What’s ahead for our property markets in light of COVID-19?
Are they going to crash like the stock market has?
Is Australia going to fall into recession?
These are obviously questions on the mind of many investors in light of the economic woes around the world and the uncertainty surrounding the coronavirus.
Now, I’m not downplaying the potential medical issues related to the coronavirus.
Clearly many Australians will come in contact with the virus over the next couple of months, some people will suffer cold and flu-like symptoms, while other more frail members of the community will succumb to the germ. And that is tragic.
At the same time, most businesses will suffer. And it won’t only be businesses in the hospitality, tourism and education sectors that suffer; there’s little doubt many, if not most, businesses will be affected in one way or another.
But the biggest effect will be the slashing of business and consumer confidence.
You see, currently, we have an ‘infodemic’ with the media, including social media, scaring us and panicking many people into buying toilet paper, bottled water (why? the virus doesn’t live in water) and even avoiding Chinese restaurants in suburban Australia.
Back to my original question, what will this do to our property markets?
Of course, I don’t really know.
But based on my perspective having been involved in property for over 47 years, while this issue will have an effect on our economy and a short-term impact on our property markets — because consumers will become less confident and sit on the sidelines waiting for things to become clear — I believe in a year from now, and particularly five years from now, and most certainly in 10 years from now, this pandemic will have had no influence on where Australian property market will end up, and the value of your and my home at that time.
Don’t get me wrong, I see some serious short-term economic issues, but the underlying fundamentals supporting Australian property markets have not changed.
Feeling fearful at market extremes is absolutely fine — we’re all human.
But acting on that fear is when people make grave financial mistakes, from which they sometimes never recover.
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As I’ve always said, don’t make 30-year investment decisions based on the last 30 minutes of news.
I believe it is quite likely Australia’s economy will fall into a technical recession this year.
But given a likely recovery in the second half of this year, it is much more likely that this will be a short-term but major disruption to our economic growth, rather than the type of recession Australia last experienced the early-1990s.
Of course, the outcomes for our economy, jobs growth and our unemployment figures will depend upon the effectiveness of the government’s stimulus package and any further interest rates cuts
But from a property perspective, a virus that will affect our economy for six weeks or six months, will come and go in a relatively short time frame.
- Asian bird flu did in 2015;
- Swine flu did in 2009-10;
- The GFC came and went in 2008-9;
- As did SARS in 2002-3; and
- September 11th in 2001.
I can go on and on.
Remember the scare about mad cow disease?
In fact, I remember scares of global cooling before global warming, and worries that our planet could not produce enough food to sustain our population.
But this is the first global crisis we’re experiencing in the social media age and we’ve learnt information spreads fast and false, and sensational information spreads faster.
So, remember these wise words from Warren Buffet: “Be fearful when others are greedy and be greedy when others are fearful”.
Homebuyers and long-term investors who have a secure job and income and pre-approved finance should take advantage of any short-term downturn in our property markets to set themselves up for the next phase of the property cycle.
As I said, I’m comfortable with the underlying fundamentals supporting our property markets in the medium to long term.
Let’s look at a couple of them.
1. Population growth
Australia’s population is growing by about 360,000 people per annum, meaning we need to build about 175,000 new dwellings each year to accommodate all the new households.
2. Declining housing supply
The oversupply of dwellings in many Australian locations is now dwindling and there are very few new large projects on the drawing board.
Considering how long it takes to build new estates or large apartment complexes, we’re going to experience an undersupply of well-located properties in our capital cities in the next year or two.
3. Interest rates are low and will go down further
The prevailing low-interest-rate environment is making it easier to own a home, either as an owner-occupier or investor.
In fact, it’s never been cheaper for investors to own a property with the ‘net outlay — meaning the out-of-pocket expenses — being the lowest they’ve been for decades considering how cheap finance is today.
4. Smaller households are becoming the norm
Sure, many people live in a multigenerational household, but pretty soon millennials will make up one-third of the property market and their households tend, in general, to be smaller, as are the households of the booming over-65-year-old demographic.
More one and two people households means that, moving forward, we will need more dwellings for the same number of people .
5. More renters
Soon 40% of our population will be renters, partly because of affordability issues but also because of lifestyle choices.
The government isn’t providing accommodation for these people.
That’s up to you and me as property investors.
6. First-home buyers are back
First-home buyers are back with a vengeance, in part thanks to the government’s new scheme to encourage them, but also because of cheap finance and rising property values.
As opposed to established homebuyers who have a ‘trade-in’ that is increasing in value, first-home buyers waiting to get into the market are finding the market moving faster than they can save, so they’re hopping on board the property train as quickly as they can.
7. The underlying fundamentals are strong
Sure our economy is facing challenges, and the share market is volatile, but our property markets are underpinned by the fact that 70% of property owners are homeowners who are there for the long term.
They’re not going to sell up their homes. They’d rather eat dog food than give up their homes.
And Australia’s banking system is strong, stable and sound.
Even though a few home buyers have overcommitted themselves financially, there should be no real concern about household debt because, in general, it is in the hands of those who can afford it.
There is currently a very low rate of mortgage default of mortgage to increase.
As the community starts to become more concerned about the economic impact of the coronavirus, it is likely that there will be a flight to quality assets, and bricks and mortar has always stood the test of time.
In other words, the share market volatility will make some investors look to real estate as an alternative secure investment vehicle underpinned by seven million homeowners in Australia.
In fact, it is the only investment market not dominated by investors.
The bottom line
The wise King Solomon had an inscription inside his ring that said: “This too shall pass.”
This was so he would not become too confident during the good times or too despondent during the bad times.
The coronavirus outbreak has spooked markets across the world and there is no doubt that it will have a significant global economic impact.
However, like all the other worldwide epidemics we’ve experienced, this too shall pass.
At his inaugural address in 1930, Franklin D Roosevelt said, “there is nothing to fear but fear itself”. Wise words indeed.