2021: The Unexpected Is Expected

OPINION

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For savvy investors, including property and mortgage investors, the new year traditionally starts by reading bold economic and property predictions penned by favourite fund managers and economists attempting to predict what lies ahead.

If 2020 taught us anything, it was to expect the unexpected. And while 2021 will be a continuation of the emotional roller coaster ride experienced the past 12 months, the difference is that the unexpected is now the expected.

It took me over a decade to truly appreciate and understand a quote from an old economics professor: “Economic forecasting is like trying to predict tomorrow’s weather whilst taking into account how people will collectively feel on that day”. There’s a big difference between economic forecasting and commentating, and those who are bold enough to forecast are (sadly) rarely right.

Despite uncertainty, Australia continues to earn its title as the The Lucky Country via leading virus control and a stable economy. The IMF’s latest predictions claim our economy will be powering towards 5.2% GDP growth this year and 4.1% GDP in 2022, much to the envy for the rest of the world. Despite what can be seen as one of the most significant trade wars in Australia’s history, the ongoing stoush with China, our aggregate exports are steadily growing, predominately off the back of mining.

Remarkably, there’s been no government support for continuing immigration during the pandemic — which traditionally is a significant economic driver— and my mind truly boggles as to how this is playing out.

When it comes to the Australian property market, we need to remember it was less than eight months ago that the general consensus of most respected economists and property commentators was that property would fall in excess of 10% – 20%. Some banks even predicted declines of up to 30%. Today, the RBA believes house values could increase by up to 30% over the next three years (so much for expert economic commentators).

Despite the overall positive property euphoria, we must not become complacent with the apparent advent of continued unabated growth and unwittingly underestimate the ‘iceberg effect’ – because we still don’t know what else could be lurking below the surface.

Iceberg Effect

No one can be quite sure of the quantum of zombie companies still feeding off the Government’s life support which is due to abruptly end this March. Moreover, once the bank moratorium is over, banks will surely begin recovering on delinquent loans. And we are yet to see the full ramifications of both of these unfolding events.

We believe that the possible negative aspects of the aforementioned events have been significantly mitigated due to the Government’s generous support measures and swift actions enabling us to enjoy our current and favourable set of economic circumstances.

Prime Minister Scott Morrison last week announced that 90% of the jobs lost during the darkest hour of the pandemic have been clawed back — thus allowing our free markets to take over the economic recovery without further government support. Interestingly, we are now experiencing a tsunami of capital flow through our financial markets.

Despite current rhetoric, as a commercial mortgage fund manager, we need to look deeper than the high-level property headlines. For commercial mortgage funds managers to engage longterm success, they need to be consistent and disciplined in their risk and credit assessments.This ensures maximisation of capital preservation can be maintained and our investors (including SMSF trustees) can rely upon the consistency of regular stable monthly income distributions.

And so to some quick fire market insights …

Regional Property

Despite a large spike in local migration from Sydney and Melbourne to regional areas, our view has not changed on the risk in lending in regional areas. Just as quickly as the prices and demand have gone up, they can as easily revert due to an exodus of people back to the metropo areas once the COVID-19 crisis abates and the physiological desire to work face-to-face, rather than through Zoom, may once again prevail. The second reason is linked to regional areas having lower restrictions on creating new housing supply. In regional areas, undersupply of properties could turn to oversupply in a relatively short period of time as it doesn’t have the same land constrains as the metro areas of Sydney, Melbourne and Brisbane.

Commercial and Industrial

According to this week’s data, the inner-city vacancy rates are 8.6% — essentially double last quarter’s figures with the delivery of further supply expected in 2021. This was not unexpected due to the additional restrictions on both businesses and landlords as well as the weakening, but still prevailing, negative stigma of working in the city. To add insult to injury, many multi-national corporations have loosened work from home policies and are slowly giving up commercial space in the city. Despite this negative trend, we remain optimistic that this will reverse over time, however as it might take years, investors should be prudent on the gearing of investments secured against this asset class.

