Why I think the property market and economy will be okay

There have been a number of economists and commentators who have predicted that property values will fall anywhere between 10% and 32% this year.

House Prices 915642It seems like it’s almost become a competition for who can be the most bearish.

However, my view is a lot less bearish.

I believe property values won’t fall by more than 10% and it’s quite possible that they might not fall at all.

You could be excused for thinking that I’m an unrealistic property optimist, but I promise that is not the case.

What is needed for property prices to fall by more than 10%

The predictions of property value declines are usually premised on the assumption that there will be more sellers than buyers.

And perhaps some of those sellers are financially distressed, need to sell quickly and as such will drop their price to secure the sale.

The occurrence of forced selling tends to weigh on property sentiment and the negative spiral begins.

However, the fact is that people will fight hard to avoid having to sell their home.

It is their ‘castle’ and it’s that last thing they want to do.

At the moment, banks are allowing borrowers to pause their repayments for up to six months.

This avoids the need to sell a property of you are in financial strife.

However, these repayment pauses will expire around September.

This is also when JobKeeper payments are expected to cease and many people are worried about the impact.

What happens after September?

Firstly, we have to remind ourselves that most people haven’t been materially adversely impacted by the Covid shutdown.

Our research (survey size of 451 people from various employment arrangements and ages) suggests that two thirds of people have experienced an income reduction of less than 15% – many haven’t been impacted at all.

Impact On Income

Of the people that have been impacted by Covid-19, almost two thirds of them expect to recover their income back to pre-Covid levels within the next 12 months.

Time To Recover

Some people will need more support

Notably, 8% of respondents said that they were not confident that they could successfully service their loan repayments after September 2020.

It is this group of people that may need additional support from the government and banking sector.

Make Rmpts Post Sep

If a borrower is unable to resume making normal loan repayments the bank will have to assess how long it may take the borrower to recover their income.

If the bank believes it will take less than say a year, then I expect it would be very willing to agree to alternative repayment terms, which may include a second (full or partial) repayment pause period.

BankIn fact, the banks might formulate policies targeting specifically industries e.g. additional support for people that work in hospitality and tourism.

Westpac recently announced last week that it will allow borrowers impacted by Covid to switch from principal and interest repayments to interest only repayments for up to 12 months – avoiding the normal credit approval processes.

I expect other banks will follow suit.

Banks will only force a borrower to sell their property if they believe it’s the only way it can get its money back.

Foreclosing is usually a banks last resort, particularly in a post Royal Commission environment.

And it is very likely that there will be more targeted stimulus

The government closed down the economy to curb the spread of the virus.

UnemploymentMost of the people that find themselves in financial hardship are in that situation as a result of circumstances beyond their control.

As such, the government’s approach has been to help them through this, and I think that approach will continue beyond September.

Now that the government has “found” an extra $60 billion as a result of their JobKeeper bungle, I feel it is very likely that the federal governments will provide further targeted stimulus (i.e. targeted to specific industries or demographics).

This will be aimed at the sectors that have been hardest hit thereby further minimising mortgage defaults.

There is still enough underlying demand for property

Interestingly, 6 out of 10 people that intended to purchase a property during 2020 still plan to do so this or next year, which suggests there should be an adequate level of buyer demand to support sales volumes.

Reports from clients and my own personal experience suggests that in some segments demand is almost just as robust as it was at the beginning of the year.

Quality assets are still attracting a lot of interest.

Many of the people that have been heavily impacted probably aren’t homeowners

Obviously, some industries have been impacted by the lockdown more than others.

Tourism AustraliaThese include recreation, travel, retail, accommodation and food services.

According to ABS data, people employed by these sectors earn between one third to one half of Average Weekly Earnings.

That is, they are some of the lowest paid workers in the economy.

Lower income earners tend to have lower rates of home ownership.

That stands to reason because their financial capacity to save a deposit and qualify for a mortgage is below average.

Therefore, people employed by these sectors are more likely to be renters than homeowners and therefore are less likely to contribute to property buying and selling selling activities.

When will consumer spending return to normal?

Consumer spending accounts for almost 60% of Australia’s GDP, so it’s important component of our economic recovery.

The big question is will consumer spending bound back after the shutdown restrictions are lifted?

We must remind ourselves that this economic slowdown was caused by a contraction of supply, not consumer demand.

Of course, unfortunately, some people and businesses have suffered serve financial loss as a result.

And their consumer demand will be lower.

However, there is also a large cohort that have avoided any negative impact and their spending power remains intact or, in some situations, enhanced.

Future Spending

This is reflected in the fact that 45% of survey respondents indicating that their spending levels will return to pre-Covid-19 levels once restrictions have been lifted.

And 40% of people indicated that they will spend a little less.

But there is little in the way of pent up demand

Woman Spending Too Much Money For ShopI thought there might also be an amount of pent-up demand resulting from people being locked in their homes unable to spend on their usual entertainment and leisure activities.

However, somewhat surprisingly, only 5.5% of respondents indicated they will initially spend more than they usually do.

However, on the whole, this data suggests consumer demand should bounce back relatively quickly and the flow on effect to the economy and consumer sentiment will be positive.

The Westpac-Melbourne Institute Index of Consumer Sentiment enjoyed it biggest monthly gain in May since the survey began nearly 50 years ago (see here).

Of course, there are downside risks

There are two main housing-related downside risks in my view.

The first one is a second wave of infection that results in lockdown measures being reinstated.

coronavirus

That would have severe economic repercussions and definitely weigh on housing values to a material extent.

However, that risk seems to have abated over the past few weeks.

Australia’s virus control is the envy of many countries and in the long run, will make Australia an even more attractive immigration destination.

The second risk is money supply, specifically, the lending volumes.

As I have cited previously (see chart below), there is a direct link between lending volumes and property price growth.

Loan Volume And Price Growth

At the moment, banks are experiencing operational bottlenecks caused by significant increase in workflow and the fragmentation of Australian and offshore staff.

For example, ANZ recently confirmed that it takes it more than 3 weeks before it even looks at a new application.

It might take the banks a few months (at best) to resolve these operational issues.

In the meantime, lending volumes will be negatively impacted.

The news is not all bad

Currently, there is a lot of negative sentiment about the property market and Australian economy generally.

No one really knows what will happen over the next few months, including me, of course.

However, in the long run, investment-grade property market fundamentals are largely intact, which I think is my most important point.

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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


'Why I think the property market and economy will be okay' have 2 comments

    Avatar

    May 28, 2020 Noah

    There’s a lot of “I expect” and “I think” on these claims. Didn’t cover population decline at all which is surprising.

    Reply

      Michael Yardney

      May 28, 2020 Michael Yardney

      I much prefer that Stuart said “I expect” and “I think” rather than giving firm forecasts.

      This is much more realistic than those people who are telling you exactly what’s going to happen – no one really knows do they?

      Reply


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