Where is the Australian property market heading in a Covid-19 world?

The effects Covid-19 is having on the world are far reaching; from physical and mental health, through to the economy and consumer sentiment – its impact is unprecedented.

Many Australians are wondering how it is going to impact their world – from their job, to their way of life – and likely the biggest investments they will make in their lifetime: the residential property market.

We at Ironfish have been watching the market carefully and how it responds to the daily changes in our economy and consumer sentiment as the Australian way of life changes and adapts.

Today, it is understandable that consumer sentiment is low with expectations around economic growth, the state of the job market, and potential movement of the property markets hard to predict. As a result of this, the residential markets nationally are seeing a fall in buyer interest for real estate, with many buyers and sellers looking to pause their property transaction decisions until some certainty is known about the future.

This mirrors what occurred nationally, though particularly in Sydney and Melbourne, in the lead up to the 2019 Federal election.

Buyers and sellers put their decisions on hold until there was certainty around our political landscape. This resulted in a fall in property sales, and as a result of lower buyer levels and low competition – values slipped in the months prior to election day. Once the outcome of the election was known and boosted by a reducing cash rate and APRA changes to serviceability buffer requirements for ADIs, the residential markets came roaring back – with Sydney and Melbourne in particular seeing a significant lift in sales volumes and capital growth. Today, in late March 2020 – the market is playing that same waiting game, waiting for an outcome from the Covid-19 situation to be known before moving ahead with confidence, and transacting on property.

So… how long will we be waiting?

This poses the question: how long will we be waiting? There is no certain answer at this point, however, for reference, Wuhan, the epicentre of Covid-19 went into lockdown on the 23rd of January.

On 8th April, only twelve weeks later, China is set to remove the lockdown, with Wuhan again expected to resume as a normal, bustling city.

How long, then, will Australia be locked down? It is hard to provide a definitive date, however it is worth looking at growth rates across the province of Hubei where Wuhan is located, and the rate of growth their compared to Australia. Hubei escalated from 494 cases to 4,334 cases in just 6 days, where it took Australia 13 days to increase from 453 cases to 4,093. Given this slower rate of growth, and now a range of Government restrictions in place, we think it unlikely that Australia would require a similar lockdown period.

Is the property market heading for a crash?

Many around the country will be asking themselves what is the ‘worst-case’ scenario for the housing market?

No doubt, we can expect many a media / sensationalist headline proclaiming impending doom in the market, which will unnerve many. Whilst values may slip in the short term, it is important to remember that it is likely only those who have to sell that will sell.

There are few key factors which we believe will drive this:

  1. The cash rate is at historic lows. Today, you can secure a fixed rate home loan for investment product at 2.59% for 3 years with NAB, whilst rental yields for a lot of product is at 4%, if not 5%, 5.5% or even 6% in certain suburbs. Therefore, it is incredibly easy to hold onto property today – meaning sellers likely won’t be forced into selling.
  2. There will be some landlords who have tenants that may have reduced income for a number of months, but some banks are already looking at ways to combat this with a range of measures including the option to pause your home loan repayments for a number of months if you are experience hardship to help you get through this short window of an economy affected by Covid-19.
  3. Whilst many investors will look to offload shares in the volatile share market – many will be drawn towards residential real estate given its relative stability, and stronger returns compared to returns on cash in the bank.
  4. Residential property serves a very real purpose – it is a roof over our heads. For most Australians, their house would be the one asset they would fight to hold over any other. It is not only an investment; it is a home.

What about the economy and unemployment rate?

