It’s hard to believe that only four weeks ago, our stock market was close to an all-time high, and auctions were drawing record crowds and prices.
As you are well aware, stock markets have plummeted with panic selling, the world is heading for global lockdown and the news on COVID-19 gets worse every day.
What effect does a stock market crash have on property?
Historically, residential housing has performed relatively well after economic shocks.
Following ‘Black Monday’ in October 1987 where the stock market fell 23% in one day, housing values were largely unaffected. One year later, property values had double digit growth. To some extent that was driven by government policy (re-introduction of negative gearing) and a fall in the unemployment rate. It was also supported by investors taking money out of the stock market and buying property.
In 2007-08 when the GFC began, we saw the financial sector ‘freeze’, leading to a credit crunch. This affected employment, incomes and borrowing capacity for housing. Nationally, residential prices fell by 7.5% in 2008. We then saw massive government stimulus, the start of the rate cutting and then a mining boom driven by China. This all led to a fairly swift recovery and significant property price increases over the next seven years.
Property is not as volatile as shares, is less likely to be speculated on and is therefore more stable than equities. It takes longer to transact property and with high transaction costs, it makes panic selling less likely.
What effect could the Coronavirus have on the property market?
We are all adjusting to a new grim reality with the arrival of the Coronavirus. Unless something changes quickly, the next six months will be something we have never seen before.
The shutdown to economic activity, the loss of jobs and the overall loss in consumer confidence, will most likely contribute to a softening property market, at least in the short term.
The duration and extent of each of these factors is unknown, so it’s hard to predict what impact they will ultimately have on property prices.
If the Government follows quarantine restrictions enforced in Italy and China, this would have an immediate and direct impact on property transactions. If inter-city travel is restricted, confinement to the home would prevent open for inspections and on-site auctions. Such a shut down would have a major impact on transactions.
In such circumstances, it’s likely that only vendors needing to sell will be selling.
We have not yet seen the extent of job losses or business failures, although recent consumer surveys suggest we are heading down toward GFC levels.
You would expect that the prospect of the first recession in Australia for 29 years will influence borrower appetite for taking on large amounts of debt to buy property.
The economic impact of COVID-19 on our society will be massive. Just how long and how deep it will be will depend on how long the Government takes to get it under control.
On the plus side, interest rates are at record lows, the Reserve Bank is creating credit with Quantitative Easing, the banks are supporting their customers with repayment deferrals and the Federal Government has just released a massive $189b. stimulus package. This goes to lessening the economic impact on all Australians.
Once a vaccine or treatment for COVID–19 is available, the economic recovery should (hopefully) not be far behind.
The Melbourne property market.
Melbourne residential property prices are high, both by historical levels and internationally.
Household debt as a percentage of household disposable income is now approaching 200% (twenty years ago it was 100%), so households (and property values) are vulnerable to an economic downturn.
Agents we speak to report a reluctance from both buyers and new vendors to commit, as they are uncertain as to what will happen to the property market. Agents don’t see vendors lowering their prices, which are currently being met by purchasers.
Where someone has to sell their property in the short term, agents are recommending they sell now while there is a pool of purchasers in the market.
The numbers of people attending open for inspections have declined in the past few weeks, but the agents say that those who do attend are serious buyers.
A good barometer of the current Melbourne property market are auction clearance rates. These were around 80% a month ago but have fell to 63% this past weekend.
Auction Clearance Rate
15 February 79%
22 February 80%
29 February 79%
7 March 74%
14 March 71%
21 March 63%
What changes are the agents making?
Firstly ‘open for inspections’ are prevented under current lock down requirements. The use of ‘virtual on-line tours’ of properties will continue to grow.
You can expect that property inspections will be conducted by appointment only, which will qualify buyers and allow the agent to understand the purchasers needs.
Sale by public auction is also prevented. Auctions will be replaced by ‘expressions of interest’ campaigns, ‘sale by set date’ or ‘private sale’. Also ‘off market’ sales are expected to grow.
Although technology has been available to agents for some time, it is now being employed to meet the changing environment.
Face to face meetings will be replaced using on-line conference services such as ‘Zoom’, and contracts can be digitally signed and exchanged using various on-line platforms.
In conclusion.
The stock market plunge should not in itself drive property prices lower, as the two markets operate independently.
The real risk to property prices is how COVID-19 will impact on the real economy through unemployment, corporate insolvency and household defaults - bringing on a severe recession.
In the short term, debt servicing has been addressed by the banks deferring mortgage payments, and the Federal Government is supporting small business. Its just too early to tell how the longer-term effects will play out, however the prospects for a major downturn in property values is real.
Auction clearance rates have been falling but so far properties have been selling within the stated range in the Statement of Information.
If someone must sell their property in the short term, they should act now while there are purchasers currently looking for property.
We are however in unchartered waters and just can’t predict how bad the economy will get. It is evolving day to day.
Although we are all working from home to minimise contact with others, we are always available to provide advice about a property should you need it.
Please keep healthy and comply with the recommendations published by the Department of Health.
Regards,
Robert Allanadale, Director
