices or possibly worse if they remain materially below the annual net
migration numbers from pre-crisis. Certain parts of Sydney and
fall dramatically in the next 12
months?
In history, a real estate crash is always preceded by rising
interest rates, a feeling of euphoric wealth creation and a lead-up
period of lax lending policies. Think of zero deposit loans, ‘low
doc’ borrowers, and excessive speculative investment in real
estate leading up to the GFC.
It is irresponsible lending on a large scale at a time of
unprecedented global growth and optimism, that typically results
in excessive speculation that eventually forces central banks to
increase interest rates (often quickly) to slow the inflation caused
by the boom.
It also leads to over-leveraged households that suddenly find
they may no longer be able to service the debt they hold. A flood
of listings and eventual foreclosures often hit the market at this
point, as we saw in America and many parts of Europe during
the GFC (and to a lesser extent Australia).on our international borders. Interestingly, it took three winters for
the Spanish Flu to be brought under control, firstly through social
Respected commentators alike are distancing and ultimately through herd immunity.
referring to the market momentum Therefore, we must continue to look beyond merely relying on a
vaccine before we chart a way forward and back to prosperity.
before the crisis now carrying us
In saying this, we are in very different times to 1918/19 when the
through to a sharp rebound, with Spanish Flu first hit, with medical advancement driving our ability
to respond and find a cure much more quickly.
capital gains over this cycle of up to
As a country, we have shown we can contain COVID. We have
30%.
learned that social distancing, heavily controlled travel and
protecting our most vulnerable are crucial to doing this. Most
importantly, we can manage the impacts quickly with much less
Melbourne in particular where overseas migrants are more likely devastating loss of lives and livelihoods than first anticipated.
to purchase and settle could be most at risk in the next 12-24
months.
Summary
By mid to late-2021, when we are largely through the crisis,
infrastructure delivery is fast-tracked, jobs rebound across most Mosaic already sees the property market starting to ramp up
sectors, and the virus is, hopefully, all but eradicated, we will again in our own business. We stand by our prediction that
start to see improvement in asset values. And none more so we would rebound, and rebound strongly, in our core
than those underpinned by land, especially in highly desirable South East Queensland markets. This is directly off the back
infill locations, close to infrastructure, water (in coastal markets), of the strong fundamentals touched on above (and covered
jobs, schools, entertainment, and lifestyle amenity. more extensively in the original Report).
High-quality residential property in high-demand areas For us, it continues to be business as usual. Most of our staff
with low current and future supply, delivered by trusted have chosen to return to the office (while still adhering to social
brands with a strong track record, will hold up very well distancing and us implementing increased hygiene measures).
in the short-term and lead price growth when the market We are working hard to deliver our robust pipeline of premium
recovers. properties throughout SEQ and capitalise on the robust and
favourable market conditions predicted for late 2021 and
This has been the case for every crisis and cycle in the past 100 beyond.
years. We expect this current crisis is laying the foundation for
an even stronger real estate cycle ahead. On this note, we still Of course, we will continue to monitor the virus and its impacts
hold the view that we will enter a steady period of price daily because the journey is not over yet. In many ways, the fear
growth from late 2021 through to 2024. is dissipating, and anxiety easing as some of our social freedoms
are returned, and we move to the next stage of dealing with this
Keep a balanced perspective crisis. This is helping many more people view our ever-evolving
situation more clearly and calmly.
Of course, the health battle is still far from over. The curve may
Wishing you and your families good health and safety, along with
have flattened, but there is still no vaccine or medical cure…yet.
a highly enjoyable and eagerly awaited return to many of the
Encouragingly, it would seem the substantial injection of funds
simple pleasures in our lives around work, school, community
and unprecedented globally coordinated effort into finding a
sport and social connection. I look forward to continuing the
“cure” is expediting real contenders. For one, Oxford University’s
conversation and providing you with more information on the
Jenner Institute is preparing for mass clinical trials while at home
market and its performance as we move closer to “crossing the
here in Australia, the University of Queensland is working on a
bridge’.
vaccine that could see human trials start as early as July, with a
possible vaccine ready in September. In the meantime, continue to look beyond the headlines and
keep that all-important balanced perspective.
These are just two of a significant number of medical research
organisations around the world racing to find the answer with
a further five advanced vaccine hopefuls already commencing
human trials. There are also early indications of anti-viral drugs
substantially reducing the impacts and severity of the virus in
infected patients.
Brook Monahan
That said, we should also prepare for the fact it may take a long Founder & Managing Director
time to find a vaccine, if ever. In this case, we must continue to Mosaic Property Group
adapt, manage, and cope with the virus as best as possible,
with continued social distancing and strict controls, particularlyYou can also read
