What’s ahead for our property markets in light of the coronavirus outbreak?
Are they going to crash like the stock market has?
That’s a question 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.
In fact, I've looked up the definition of a "pandemic" and this definitely is a "pandemic" even though our health authorities are not prepared to call it one.
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 many businesses will suffer, particularly those in hospitality, tourism, education and those who supply chain from south-east Asia will be affected.
But the biggest effect will be the slashing of business and consumer confidence.
While we may not have a pandemic – yet – 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 (?).
So what will this do to our property markets?
Of course, I don't really know.
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.
However, I believe in a year 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.
As I've always said... don't make 30-year investment decisions based on the last 30 minutes of news.
It is quite likely that Australia's economy will fall into a technical recession in the first half of this calendar 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 early 1990s.
Of course, the outcomes for our economy, jobs growth and our unemployment figures will depend upon the effectiveness of the stimulation package and government is proposing.
So, from a property perspective, a virus that will affect our economy for 6 weeks or 6 months will come and go in a relatively short time frame.
Bird flu did in 2015
Swine flu did in 2009-10
The GFC in 2008-9
SARS in 2002-3, and
September 11 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.
Remember these wise words
As Warren Buffet said: "Be fearful when others are greedy and be greedy when others are fearful."
Home buyers 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 around 360,000 people per annum, meaning we need to build around 170,000 to 180,000 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” – 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 multigenerational households. 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 65+ year old demographic.
More one- and two-person households mean that, moving forward, we will need more dwellings for the same number of people.
5. More renters
Soon 40 per cent 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, if first home buyers wait to get into the market they're 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 per cent of property owners are home owners 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 the 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 have 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 7 million homeowners in Australia.
In fact, it 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 that 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.
Michael Yardney is a director 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.