Coronavirus vs Australia housing market

Dan Toh April 15, 2020 09:05

In Australia, whenever something resembling a crisis comes along, the housing doomsayers will come scurrying out of their dens with proclamations of “Repent! The end is near!”.

And for the longest time, they have been wrong. And I don’t mean wrong 70% of the time, or even 50% of the time. Try 0 for 10 times.

You may be wondering why so? Is Australia really the lucky country that got away time after time despite some of the best brains from economists to journalists making seemingly intelligent predictions?

The answer is well, somewhat disturbing. First and foremost, most economists don’t understand housing markets. They are a lot more comfortable forecasting though numbers and charts. Housing, which tends to be more social economics than technical economics, often confuses them. For example, they are happy to call for corrections whenever the economy goes south. However, the correlation between an economy and its housing market is highly dependent on several factors including supply/demand balance, investor/owner ratio, interest rate, employment, foreign participation etc. While many financial products rise and fall with economic news, residential housing in a healthy market is highly tolerant and buffered against economic fluctuations. In other words a lot has to go wrong for housing to start collapsing.

And when it comes to media, well, it was recently reported in The Guardian quoting Dr Oliver Shane from AMP saying that housing will fall by 20%. Let me quote what Dr Shane actually wrote in his article dated 19 Mar 2020.

“Our base case is for a rise in unemployment to around 7.5% which is likely to drive a 5% or so dip in prices ahead of a property market recovery into next year as the economy bounces back and pent up demand is unleashed again helped by ultra-low interest rates.”

“A sharp rise in unemployment to say 10% or beyond risks resulting in a spike in debt servicing problems, forced sales and sharply falling prices. This could then feedback to weaken the broader economy as falling home prices lead to less spending and a further rise in unemployment and more defaults and so on. This scenario could see prices fall 20% or so.”

While the first para states the base case, the second was warning the government that keep unemployment at bay is key to stabilising the housing market. Choosing to quote that as his forecast for a 20% is obviously fitting his opinions to a preconceived agenda that the writer already had in mind.

The combination of misinformed economists and self-serving journalists make a lethal drug of confusion and fear that many can get addicted to and keep going back to them for more to fuel their propensity for doom and disaster.

While that might seem disturbing, there can be silver linings for investors if we are to look hard and sensibly enough.

Take the current COVID-19 situation for example. During 2017-19 we saw Australian banks halt lending due to government’s calls to stricter lending checks. The Australia Prudential Regulation Authority (APRA) imposed several restrictive policies that saw lending for not only locals but especially for foreigners tightened drastically. House prices across Sydney and Melbourne fell as a result along with transactions and auction rates. Developers were halting and stalling their projects as requirements for construction loans became more onerous.

However, with global trade slowing, no thanks to the trade war, along with the restoration of order to the housing market, APRA started easing the policies mid last year. RBA too, in an effort to lift employment and inflation bravely executed 3 consecutive interest rate cuts to reduce it to 0.75%. Such had an immediate effect on the housing market and over the last quarter of 2019 we saw house prices bouncing back strongly especially in Sydney and Melbourne. Given that lending to foreigners remains tight, this comeback was largely driven by local pent-up demand. Auction clearance rates recovered from a low of 45% to over 70% in Sydney alone.

House prices in Australia continued its run from Jan to Mar 2020 and annual transactions went up from 431,099 to 437,328. The market then went into the Covid-19 lockdown on 23 Mar 2020 but certainly from a position of strength in terms of demand and growth. As to how the market would hold up in the light of this crisis is anyone’s guess at this point, but here are some pointers that investors can do well to take note of:

• Out of Australia’s top 15 trading partners, 11 are in the Asia region taking up close to 60% of its total export, and with China taking up 32.7% alone.
• McKinsey recently released an interesting article "Could the next normal emerge from Asia?” that states that Asia is leading the way out of Covid-19.
• China and Australia in particular are able to implement harsh restrictions but with strong compliance and understanding from its people, which I believe are the keys to the fight against Covid-19, apart from a strong healthcare system.
• Today, while Australia is far from being out of the woods yet, daily new cases are obviously well passed its peak and death rate is held at a low of 2%, even lower than Germany’s 2.3%.

While I would love to say that the worst is over for Australia, this coronavirus has a bad habit of coming back with a vengeance so I reckon it ain’t over until the fat lady sings. But one thing that I am certain of is, similar to what Dr Oliver Shane has stated, chances are this will be a non-event for Australia’s housing market when we look back in a couple of years unless we see unemployment spike up to 10%. This is especially when we see the new infection cases dwindling quickly within just 3 weeks of the lockdown and Australia seems to have successfully prevented community spread.

In the meantime, while existing homeowners are not rushing to sell their homes, developers do have to keep up the sales activities to pay bills and investors. So it may be a good time for smart and brave investors to be bargain hunting in the new homes segment. Given the weak Australian dollar the opportunity for foreign investors is obvious as well.

Just as the virus had investors asking what will happen to the market because of it, long term property investors like us should be asking what will happen when this is over. And I suspect your answer should make your decisions a no brainer.

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Dan Toh

CEO and founder of RunningStream