How will the fallout from COVID-19 affect our property markets?
It looks like they're going to be shut down.
Currently Australians are living through one of the most significant economic and social upheavals in our history.
Our economy has been massively disrupted and Australians are having to quickly adjust to new ways of living and working as governments urge us to keep our distance, stay at home and stop the spread.
And there is a lot of uncertainty about the future – the future of our health, our economy and our property markets.
No one knows the full economic toll with job and business losses mounting by the day.
And we're not really sure what will happen to the property markets.
However, with most economists accepting that we’re heading for, if not already in, a recession some are wondering if COVID-19 will finally cause our property markets to crash.
They recognise that the property industry is essential to sustaining the economy through this incredibly challenging period.
And it will be a big driver behind the recovery when it comes, so clearly, they’re worried.
While I’m concerned my personal health and the health of our economy, I’m not really worried about the long term health of our property markets.
The RBA and governments are building bridges:
The RBA and Government’s focus is on supporting businesses and households who will suffer major hits to their incomes.
They are building bridges to help us get to the other side.
RBA Governor Phillip Lowe explained: "We are clearly living in extraordinary and challenging times, the coronavirus is first and foremost a very major public health issue, but it’s also become a major economic problem and it’s having deep ramifications for financial systems right around the world."
He reminded us that as our country manages this difficult situation, it’s important that we do not lose sight of the fact that we will come through this.
What about no auctions and open for inspections?
The Prime Minister announced new restrictions on social gatherings meaning that open homes and property auctions are now banned.
However property sales will still continue with ‘expression of interest’ or ‘private sales’, with private inspections arranged by agents.
This will likely lead to a material slowdown in sales, but sales will still continue unless the social distancing restrictions are extended further, which seems likely to be the case.
Rather than significant price drops, I see our property markets going into a period of suspension with both buyers and sellers sitting on the sidelines until the markets reopen and the economy picks up.
Of course there will always be some non-discretionary buyers and sellers who have no choice but to buy, sell or rent.
For example those who just their home and need to buy, or those who just bought a house and need to sell, and those who need to move house due to marriage, a birth, a death or divorce.
Yes…we're going into recession
It now seems that unemployment is likely to rise to double digits in the short-term, and that’s terrible for those who are going to suffer financial hardship.
Unfortunately many Australians will have difficulty paying their mortgage or their rent, but currently the government is looking at ways of assisting tenants or landlords or both.
Last week the Reserve Bank lowered interest rates to 0.25% and has commenced quantitative easing, lowering the 3 year bond yield.
We've also been told by the RBA that interest rates are going to remain low for the next three years, suggesting it will take at least that long to get unemployment to the level they were looking for - around 4.5%.
How are our economy and our financial and banking systems placed to cope with this sort of the situation?
In his speech last week RBA Governor Lowe said :
“Australia has a strong financial system which is well placed to provide the needed support to businesses and households. The system has strong capital and liquidity positions and our financial systems have invested heavily in their resilience.
“As APRA confirmed … the current large buffers of capital and liquidity in the system are able to use to support ongoing lending in the economy.”
The banks have been given a $90billion lifeline to go out and lend money and stimulate the economy at a very cheap interest rate.
As I see it, it's the banks' moral obligation to help home owners and small businesses including property investors during these difficult times.
What is this going to mean for our property markets?
Looking back in history it is clear that residential property has performed relatively well at times of negative economic shocks.
In the coming weeks, property transactions numbers will fall significantly, but the impact on values is unclear.
Consumer confidence has slumped following the significant fall in the share markets as well as economic uncertainty.
And job security and consumer confidence are critical for making big purchasing decisions such as buying a new house or investment property.
However over the last two weeks I've been speaking to many clients at Metropole, particularly the more experienced investors who lived through a couple of property cycles and who have secured jobs, and they see this as a short-term "blip" in their long term investment journey.
They recognise that it's times like this, a time when many people sit on the sidelines waiting to see what's going to happen, as a great opportunity to buy a property considerably cheaper than they would have a few weeks ago and much cheaper than they will have to pay for it in 12 month’s time.
Not all markets will be impacted equally
Clearly Australia does not have ‘one’ property market.
It is likely that the more expensive end of the property market will be the hardest hit. It always is when the stock market crashes.
At the other end of the market cheaper, blue collar suburbs where the local workers can't perform their jobs remotely and where there is a higher incidence of casual employment, are likely to suffer significant price drops.
However, well located homes in established middle ring suburbs are likely to hold their values better.
Considering that we're likely to have a short sharp recession followed by a fast rebound, our property markets should pick up in the second half of 2020 underpinned by pent up and rising demand at a time of low supply.
One of the major lessons I have learned from previous downturns is the importance of taking a long-term perspective which always outsmarts short-term reactive thinking.
And for mine, it’s always property fundamentals that really matter and drive our markets in the long term.
Things like demographics, supply and demand, affordability, availability finance, and local economic trends.
Of course, we all know the old saying, being fearful when others are greedy and be greedy when others are fearful….
But it’s normal human nature to find it difficult to buy your new home or invest when everyone else is running around thinking the world is coming to an end.
However, now that I have invested through 8 property cycles, I have found that it is exactly these conditions the present the best opportunity.
That means now is the time to get prepared to take advantage of the opportunities that the market will offer.
After each global disruption, there has been an increase in property prices, and there is no reason to suggest this will be any different as the underlying property fundamentals are still strong.
Michael Yardney is CEO of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.
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