Bargain hunters urged to weigh risks of distressed sales

Mortgage holidays are set to end, government support is being scaled down and analysts are saying distressed sales are likely to rise. Are the coming months a good time to try to find a bargain, or are there risks in chasing an under-market value acquisition in the post-COVID economy?

Distressed investor outside house with For Sale sign
Analysts warn many investors may find themselves forced to sell properties if they can't service their debts. Photo: Shutterstock (Image source:

Mortgage holidays are set to end, government support is being scaled down and analysts are saying distressed sales are likely to rise. Are the coming months a good time to try to find a bargain, or are there risks in chasing an under-market value acquisition in the post-COVID economy?

For seasoned property investors, acquiring a property for less than what it’s worth is a tantalising and sought after prospect.

Many scour listings for key terms such as ‘must sell’, ‘quick sale’, ‘forced property sale’ or ‘bank says sell’ to set themselves up for fast gains once the market turns.

But in the post-coronavirus reality of 2020, seeking out a vendor in distress and buying under market value may carry more risk than the strategy has historically.

Two key dates loom for property markets across Australia, with the scaling back of JobKeeper and JobSeeker stimulus at the end of this month and the end of mortgage deferrals in March to have wide-ranging impacts.

CoreLogic’s head of research, Eliza Owen, says the nature of the COVID-19 crisis and its associated downturn made it likely that fewer borrowers would be able to service mortgage repayments by next year. 

Data from the Australian Prudential Regulation Authority showed that $195 billion worth of home loans had been granted temporary repayment deferrals at June 30, equating to 11 per cent of all housing loans in Australia.

Around half of the 900,000 loans deferred over the pandemic will be assessed in coming weeks, with 260,000 of those mortgages due to be evaluated either by the end of September or October.

Options to be provided by banks include resuming repayments, restructuring or varying loans, a four-month deferral extension or tailored assistance for those unable to repay their loans long term.

Commonwealth Bank of Australia chief executive Matt Comyn told the House Standing Committee on Economics this month that investors should consider selling their properties if they are facing challenges maintaining loan payments.

Mr Comyn said just 28 per cent of the bank’s deferred home loans were investor loans, with investment lending hitting its lowest point since 2004.

He said CBA would be more willing to work with owner-occupiers battling to service mortgages than investors, however, with many still holding positive equity despite recent price declines.

Ms Owen said if borrowers were found to be unable to service their loans, the result would be more stock coming to market and downwards pressure of prices, potentially accelerating the decline in home values being experienced in Sydney and Melbourne in particular.

“There are pockets of each of the capital cities that are susceptible to an increase in distressed sales, but it comes back to the way that COVID-19 has affected the housing market, which is mainly the rental market and the high concentration investor market,” Ms Owen told Australian Property Investor Magazine.

“For example in job losses, they have been about 5 per cent across the country, but the ABS payroll data tells us that job losses across accommodation and food services has been more like 20 per cent from the start of the pandemic. 

“People working in those sectors are more likely to be renting, they are more likely to be relying on payments like JobKeeper and JobSeeker, and so once those payments start to taper off, it will affect investor rent returns and it may cause more investors to reconsider whether they are going to hold their property.”

Ms Owen said high levels of apartments and units under construction in Sydney and Melbourne could also potentially create more distress through settlement risk.

“If valuations at settlement will come lower than the contract price for some of those inner city unit markets, that could lead to settlement issues and it could lead to investors looking to sell,” Ms Owen said.

“With the mortgage repayment deferral policies in place, people who have found themselves in a more distressed housing situation may not have had to sell, but they might be forced to make that decision come March when those policies wind down.”

So with the likelihood of many motivated sellers bringing properties to market in coming months, should investors with secure incomes take the opportunity to buy?

That depends, Ms Owen said, with the opportunities for a profit-making acquisition not likely to be clear cut due to a mismatch between the types of properties that will come to market, and the types of owner-occupier buyers active in the market.

“When you think about people who might be looking for a ‘quote-unquote’ bargain through the pandemic, the stock that gets really discounted or the stock that is put on market by motivated sellers might not actually be that appealing to the first homebuyers or upsizers and downsizers that we are seeing are more present in the market right now,” Ms Owen said.

“A one-bedroom inner city unit that is designed for an international student might not be the kind of thing that a first homebuyer is looking to purchase.

“So I think because of the nature of the downturn there will probably be a bit of a mismatch between the distressed stock that comes onto the market and the types of buyers that are in the market.”

Ms Owen said it wasn’t all doom and gloom, however, with opportunities for growth emerging in certain cities.

“It’s interesting that in the Canberra market, property values have still risen during the pandemic and are actually currently at a record high,” she said.

“We put that down to things like more owner-occupier demand, more demand from people looking to start a family and buying larger properties, as well as record low mortgage rates.

“Across other parts of the country, like if you look at WA, there is a lot of stimulus available for first homebuyers, particularly in the new builds segment, so there are pockets of the market where prices will still rise despite the global pandemic and despite the shock to global incomes and jobs. 

“I would say the risk and where we will see the bigger price declines that are fairly localised are the inner city markets of Sydney and Melbourne.”

Lockdown fallout

In Melbourne, getting a property to market in the current lockdown climate has become a major challenge, even for the most motivated of sellers.

Private inspections of homes remain on hold until October 26, after Victorian Premier Daniel Andrews extended the strictest COVID-19 restrictions in the country to keep a lid on the state’s outbreak.

Ray White Group managing director Dan White said the decision, which was over and above restrictions placed on many other industry sectors, was hurting some of Melbourne’s most vulnerable sellers.

He said Ray White had been inundated with enquiries from vendors distraught at the prospect of further delays in the marketing and sale of their properties.

“This is a needs based market. Shelter is a basic human need – many people simply need to move for various reasons and do not have the luxury of waiting for restrictions to ease,” Mr White said.

“The financial stress is compounding every day for many of our clients.

“Many of our customers often need to move properties for fundamental reasons – be it illness, divorce or other hardships like unemployment.”

One motivated seller who contacted Mr White is Melbourne-based carpenter Jack Jakupi, who has been forced to seek work in Western Australia after having been out of a job since March.

“I cannot keep the house, it must be sold as the interest is accruing at more than $1,400 per month. I really need it sold as I am not able to make any more payments,” Mr Jakupi said.

“The house is empty, there’s no-one in there, what is the risk?

“I have never been more stressed in my life, the financial strain on my family is enormous.

“I need to sell my house so I can buy something here for my family. I want my family to be all together.”

Recovery zone

CoreLogic’s Ms Owen said she believed the key for a housing market recovery from the coronavirus downturn would ultimately be tied to a labour market recovery.

“That hasn’t always been the case historically, but ultimately with mortgage rates already at record lows, the key to purchasing capacity recovering is going to be a recovery in the labour market,” she said.

"The challenging thing about picking a recovery from COVID is that we’ve now seen that this pandemic doesn’t have a hard end. It is something where you might start opening borders and start opening businesses, and then you might get another spike in cases and have to go back into more stringent restrictions. 

“So for that reason it’s been very difficult to pick a trough and a recovery point for the market. 

“The arrival of a successful vaccine would do a lot not only for economic operations but also consumer confidence. 

“It would make a lot of people more confident about making a big purchasing decision like buying a house and I think it could be really good for a housing market recovery.”

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