We are half way there!
You may ask “Half way to what?”
Well … we’re more than half way through this year, and let’s hope the second half of 2020 is going to be better than the first half.
Clearly we’re living in unprecedented times, in unique times, with the confluence of three major challenges.
I’ve never seen a trilogy like this with:
- a global pandemic,
- Australia slipping into recession and
- Increasing geopolitical and local social unrest.
This means there’s a lot to think about … both at the macro level affecting our country and its place in the world economy and at the micro level with your investment or business strategy.
Remember … your investments, your business and your career operate inside a complex, yet delicate ecology made up of people, resources, organizations, policies, procedures, and our physical environment which sometimes throw out some surprises.
This ecology is a finely tuned machine … and though it’s flexible and resilient… it has its limits.
It’s like those jugglers at the circus, with so many plates spinning in the air at the one time.
Which ones are going to keep spinning, and which ones are going to come crashing down?
This means it’s important to keep an eye on all those spinning plates and watch out for warning signs.
Ignoring the warning signs of plates about to topple almost always ends badly.
Yet even rational adults at times revert to burying their heads in the sand trying to hide from the scary realities of what’s going on.
Of course, you can ignore reality, but you can’t ignore the consequences of ignoring reality.
Then there are the pessimists who only seem to see the downside.
And at present they’re out in force.
We’ve got a group so called “experts chasing a headline” and the media loves them because they provide great clickbait.
These Negative Nellie’s can only see the worst happening with a major world recession and real rstate Armageddon with housing values dropping by up to 30%.
And unfortunately they’re attracting disciples – I’m seeing a lot of those at the moment leaving negative remarks on my YouTube channel, hoping that property values are going to crash and make those rich Baby Boomers give back their ill-gotten gains.
On the other hand, there are the optimists who only see the upside … and some may get blindsided by dangers which are obvious in hindsight.
Yet over the years I’ve realised that the secret to success is the ability to pursue the upside while keeping the downside in view so it can be managed.
In other words, I’m a realist … which is probably an appropriate word for a successful real estate investor.
Sure, there’s lots of downside if you look for it
I realise that there is pain is everywhere.
It’s fairly obvious that people, businesses, markets, financial systems, and even society itself is suffering.
Which of those plates will keep spinning and which will topple?
If they topple will they break? If so, what does that look like? Do you have a plan?
Not only are those frightening contemplations, they’re hard work.
But if you love the freedom to pursue opportunity, own property portfolio, build wealth, and retain and enjoy the fruits of your efforts, it’s hard work you’ll need to do.
Jim Rohn said it well: “If you don’t design your own life plan, chances are you’ll fall into someone else’s plan. And guess what they have planned for you? Not much.”
So what’s ahead?
Of course, no one really knows what’s going to happen, so it’s important to analyse and anticipate possibilities and probabilities.
Yes, the health crisis led to an economic shutdown, which had the potential to create a financial system crisis that the pessimists are worried about.
But that’s really unlikely to happen.
Australia’s economic outlook depends on the success or otherwise achieved by the government health authorities and communities in suppressing the spread of the virus.
If the virus is contained and the active caseload remains manageable, then more parts of the economy will reopen, and a degree of normality can return to society and the economy.
Sure, there have been setbacks but as our economy reopens obstacles like the outbreak in Melbourne can be expected in suppressing the spread of COVID-19.
You see…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 position 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 we had hoped for and 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, which is just finished, will only be reported in September and we’re sure to see 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.
Sure, some of our support mechanisms will be taken away at the end of September, with JobKeeper and mortgage holidays ending; but I can’t see the government pulling the rug out from under us.
They have spent too much time, money, energy and publicity telling us how they are going to support us, so it’s likely the support will remain but in a more targeted fashion.
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.
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 customers out of their homes.
What does this mean for our property markets?
Our property markets have been remarkably resilient so far, but there is no doubt that overall house prices will fall little further.
Looking back at previous economic downturns there are a few lessons we can learn to help us better understand what’s ahead.
The good news is that negative economic shocks don’t necessarily lead to severe declines in property prices.
This was true in our last recession of the early 90’s when only the Melbourne property market dropped significantly in value but rebounded quickly, and similarly during the Global Financial Crisis property values held up well.
Remember, 70% of properties are owned by owner occupied and used for shelter – not for speculation.
In fact, 50% of homeowners don’t have a mortgage against their property and those with a larger debt are in general the hands of those who can afford it, considering how cautious the banks have been with the lending policies over the last few years.
However, we are already seeing the number of property transactions significantly decrease as discretionary sellers and buyers will go on strike.
Our markets will remain fragmented
As always, our property market will remain fragmented and some segments will suffer more than others.
While A grade homes and investment grade properties in our more established affluent suburbs are likely to hold their values well, crunch time is coming for many off-the-plan apartment buyers who won’t be able to settle on the properties they committed to buying a number of years ago, in very different economic times.
The following chart from Corelogic shows that more than half those who bought an off the plan property are now finding their properties value in below contract price on completion.
25% of these properties value in at less than 90% of the contract price, meaning that the purchases have lost their deposit.
Of course lenders value a property at completion and if the valuation is lower than the contract price the loan may be refused or the buyer will asked to provide a larger deposit.
Unfortunately, some investors will be financially ruined, others will end up holding dud properties that are likely to become the slums of the future.
Truth is, off the plan properties were never good investments:
- they have no scarcity,
- are generally in the wrong locations
- Have little owner occupier appeal
- Are too expensive with too many fingers in the pie with marketers taking significant margins
- They are dogged by poor quality construction, etc. etc.
Similarly many young families who have over committed financially to their new homes in the outer suburbs will feel mortgage stress.
At the same time our rentals markets will suffer as many of those who have lost their jobs in industries such as hospitality, services, arts and entertainment were younger people who are renting.
Add to this the fact that we have fewer overseas students coming, and this will affect our in the CBD rental apartment markets.
And with fewer overseas tourists many of those properties that were previously on Airbnb have now been placed into the general rental market.
This has led to rising vacancy rates and falling rentals, particularly in our CBD’s.
The bottom line
As I said at the beginning, there are many plates spinning in the air, but as a realist, I believe very few will topple and break.
And when we look back in a year’s time will be in a much, much better position economically, financially and health wise.
And those cash up home buyers and property investors who take advantage of the opportunities the current property markets present we look back in a decade feeling very smug, just like those you took advantage of the opportunities during the Global Financial Crisis over a decade ago.
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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