As the fever pitch seems to get notched up to a new level every day, it’s hard not to wonder where we will all end up once all the chips have fallen.
Most of the questions that I’ve been fielding (apart from those around family and sanity) are from property owners and investors like yourself who are concerned around where the market is headed and whether we’ll see a dramatic fall in prices.
From that perspective, I’d like to shed some light on how I see the property market unfolding in the short and medium term so that you can breathe a little easier and keep a clear head in the coming months.
To begin with, I’m going to start by saying that I’m no Nostradamus.
I can’t predict the future any better than anyone else can.
Not something I’d normally lead with, but we’re in truly unprecedented times right now.
No one has any idea of what the future holds and the landscape seems to be changing by the day as global news comes in and stimulus packages are revealed.
I do think it’s worthwhile to reflect on how the property market has performed in times of economic crisis in the past though, and the 3 lessons that we might be able to take with us as we ride through this rodeo.
1. Property is one of the safest havens when it comes to protecting your wealth
If you’ve been watching the share market (and your own Super) you’ll know that it’s a blood bath out there.
Anyone who’s talking it up at this point has missed the fact that listed companies haven’t even begun to report on quarterly earnings yet, and with 65,000 people laid off as of today alone, you can be sure that there’ll be no smiles (or handshakes for that matter) at the next board meeting.
In short, the market has come off nearly 35% across the board to date and things are only set to get worse.
The beauty of property in this environment is that it’s quite hard to get rid of compared to shares. You simply can’t offload at the click of a button.
That makes it far less volatile and less likely to be subject to reactive responses like the “sell everything, it’s the end of the world” conversation you just had with your bestie.
Have a look at the chart below as this gives a great insight into how property has performed in recent crises, courtesy of CoreLogic…
This is price growth through some of the worst crises of our time going back to 1985, marked by the yellow line, with major economic crisis periods shaded in blue.
The Black Monday crash of 1987, where stock prices fell 23% in a single day actually saw property rising on the back of financial deregulation.
Following that, our most recent recession of 1992 saw price growth slow, but only fall into negative territory by a mere 2.5%.
Through all the shaded periods of economic crisis we can see here, property has often continued to grow positively at some level, with the exception of those times where the lack of credit has been the central driver of the downturn – think the GFC in 2008, and the most recent events of 2017/18 where we saw bank lending tightened, the threat of regulatory change and a banking royal commission.
These periods have not been without their heightened unemployment either, and while the coming months are set to see unemployment as we’ve probably never experienced, the chart below shows that even during the last recession of ’92, where property prices held firm, unemployment was peaking near 11%.
Coincidentally, 11% is the figure that Westpac’s Bill Evans is predicting we will see in the coming months.
Others have predicted more dire figures, but where it ends up remains to be seen.
The point here is that even in times of heightened unemployment, property has proven to hold its value.
2. Transaction numbers will fall, but not necessarily prices
There’s no escaping the fact that if buyers and sellers find it increasingly difficult to leave their front yard there is little chance of doing a transaction.
That doesn’t mean nothing will get done. There are always those who need to move and there are those who think now is probably a great time to buy, so odds will be overcome.
As we move into the Easter period and increasingly tighter lockdown measures are put in place though, we’re going to see more and more people sitting on the sidelines to see where things will head, or to wait until they can at least stop home-schooling their kids and get out to see some inspections.
All in all, that means less buyers buying and less sellers selling.
Don’t confuse a fall in sales volume with a fall in prices though.
We may very well see a semi-freeze on the market in the coming months, but probably no different to what happens over Christmas where most of us self-isolate for a while anyway.
Either way, the next few months is unlikely to see any doomsday scenarios where prices go into freefall as some would like to think.
3. Fire sales will come down to the household, not the market
When people think of markets turning bad, they tend to think universally – that the whole market will take a downturn.
In my experience, this is rarely the case.
There are markets within markets, and while some areas may fall significantly, others remain relatively stable.
Combined with my earlier point – that the property market is less prone to quick and reactive emotional decisions – the decision to sell in this market will come down to the individual and how financially fortified they are.
It’s true that household debt is now at its highest levels ever, currently 186% of annual household income, however that has been balanced in part by ever-reducing interest rates which have made our overall dollar spend per month relatively unchanged.
With recent interest rate falls and potential mortgage “freezes”, this burden will likely have been eased even further.
My experience on the buying side has been that even in down markets, not every seller is willing to sell below market value and most have an expectation to sell above or simply wait until they can get the price they want.
This has certainly been the case in recent times, where overall prices in Sydney and Melbourne fell roughly 10%, and sellers simply held their property back, creating a shortage of supply.
As we see the fallout move through this market in coming months it may very well be a different kettle of fish, but the need to sell will fall more with those households who are highly leveraged, don’t have the savings or aren’t privy to any of the stimulus measures the government is currently putting in place.
It still remains to be seen what the stimulus packages will allow for when it comes to rent relief and mortgage relief, putting both tenants and landlords on tender hooks for the moment.
This remains one of the biggest uncertainties in the property market right now, especially for investors.
After all, mortgage repayments and rental income go hand in hand – it would be difficult to see how one would be given a reprieve and not the other.
Until then, the same fundamental principles of property still apply – that property is a long-term investment that will build wealth over time and remains relatively resilient during economic crises.
While recent events are taking us into unchartered territory as far as an economic fallout is concerned, rest easy that you’re in one of the safest asset classes available.
It remains to be seen whether property will be significantly affected, but as the great Chinese proverb says, this too shall pass.
From the bottom of my heart, I hope that the impact of all this remains manageable for you.
Please take care of the health of you and your family and do your best to help those around you where you can.