House v Unit

Most of the positive property headlines focus on houses prices rather than the entire residential property market, which prompts a question about price trends for units? Corelogic recently published that the difference between house and unit prices has never been wider with this gap only continuing to expand.

In saying this, there are a number of contributing factors to consider:

Most units are concentrated in close proximity to the city and highly populated areas, which proved to be less desirable during COVID-19.

Investors make up the largest segment of unit purchases as they favour apartments over houses, due to ease of management and cost. Property Investment activity is at one of the lowest levels for over 10 years.

Due to Covid-19 we’re short approximately 500,000 people who are normally short to medium term renters — a direct correlation to the lack of overseas students and tourists.

Owner-occupiers are the predominate buyers in the current market and their requirements are different to those of the investor set, that is, they want larger apartments. Due to the lack of supply of this specific product, owner-occupier buyers are turning to houses as an alternative.

The Federal Government’s current $2billion Home Builder scheme is artificially increasing demand for houses through generous incentives on offer, the take up of which has far exceeded expectations.

Despite all the odds, including decreasing demand, unit prices remain resilient. We believe that unit prices, which normally lag behind house prices, will catch up in the long term and eventually the gap will shorten.

Mortgage Investment Opportunity

Msquared Capital has identified a number of emerging gaps in the commercial lending market which has enabled us to introduce investors to unique opportunities.

Business owners who’ve been temporally impacted by COVID-19 are now requiring commercial funding and banks have been slow to adapt and are still trying to wrap their heads around how to provide businesses with the right access to cashflow during COVID-19. These business operators typically have quality real estate to offer as security and this creates a specific opportunity for our investors right now.

With the RBA recently making a strong public commitment that interest rates will remain unchanged until 2024, both business and consumer confidence around obtaining appropriate finance is high. On the flip side, those investors who have historically relied upon bank term deposits to provide them with a good regular income stream are losing out with TD rates hovering around a meagre 0.75%pa.. Accordingly, it’s a great time for those investors to look at alternate investments, including a registered first mortgage loan to a small business borrower (with target rates of return currently between 6.50%p.a. and 8.00% p.a).

Paul Miron has more than 20 years experience in banking and commercial finance. After rising to senior positions for various Big Four banks, he started his own financial services business in 2004.

msqcapital.com

The big wedding can wait. Couples are deciding they would rather take the plunge into homeownership.

In reshuffling the traditional order of adult milestones, some couples may decide not to marry at all, while others say they are willing to delay a wedding. Buying a home is as much, if not more of a commitment, they reason. It helps them build financial stability when the housing market is historically unaffordable.

In 2023, about 555,000 unmarried couples said that they had bought their home in the previous year, according to a Wall Street Journal analysis of Census Bureau data. That is up 46% from 10 years earlier, when just under 381,000 couples did the same.

Unmarried couples amounted to more than 11% of all U.S. home sales. The percentage has climbed steadily over the past two decades—a period in which marriage rates have fallen. These couples make up triple the share of the housing market that they did in the mid-1980s, according to the National Association of Realtors.

To make it work, couples must look past the significant risk that the relationship could blow up, or something could happen to one partner. Without a marriage certificate, living situations and finances are more likely to fall into limbo, attorneys say.

Mark White, 59 years old, and Sheila Davidson, 62, bought a lakeside townhouse together in Newport News, Va., in 2021. But only her name is on the deed. He sometimes worries about what would happen to the house if something happened to her. They have told their children that he should inherit the property, but don’t have formal documentation.

“We need to get him on the deed at some point,” Davidson said.

White and Davidson both had previous marriages, and decided they don’t want to do it again. They also believe tying the knot would affect their retirement benefits and tax brackets.

