David Chu, Head of International Business, discusses the current state of the property market in Australia following reports of an expected fall of up to 32%.
David Chu, Head of International Business, recently joined Thomas Sung (host) on the SBS Radio Cantonese Program to discuss the current state of the property market in Australia following reports of an expected fall of up to 32%. Listen to the podcast episode in Cantonese or read the transcript of his interview in English below.
Host: After looking at the global securities market, let's get back to the situation in Australia. The Commonwealth Bank said in its recent announcement that Australia's property market may fall up to 32%. The news gave many a terrible fright on its release. Later, many analysts stepped out to provide their analyses with the belief that the Commonwealth Bank's forecast seemed too conservative. What is the situation? We have David Chu, Head of International Business of ShineWing Australia, here today to share his opinions.
David: When the Commonwealth Bank mentioned real estate in the release of their annual results, they estimated that it will fall by 32%. But if you look closely, you will find that they were mentioning 32% from March 2020 to March 2023. That is, it will fall by 32% in three years, not 32% in one year. It is definitely startling if you just see the headline.
Host: On what basis did they make such a guess?
David: They said if the pandemic led to the economic recession and the recession continues for a long time, that is what will happen. Nevertheless, be careful while listening, the expression they used is "prolonged crisis", which was referring to what it will be like if the current situation continues. Their point of view is assuming the economic growth these several years, for example, in 2020 to be -6%, then an increase of 6% in 2021, with the unemployment rate of 8.25% in 2020, which will stay at 8% in 2023. They said if that is the case, the property market will fall by 32%. Some economic experts commented that this might be “the worst case scenario”.
Host: In that context, what would be a more balanced estimate? How will the property market develop? Will there be support?
David: Of course there are other economic experts who agreed that the Commonwealth Bank's plan should be the worst case scenario. Some economic experts estimate the economic growth in 2020 to be a bit worse, -7.1%, but in 2021 it may come back with a rise of 0.3%. The unemployment rate will be 9% in 2020, 8.5% in 2021, and for 2022 and 2023 depending on how things evolve. With this in mind, home prices may only fall by 11% from 2020 to 2023. Some experts also said that as an investment tool, buying a home and leasing it out for rent is not really that bad, which gives at least 3-4% return, better than putting the money in the bank, which yields at most 1% interest. After all, the RBA interest rate is only 0.25%. Relatively speaking, the return on real estate investment should be good enough to support home prices, so some economic experts have a more optimistic view. Nonetheless, experts do agree that housing prices will fall, and it is just about how much it falls by.
Host: I know that experts have different opinions on home prices. What do they say?
David: Some experts believe that if the pandemic caused the economic recession, and if growth can be resumed as soon as possible, home prices should not fall by as much as 30% in three years. Experts from some other Big 4 banks said that only a 10% drop on average might take place over the next 12 months. UBS's estimate is a drop by 10-20%, and Morgan Stanley believes it will drop by about 15%. AMP Capital is relatively pessimistic, saying that it may drop by 25%. Of course, these are all estimates by various institutions at such an early stage. As for whether it will fall by 32% in three years, this is of course based on some of the more conservative assumptions just mentioned.
Host: So during this pandemic, I know that some tenants have found themselves in difficulties. One report said that close to 10% of the tenants across the country asked landlords to reduce rents. I know that rent reduction has been voiced and demanded overseas, such as Hong Kong. I heard someone has made it happen. Is this common in Australia?
David: In fact, this is quite common in Australia, and it may have even been requested by more people in Australia than in Hong Kong. The main reason is the introduction of some regulations in Australia. Firstly, landlords of both residential and commercial buildings can’t evict tenants for these six months, because if you lose your job, it is naturally difficult to repay your mortgage and rent. On the payment of rent, some leases clearly stipulate that after two or three months of default in rent payment, the landlord can request termination of the lease and demand vacation of the property. The same is true for commercial properties. Therefore, the government issued a rule that tenants should not be evicted for six months. Second, if you have difficulty repaying your mortgage, you can also apply to the bank for deferring your repayment. On loans, the Commonwealth Bank also mentioned in their release of annual results last time that they received 140,000 applications on home mortgages and 70,000 applications on commercial loans. On personal loans, like credit cards, the Commonwealth Bank received 25,000 applications. The general public has also made requests to reduce their burden. Some of my friends lease out their shops and tenants are asking them for rent reductions. It depends on how their negotiations with the owners go. Some just don’t want to waste a large amount of time negotiating and go ahead to halve the rent; some say that the rent can be reduced, but in exchange for an extended lease, so that the loss will not be significant. So everyone deals with it their own way. Getting back to your question whether this is common, it is indeed more common in Australia than in other countries, and the situation may be much better than that of the United States.
Host: We also expect these measures to give some relief to the tenants who are now hit by the pandemic. We are very grateful to Mr. David Chu, Head of International Business of ShineWing Australia, for taking the time out of his busy schedule to share with us his analysis of whether proper prices in Australia will fall by 32% under this pandemic. Thank you!
David: Thank you Thomas! Thanks everybody.
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