So what’s ahead for our property markets in light of the Coronavirus issues?
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.
In today's Masterclass with Ken Raiss we answer 4 questions that you need to ask so you will have clearer direction, more certainty and better results moving forward.
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 in particular 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.
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 that Australia's economy will fall into a technical recession this year.
But given a likely recovery in the second half of this year or early next 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 government’s stimulus package and any further interest rates cuts
But 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.
- 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?
But this is the first global crisis we're experiencing in the social media age and we've learned that:
- Information spreads fast and
- False or sensational information spreads faster.
So, remember these wise words...
As Warren Buffet said: "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.
Not all markets will be impacted equally
Clearly Australia does not have ‘one’ property market.
It is likely that the more expensive end of the property market will be the hardest hit. It always is when the stock market crashes.
At the other end of the market cheaper, blue-collar suburbs where the local workers can't perform their jobs remotely and where there is a higher incidence of casual employment, are likely to suffer significant price drops.
However, well-located homes in established middle-ring suburbs are likely to hold their values better.
Considering that we're likely to have a short sharp recession followed by a fast rebound, our property markets should pick up in the second half of 2020 underpinned by pent up and rising demand at a time of low supply.
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.
And for mine, it’s always property fundamentals that really matter and drive our markets in the long term.
Things like demographics, supply and demand, affordability, availability finance, and local economic trends.
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 as the underlying property fundamentals are still strong.
I'm comfortable with the underlying fundamentals supporting our property markets int he medium to long term.
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Let’s look at a couple of them…
- Population growth
Australia’s population is growing by around 360,000 people per annum, meaning we need to build around 170 to 180,000 new dwellings each year to accommodate all the new households.
Sure with slowing immigration, this will slow down for a short while, but our population will grow again as more people choose to come to this lovely country.
- 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.
- 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.
- Smaller households are becoming the norm
Sure many people live in 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 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 .
- 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.
- 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 “trad- 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.
- 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 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.
Yes…we're going into recession
It now seems that unemployment is likely to rise to double digits in the short-term, and that’s terrible for those who are going to suffer financial hardship.
Unfortunately many Australians will have difficulty paying their mortgage or their rent, but currently the government is looking at ways of assisting tenants or landlords or both.
Last week the Reserve Bank lowered interest rates to 0.25% and has commenced quantitative easing, lowering the 3 year bond yield.
We've also been told by the RBA that interest rates are going to remain low for the next three years, suggesting it will take at least that long to get unemployment to the level they were looking for - around 4.5%.
How are our economy and our financial and banking systems placed to cope with this sort of the situation?
In his recent speech RBA Governor Lowe said :
“Australia has a strong financial system which is well placed to provide the needed support to businesses and households. The system has strong capital and liquidity positions and our financial systems have invested heavily in their resilience.
“As APRA confirmed … the current large buffers of capital and liquidity in the system are able to use to support ongoing lending in the economy.”
The banks have been given a $90billion lifeline to go out and lend money and stimulate the economy at a very cheap interest rate.
As I see it, it's the banks' moral obligation to help home owners and small businesses including property investors during these difficult times.
Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on
If you're wondering what will happen to property in 2020–2021 you are not alone.
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