Pending how infection rates spread or slow will determine how the economies (domestic and global) and unemployment rates will be impacted. We will be watching this closely, however, note the following positive developments;

  • In Australia the tide may have turned, although it is still early days. The extra lockdown measures announced by the Prime Minister on Sunday 22nd March will take time to reflect in the rate of infection numbers, but already it does appear to be having an impact. Since these additional lockdown measures came into place, the rate of growth nationally has declined every day except one. From a daily growth rate of 26.1% recorded on the 22nd of March, it has dropped to sit at 6.6% on the 30th of March.
  • China, one of our largest trading partners has registered less than 2,500 new cases in total between the 1st and 29th of March. This is an incredibly small number over nearly the entire month in a country with a population of over 1.4 billion and indicates that the infection has almost stopped completely. Not surprisingly, China is starting to return to normal, with people going back to work across the country and the economy starting to fire back up.
  • India, a country with a population of more than 1.3 billion, to date has less than 800 cases of the virus reported. On Wednesday the 25th of March, the country put their entire population into a total lockdown for 21 days. By doing this, they have hopefully shortened the window of time in which Covid-19 affects their way of life, and economy.

In order to combat any impact on the economy, the Australian Government has already injected massive stimulus in conjunction with the RBA, having rolled out a combined $189 billion support package. This has been designed to support business, and individuals affected by this ‘Black Swan’ event so they can work through some challenging months ahead before the economy returns to its previous activity levels.

In addition to this, on the 30th of March, the Government announced a further $130 billion support package, taking the overall stimulus to $319 billion, representing 16.4% of GDP. This $130 billion package – labelled the “Jobkeeper Payment” Package, will provide a subsidy to businesses that have been significantly impacted by the Coronavirus so businesses can continue to pay their employees. This means employees can keep their job, and earn an income, even if their hours have been reduced, or they have been stood down. The subsidy per employee is $1,500 before tax per fortnight, and this amount can be topped up by the business if they choose. This subsidy will commence on the 30th of March, 2020 – and will be in place for 6 months.

This will go a long way to ensure the small amount of property owners who are in a position where they are forced to sell their property due to a lack of income, may now be able to hold onto their property, and wait until the economy recovers.

It will also mean that the unemployment rate will be supported, as employees will still technically be employed by their business, with wages subsidized by the Government until a time the economy is back up and running.

This said, it still expected there will still be casualties, and the unemployment rate will rise over the months ahead – however as Dr Andrew Wilson, Chief Economist, My Housing Market, stated in the media last week:

“Higher unemployment will certainly continue to activate the government to get the economy up and running again and I think we are going to have unprecedented stimulus into the economy… they (the Government) will look to the housing market as an early driver of revitalising economies, we have seen that during the GFC and back even in the (19)80-81 recession where Bob Hawke introduced the first home buyer grant”.

What impact with Covid-19 have on the rental market?

Not only will investors around the country be thinking about values and capital growth prospects – many will also be thinking about Covid-19’s impact on the rental market, and therefore their cash flow. Already agents around the country are reporting a more challenging rental market. This is no surprise, with many tenants opting to end tenancies to move back in with family or move into a ‘house-share’ arrangement to reduce their living expenses. Further to this, there will also be an influx of rental properties to the market as the short-term market (Air-BnB etc) dries up, and landlords look to move these from a short term arrangement to the long term letting pool. Hence, it is expected that over the coming months, vacancy periods will increase, and rents will soften in some markets.

This is a challenge that investors will need to face, however seasoned investors recognise these as short term issues in their long term investment plan. Although in the next 3, 6 or 12 months, some investments will return a lower yield, or experience some vacancy, however investors need to compare this small hit to cashflow against the long-term capital growth of their asset, and assess which is more important. If investors can appreciate this, there is no need to panic, and instead find a way to continue to hold their investments for the long term.

In summary:

At this point in time the potential outcomes of this global event are largely unknown, however the cash rate is incredibly low making it relatively easy to hold onto residential property; rents are reflecting comparatively strong yields; supply across our major cities is low and expected to stay that way; and the Government is releasing unprecedented stimulus into the economy and employment market to keep the economy supported until such a time that Covid-19 has subsided and the economy can return to normal.

We encourage investors to remain committed to ‘long-term thinking’ with their residential property investments, and we will continue to provide regular updates on the Covid-19 impact on the Australian economy and housing market.

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