The implications of Coronavirus on the property market
Many Australians view housing as an attractive investment seeing it is as a more stable option than other alternatives. Property investors have achieved strong capital gains as falling interest rates, preferential tax treatment and high immigration levels have supported house prices.
Forecasting the general level of house prices is difficult at the best of times. Many factors can influence prices including how high or low interest rates are, vacancy rates, location and so on. Heading into the current period, we saw strong house price growth into late March supported by cuts to interest rates.
Monthly change in Home Value Index (5 capital city aggregate)
However, as the full impact of the current crisis plays out, we believe that there is an increased likelihood that house prices will fall. The extent of these falls will depend on the length of time of both the health and economic slump we are experiencing persist.
Our rationale includes:
Unemployment remaining at high levels with weak income growth means less ability for people to obtain and afford mortgages.
Emergency government payments such as Jobkeeper are only meant to last until September 2020 resulting in weaker incomes and less money to afford existing or new mortgages.
Bank lending is likely to be challenged given banks are more reluctant to lend in a weaker economic environment. This would suggest less money chasing property and an overall negative for prices.
Mortgage rates are at their all-time low and unable to fall much (if any) lower. This is a sharp contrast to previous recoveries, which experienced tailwinds from falling mortgage rates that had boosted potential buyer borrowing power;
International migration, including overseas students, has been an important source of housing demand, especially in Sydney and Melbourne. Lower demand for housing will see rising vacancies and pressure on prices.
Rising housing supply with a large pipeline of apartments being completed and short-term rentals like Airbnb returning to the long-term leasing market.
Rents are likely to fall on the back of rising supply and increased unemployment.
Critical to how low property prices fall (or “correct”) is how well Australia contains the coronavirus and reopens the economy. At the time of writing, we have done very well, especially compared to most of the rest of the world. This should see us begin our economic recovery sooner, helping to reduce the downward pressure on prices.
How could this impact you?
While all housing may be affected to some extent by the factors we have outlined, your specific circumstances may be different. For example:
Some regions are more reliant on how a specific industry is doing as opposed to the broader market.
Capital cities outside of Sydney and Melbourne have, on average, delivered less capital growth. Most returns have come from the rent generated and will likely continue barring a new substantial pick-up in demand e.g. Perth in the mining boom.
However, there is an overriding danger given the scale of the economic slowdown. In the recession during the early 90s, Australian property held up reasonably well with the ABS House price index seeing a maximum loss of ~3% on average for Sydney. However, we have also had slumps outside of a recession such as theperiod.
To give perspective on the impact the current experience could have, the major banks have issued their own baseline forecasts, such as;
Westpac has forecast an overall decline of -15% in 2020 and -5% in 2021.
Commonwealth Bank has forecast an overall decline of -11% over
These forecasts estimate the range of outcomes that could occur over the next couple of years. We also note that these forecasts do not necessarily allow for positive factors such as government intervention. For example, if State Governments removed stamp duty (one reform being discussed) this could help offset some of the weakness we are anticipating by removing a substantial transaction cost currently in place.
As with any investment, property investors should continue to monitor conditions and ensure it continues to meet their objectives and goals together with professional advice. It is important to remember that property will, most likely, not be your only asset. Through superannuation you will be diversified into other investments that are unlikely to experience the same results.
Speak to us today if you would like to discuss your overall positioning and how you are tracking towards your long-term goals.
General Advice Disclaimer: The information in this report is general advice only and does not take into account the financial circumstances, needs and objectives of any particular investor. Before acting on the general advice contained in this report, an investor should assess their own circumstances or seek advice from a financial adviser. Where applicable, the investor should obtain and consider a copy of the prospectus or other disclosure material relevant to the financial product before making any investment decision to acquire a financial product. It is important to note that the price or value of financial products go up and down and past performance is not an indicator of future performance.