Yahoo Finance How a second wave will hit Australia's property markets
Our property markets have been remarkably resilient so far.
But how would a significant second wave of coronavirus affect our housing markets?
If we look back there are a few lessons we can learn to help us better understand what’s ahead.
Fact is, that in spite of the coronavirus-induced economic downturn, Australian property values didn’t crash like some doomsayers predicted. Our economy rebounded more quickly than many expected on the back of the fact that Australia, other than Victoria, has done very well in containing the virus up to date.
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Clearly the significant financial stimulus and support measures provided by our governments have kept the doors of many local business open and many people in their jobs.
At the same time rental relief packages have kept tenants in their homes and mortgage support has meant that there have been very few forced sales.
However, home buyers and sellers went on strike choosing to postpone their next move until more certainty returned to the market and this contributed to a 32.4 per cent drop in property sales volumes over April.
Then as social distancing measures eased and consumer confidence returned, property transaction numbers experienced a strong recovery in May and June.
Initially it looked like we were going to experience a deep, but short, economic recession and that our property markets would weather the storm defying the 10-20 per cent fall in values some had predicted.
But if Australia is hit by a significant ‘second wave’ of coronavirus cases that would postpone the economic recovery that many economists expect in the second half of 2020, unemployment would rise even further and consumer and business confidence would take a significant hit.
So what’s ahead?
Of course, no one really knows what’s going to happen to the economy and property values, so it’s important to analyse and anticipate the possibilities and the probabilities.
How our real estate markets would be affected by a second wave would depend on how rapidly the health issues come under control, how quickly businesses resume normal trading, how soon our economy picks up and most importantly how quickly consumer confidence rebounds.
Not surprisingly there’s a strong relationship between how people feel about their finances and job security and the financial decisions they make, and this in turn will flow through to how our economy recovers and our property markets will perform.
When we feel confident about your financial circumstances we’re more likely to feel safe in making significant financial commitments like buying a new home or investing in property.
However, a significant second wave of coronavirus and a continuing barrage of negative news in the media about our health, unemployment and businesses going bust is likely to dampen consumer confidence further and have a negative impact on our property markets.
On the other hand, if a second wave of infection overtakes us we can expect further government support.
The government and the Reserve Bank have clearly stated that they will do anything and everything they can to support our economy and minimise the impact of the coronavirus on businesses and our economy.
I can’t see the government which has spent so much time, money, effort and publicity building a ‘bridge’ to get us across to the other side, to allow us to fall off a cliff rather than to extend that bridge even further.
What about property prices?
If a second wave of coronavirus causes further lockdowns, or more social distancing restrictions, our property markets will slow down as they did in March and April.
Both buyers and sellers will go on strike till the picture becomes clearer.
But like earlier this year, property values won’t plummet, because it’s unlikely that there will be a flood of properties for sale.
Of course there isn’t one property market, and during difficult times there is a flight to quality meaning A grade homes and investment grade properties in our major capital cities are likely to hold their values well or only fall around 5 per cent, while B grade properties (secondary properties) are likely to fall in value up to 10 per cent, and C grade properties will be difficult to move at any price.
But this will be on a on very low levels of transactions and the pace of recovery from that point will depend on the speed of the economic recovery.
At the moment I’m seeing three levels of buyer property sentiment out there.
There are the Negative Nellies who are worried that property prices are going to crash and all they can think of is doom and gloom. But they’ve always been out there and over the long term they’re always been wrong.
There are those who are bunkering down, battening the hatches and just waiting for news that this is all over.
Then there are those with a positive outlook who have a secure job and a long-term focus who is seeing great buying opportunities in the market when there is less competition and interest rates are the lowest of ever been in history.
Interestingly while the number of investors in the market is currently at very low levels, first homebuyers are taking advantage of the government grants, the HomeBuilder allowances and the prevailing low interest rates and getting a foot into the property ladder. And this trend is likely to continue
Some property sectors are likely to suffer
The worst affected residential markets will be:
Apartments in high-rise towers –these properties are likely to be out of favour for quite some time.
Off the plan apartments and poor-quality investments stock (as opposed to investment-grade) apartments, particularly those close to universities. Many of those who bought a few years ago will find the values of their properties on completion today will be less than their contract price.
Outer suburban new housing estates house and land packages, where young families are likely to have overextended themselves financially and where many people will find themselves underemployed.
Properties in the blue-collar areas as many people living in these locations will find themselves underemployed.
What’s going to happen to our economy?
Yes, the health crisis has led to an economic shutdown, and while some were concerned that this had the potential to create a major financial meltdown, clearly that hasn’t happened.
Sure, there have been setbacks but as our economy reopens obstacles like the outbreak in suppressing the spread of COVID-19 in Melbourne can be expected.
Of course, a serious second wave of infection will delay our economic recovery, increase unemployment and dampen consumer and business confidence.
Unfortunately there is no roadmap to follow, so governments will need to quickly respond to changes in circumstances.
But most of the bright folks I’ve been following and talking with agree that Australia is better positioned than any other country in the world to work its way through the challenges ahead.
And these include the economists at all our major banks and institutions, as well as at the Reserve Bank and the International Monetary Fund.
They all agree that we’re not going to have a V shape recovery like occurred following the Global Financial crisis.
This time round we don’t have China out there taking all our exports, buying our real estate and supporting our economy.
It looks like we will have a step wise recovery as our economy opens up in stages.
The economic results for the June quarter will only be reported in September when we will learn that we experienced a severe recessionary period.
But by the time these results are reported it is likely that our economy will already be on the rebound, with more businesses opening and more jobs being created.
Of course the lock down in Melbourne will slow down our economic recovery and the spike in cases in Melbourne and Sydney have made Aussies more nervous.
This means they’re like you to be more cautious about spending, especially on big ticket items.
However, to make up for our worries and the stresses we’re experiencing, we’re more likely to spend on entertainment and pleasure which should help our local retail markets.
And with our international borders closed for the foreseeable future, the millions of Australians who would have otherwise travelled overseas will vacation locally helping boost our tourism industry.
Now we know that some of our support mechanisms will be taken away at the end of September, with JobKeeper and mortgage holidays ending; but the government is going to replace these with other more targeted stimulus packages.
Our governments have a vested interest in keeping our real estate markets liquid and buoyant, recognising that consumer confidence is critical for our economic recovery.
They know that the quickest ways to see consumer confidence plummeting is for people to see the value of their homes dropping.
So it’s likely we’ll see a number of new targeted support packages rolled out over the rest of the year and some of these will be announced in the July 23rd mini Budget.
At the same time our banks have a vested interest in supporting our property markets.
Fortunately they are well financially sound and capitalised and they’re not keen to turf their clients out on the street.
What else is likely to happen?
It has been said that up to 3million Australians have changed their living habits because of Covid-19, with many young people moving back with their parents.
And this trend will likely continue, meaning our rental markets will continue languishing with fewer people seeking rental accommodation at a time when vacancy rates, particularly in our CBD’s and inner suburbs, remain high.
At the same time our banks will remain vigilant and continue to scrutinise all new loan applications carefully.
S o if you’re looking to refinance your loans to the prevailing low interest rates or take on a new loan be prepared for long possessing delays and to answer many questions
The banks will also offer further extensions to the repayment holidays given to borrowers with cash flow issues.
The bottom line
In time of trouble it’s important to retain a long term perspective.
Property is resilient – very different to share market.
Most property is lived in, which means people will do away with many other luxuries before someone will sell their property, much less their home.
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.
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.
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 and hosts the popular Michael Yardney Podcast.
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