It’s no secret that Australia is going to fall into recession.
But what does that really mean?
How will this affect you, your job, your finances and the value of your home or your investment properties?
In today's MASTERCLASS with Ken Raiss, director of Metropole Wealth Advisory and Australia’s leading property tax specialist, I’d like to chat about what it will look and feel like as we work our way through the recession and is there anything you can do about it to protect yourself and minimise your downside?
NOW READ: Recession 2020 and the Australian property markets
And what can strategic property investors and business people do to build wealth during the months ahead.
And we’ll finish off with a number of specific recommendations so at the end of todays’ session you’ll have a better understanding of what’s ahead and what you can do to put yourself in a better position to thrive not just survive the recession.
Both Ken and I have lived through quite a number of property cycles and economic shocks, while many Australians haven’t lived through a recession so watch the Masterclass as we talk about what living through recession could feel like and how you could profit from a recession.
Now before you say how heartless, how could you consider profiting through recession, I want to make something clear....I’m not suggesting we take advantage of people, but I am suggesting we take advantage of the opportunities that will arise.
Recessions are always periods of significant opportunity and transfer of wealth.
That’s just how the economy works.
If think about it, because of social distancing we aren’t going to restaurants any more, but we're still going to be eating, and some restaurants are prospering with takeaway while other grocery stores supermarkets are prospering because we are buying more food there.
So it doesn’t always work out that if you win somebody else is going to lose house with the result.
What is a recession?
- Everyone is talking about it, but a great proportion of the working population have never known a recession in Australia, so we first start with what is the technical definition of a recession and then we can talk about what it looks like how it feels and what we should do
Why this recession will be different?
- Recessions usually come after a period of substantial growth, speculation and general excess.
- This time around, the Australian government has, rightly, sacrificed economic activity in the name of health in response to the COVID-19 crisis. It’s not alone in this, as you’d well know, major economies worldwide have done and are doing the same thing, albeit in different ways. An unfortunate victim in this is Australia’s almost 30-year run of economic growth, we are experiencing our first recession since 1991.
- How will this recession be different to last time?
But Australian won’t be alone in this.
- A global recession is likely as major powerhouses like the US and China factor in the huge economic hit of social distancing, isolation measures, and virtual shutdown of regular activities, businesses and services that are not essential.
As we move through the balance of this year into and then hopefully out of a recession what are we going to experience?
- Higher Unemployment
- There will be much higher unemployment, it will be harder to switch jobs, and it’s reasonable to expect more redundancies and terminations as the crisis continues.
- This leads to a loss in income and falling wages, which …
- Reduces the spending power of affected Australians.
- Compounding that, even for those who are holding on to their jobs, uncertainty will rise – people worry about the future, they worry about their income, they worry about their employment prospects. That will impact spending patterns, and how much people are willing to part with beyond the essentials.
- The Real Estate market will take a hit.
- because of social distancing and the inability to inspect properties and transact in the normal way. People are not used to change online options or inspecting properties digitally.
- Property transaction numbers will decrease – there will be fewer buyers in the market and there will be fewer sellers placing their properties on the market for sale.
- Property parties will drop slightly, but we are located investment grade properties and A grade homes will not fall much in value – possibly 5 to 10%, while secondary properties will suffer significantly higher price drops.
Is there any upside?
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- Will be great opportunities for investors who are prepared to take a long-term view.
- Interest rates will remain at historic lows, the official cash rate is currently sitting at the all-time low of 0.25%. This will mean it’s cheaper to service a mortgage.
- Falling property values will provide a short term window of opportunity for people who have struggled – particularly in cities like Sydney and Melbourne – with affordability.
- The same logic applies to shares. For those with a long-term outlook, there are opportunities to find value at a lower price point in a bear market.
How will this recession be different to before?
This recession will be very different to previous downturns, both here and overseas because the current crisis is not the result of a bust after a boom.
This is an enforced shutdown and a significant disruption – it was not caused by anything fundamental in the Australian economy.
We entered this recession with Australia’s balance of trade positive and almost a balanced budget, and at a time when our banking system was solid.
Further, our governments, and governments around the world, have learned from the past, particularly the Global Financial Crisis, and have stepped in early with unprecedented relief packages for people and businesses to minimise the downside and build a bridge across to the good times.
At the same time, the government has provided financial support programs and encouraged the banks to offer mortgage deferrals, which means there is it will be unlikely that there will be many mortgagee sales which would otherwise destabilise our property markets.
Similarly, both commercial and residential tenants have been offering support packages and programs to minimise the downside.
Because of this, it is likely that once the virus is under control, we can recover more quickly than in previous downturns.
What will Australia look like after the recession?
- Interest rates will be low – not just in Australia but around the world
- Monetary policy will have little effect
- Our government will be lumbered with a significant amount of debt –
- Physical stimulus will be important
- What will happen to inflation?
- Remember the old target of 2 to 3%
- Unemployment will be high
- Certain industries are going to suffer while others will blossom as a result of the recession.
- Financial sector – structural economic adjustment and very low interest rates will weigh, but the adjustment will be uneven; some newer business models are being tested.
- Prosper :
- Government – likely a lot bigger; with eventual privatisation one possible spinoff
- Manufacturing – localisation as both a government and business preference
- Health – the system needs more redundancy
- Technology – working-from-home (or telecommuting) increasingly normalised
- Defence – G-Zero is becoming embedded, rather than diminishing
- Agriculture – COVID-19 and G-Zero suggest more countries will be focussed on food supply
- Infrastructure – with perhaps an increased focus on smaller-scale projects
- Aged care – demographics are still favourable, but preventing COVID-19 transmission is likely to be an ongoing task
- Australian superannuation – mandated inflows still provide structural support, but the sector’s liquidity position has become a focus
- Consumption – household consumption will likely show permanent changes in behaviour after the lockdowns.
- Don’t overreact
Recessions are largely driven by how the population on a whole is feeling about the economy—not the economy itself.
Investors overreact, and some bargains will become available because of this in the stock market, and in the property market because sellers will overreact.
- Think Long Term
- Don’t make 30 investment decisions based on the last 30 days of news.
- Think 10 years down the road. If you want to really build significant wealth think long-term outside the normal ups and downs with economic cycle
- Don’t try and time the market
- Build a solid financial foundation
- Have the right finance strategist by time not just properties
- Direct ownership structures to ensure you maximise your upside protect your risks, minimise tax and pass on your wealth to future generations
If you're wondering what will happen to property in 2020–2021 you are not alone.
You can trust the team at Metropole to provide you with direction, guidance and results.
In challenging times like we are currently experiencing you need an advisor who takes a holistic approach to your wealth creation and that's what you exactly what you get from the multi award winning team at Metropole.
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