Financial foundation

Couples that forgo or postpone marriage say they are giving priority to a financial foundation over a legal one. The median homeowner had nearly $400,000 in wealth in 2022, compared with roughly $10,000 for renters, according to the Federal Reserve’s Survey of Consumer Finances.

Even couples that get married first are often focused on the house. Many engaged couples ask for down-payment help in lieu of traditional wedding gifts.

“A mortgage feels like a more concrete step toward their future together than a wedding,” said Emily Luk, co-founder of Plenty, a financial website for couples.

Elise Dixon and Nick Blue, both 29, watched last year as the Fed lifted rates, ostensibly pushing up the monthly costs on a mortgage. The couple, together for four years, decided to use $80,000 of their combined savings, including an unexpected inheritance she received from her grandfather, to buy a split-level condo in Washington, D.C.

“Buying a house is actually a bigger commitment than an engagement,” Dixon said.

They did that, too, getting engaged eight months after their April 2023 closing date. They are planning a small ceremony on the Maryland waterfront next year with around 75 guests, which they expect to cost less than they spent on the home’s down payment and closing costs.

The ages at which people buy homes and enter marriages have both been trending upward. The median age of first marriage for men is 30.2, and for women, 28.6, according to the Census Bureau. That is up from 29.3 and 27.0 a decade earlier. The National Association of Realtors reported this year that the median age of first-time buyers was 38, up from 31 in 2014.

Legal protections

Family lawyers—and parents—sometimes suggest protections in case the unmarried couple breaks up. A prenup-like cohabitation agreement spells out who keeps the house, and how to divide the financial obligations. Without the divorce process, a split can be even messier, legal advisers say.

Family law attorneys say more unmarried people are calling for legal advice, but often balk at planning for a potential split, along with the cost of drawing up such agreements, which can range from $1,000 to $3,000, according to attorney-matching service Legal Match.

Dixon, the Washington condo buyer, said she brushed off her mother’s suggestion that she draft an agreement with Blue detailing how much she invested, figuring that their mutual trust and equal contributions made it unnecessary. (They are planning to get a prenup when they wed, she said.)

There are a lot of questions couples don’t often think about, such as whether one owner has the option to buy the other out, and how quickly they need to identify a real-estate agent if they decide to sell, said Ryan Malet, a real-estate lawyer in the D.C. region.

The legal risks often don’t deter young home buyers.

Peyton Kolb, 26, and her fiancé figured that a 150-person wedding would cost $200,000 or more. Instead, they bought a three-bedroom near Tampa with a down payment of less than $50,000.

“We could spend it all on one day, or we could invest in something that would build equity and give us space to grow,” said Kolb, who works in new-home sales.

Owning a place where guests could sleep in an extra bedroom, instead of on the couch in their old rental, “really solidified us starting our lives together,” Kolb said. Their wedding is set for next May.

Homes and weddings have both gotten more expensive, but there are signs that home prices are rising faster. From 2019 to 2023, the median sales price for existing single-family homes rose by 44%, according to the National Association of Realtors. The average cost of a wedding increased 25% over that time, according to annual survey data from The Knot.

Rent versus buy

Roughly three quarters of couples move in together before marriage, and may already be considering the trade-offs between buying and renting. The cost of both has risen sharply over the past few years, but rent rises regularly while buying with a fixed-rate mortgage caps at least some of the costs.

An $800 rent hike prompted Sonali Prabhu and Ryan Willis, both 27, to look at buying. They were already paying $3,200 in monthly rent on their two-bedroom Austin, Texas, apartment, and felt they had outgrown it while working from home.

In October, they closed on a $425,000 three-bed, three-bath house. Their mortgage payment is $200 more than their rent would have been, but they have more space. They split the down payment and she paid about $50,000 for some renovations.

Her dad’s one request was that the house face east for good fortune, she said. Both parents are eagerly awaiting an engagement.

“We’re very solid right now,” said Prabhu, who plans to get married in 2026. “The marriage will come when it comes.”