What impact will Melbourne’s virus lockdown have on property and economy?

Melbourne’s Covid transmission outbreak has been widely publicised by the media.

Melbourne’s daily positive test rate is relatively benign by world standards (i.e. 0.5-0.6% versus 7.5% in the USA).

However, the reinstated 6-week lockdown of Melbourne is likely to have a negative impact on Australia’s economy.

Melbourne is responsible for producing over 19% of Australia’s GDP.

Spending has bounced back strongly with Victoria lagging

Firstly, let’s start with the good news.

The good news is that according to ANZ Economics, spending has bounced back relatively strongly.

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Spending overall is up 5.5% year-on-year to 3 July 2020.

Households are spending more on goods and groceries but substantially less on travel and entertainment.

Spending in Victoria is lagging compared to other States, due to the stricter lockdown rules.

Victoria’s lockdowns will give rise to higher unemployment and a prolonged recession

Up until a few weeks ago, I was firmly in the V-shape camp.

That is, I expected the Australian economy would recover sharply after lockdown restrictions were lifted. I based this view on the assumption that there would be more targeted government stimulus post September.

To date, economic data (similar to the spending data above) has been supportive of this view.

However, given Melbourne accounts for over 19% of Australia’s total GDP, Melbourne’s reinstated lockdown is likely to weigh heavily on the nation’s economic recovery.

It is my view that a second lockdown will substantially harm consumer and business confidence.

A few weeks ago, restaurants and entertainment venues were contemplating reopening.

Now they won’t be able to do that for at least another 6 weeks.

There are not many (otherwise) viable businesses that could survive a 5-month closure.

As a result, I fear that more businesses will not survive this period and as such, unemployment will rise and take much longer to recover.

Based on data from March & April, the following categories of expenditure will likely suffer the most: dining and takeaway, accommodation, entertainment and travel.

Impact of immigration, education and population growth

Border closures will have a negative impact on population growth due to reduced levels of overseas and interstate migration.

Australia CoronavirusAnd population growth drives economic activity and property values.

It is important to understand the migration statistics.

Around 60% of Australia’s population growth is from net overseas migration.

Anyone that lives in Australia for 12 out of the past 16 months is included in this statistic.

Approximately 75% of immigrants are on temporary visas.

Given temporary visas holders must sell any property within 3 months from leaving Australia, it is fair to assume that most of these people rent accommodation, rather than own it.

Net overseas migration (including both temporary and permanent) is typically represented by three main categories:

  • 33% from the higher education sector – students aged between 18 and 22;
  • 29% from skilled migration or working holiday makers. Typical age is between 22 and 37 and 85% go to the three Eastern States; and
  • 21% from non-working visitors (these are all temporary visas holders of course).

Therefore, whilst overseas migrants definitely contribute meaningfully towards rental property demand and economic activity, they contribute to a much lesser extent towards demand for property ownership.

Therefore, whilst lower overseas migration will negatively impact the economy, I anticipate that it will have a much lower impact on the demand for property ownership.

More government and banking support are almost guaranteed

Bank Money Loan CreditOn 23 July, the Federal Treasurer will confirm whether JobKeeper and/or similar support will continue beyond September.

As I have stated previously, further or increased government support is almost guaranteed, but it will be more targeted (including providing additional support to Melbourne-based businesses).

I note that the Australian Banking Association confirmed overnight that the banks will provide repayment pauses for an additional four months to those borrowers that continue to be impacted by the Covid lockdowns.

As I have stated previously, it is in the banks best interest to minimise mortgage defaults and forced property sales.

What will happen to property prices?

As I have written previously, there is a very weak relationship between property prices and unemployment.

However, there is a much stronger relationship between lending volumes and property prices.

Higher lending volumes stimulate property price growth.

Fall PriceI think both demand and supply for borrowing, particularly by Victorians, will be below normal levels for the next year.

Supply will be reduced because banks will be weary of lending to borrowers that may be impacted by a weak Victorian economy.

Demand will be reduced because of the higher unemployment in the entertainment, hospitality and travel sectors will have flow on effects to the rest of the economy.

Even if people’s finances aren’t impacted, it will negatively impact confidence.

As such, people may delay borrowing until they feel more confident, which probably won’t happen until 2021, particularly if a vaccine is not found sooner.

As I have stated previously, to date, property prices have remained relatively stable.

This is because there has been a sufficient number of willing and motived buyers to support the below average volume of property on the market.

That is, the level of demand has outstripped (low) supply.

I don’t anticipate that this will change and as such, property prices should continue to hold up well.

What does this all mean?

My view before they reinstated Melbourne lockdown, was that the Australian economy would bounce back strongly, particularly in the last quarter of this year.

Victoria AustraliaI expect that this might remain the case for States and Territories other than Victoria.

However, it is now my expectation that Victoria’s economic recovery will be protracted.

In terms of property, I don’t expect Melbourne’s volumes or sentiment to recover to more normalised levels until early to mid 2021.

That said, I still do not expect any major price corrections.

But Melbourne is likely to underperform other property markets in the shorter term.

That is, growth is likely to be stagnant whereas other states may experience property price growth sooner than Melbourne.

Importance of diversification

Perhaps this situation reinforces the importance of diversifying your investments as unsystematic risks can impact investment returns.

This means you should invest across various asset classes e.g. property, shares, bonds and so on. Also, where possible and practical, when investing in property, seek geographical diversification.

The good investment news is that Melbourne’s “lockdown 2.0” is unlikely to have a material impact on the long-term performance of investment grade property.

The Melbourne housing market has previously endured deep recessions, stock market crashes, double-digit interest rates and many other challenges and still produced a median house growth rate of over 8% p.a. over the past 4 decades.

But economically, we do have some challenges ahead of us.

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Stuart Wemyss

About

Stuart was a Chartered Accountant before establishing mortgage broking firm ProSolution Private Clients. He has authored two books and shares his experience with readers of Property Update. Visit www.prosolution.com.au


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