BOOM OR BUST - An early look at the impact of COVID-19
At the time of writing, everything in our society is so fluid, predictions of any kind seem foolhardy. As an example, interest rates were cut twice in March, the first time we have seen an emergency cut in over 20 years. This barely caused a ripple in the mayhem.
Nevertheless, we have witnessed some early trends which are worth noting, and we feel there are some vital signals and signposts that are worth following to gauge the market's performance.
What has happened thus far?
The immediate distress in the real estate market actually occurred in the rental market. As major companies closed down in mid to late March, unemployment skyrocketed in days. Casual workers, those in industries such as tourism, hospitality and airlines were immediately impacted. Landlords and real estate agents suddenly found their fantastic long-term tenants were unemployed through unprecedented circumstances.
The State and Federal Government introduced measures to protect tenants from being evicted. Further to that, the Federal Government introduced the most comprehensive support package ever offered to Australians in the form of Job Keeper payments. This package was designed to keep employers and employees in work and in business whilst we ride through COVID-19.
In the spirit of 'we are all in this together', landlords who had tenants in changed circumstances were overwhelmingly supportive and empathetic. We commend the many landlords who have been gracious in dealing with those tenants in distress during COVID-19. It is worth noting that many landlords are also facing distressing circumstances of their own at the same time.
In fairness, banks have also come to the table offering payment relief to landlords whilst we work our way to the other side. This, in turn, allowed landlords to accommodate tenants that faced changed circumstances during COVID-19.
Vacancy rates in the rental market have skyrocketed, putting downward pressure on rents. This is as a result of decreasing demand, increasing break lease situations, existing apartment oversupply in certain markets and rising supply as owners seek refuge in the rental market. Many short-term rental properties such as those listed on AirBNB have and will continue to returned to the long term rental market, adding to oversupply.
Whilst the share market went on a roller coaster ride with movements of 20% to 30%, the property market was relatively stable in comparison.
The Melbourne real estate sales market was surprisingly stable throughout March. It would be an overreach to suggest there was no impact from COVID-19 because there was. However, it is fair to say that offers and transactions continued at a healthy rate as buyers took a long-term view of events.
In late March, the Federal Government banned Open Inspections and Public Auctions during COVID-19, these changes had a significant and immediate impact on the market, with online auction clearances dropping to about 30%. However, there was little impact on us as we haven't run an auction in 25 years and our team are fully adept at one on one inspections. We have seen a sharp drop in quantity but a higher quality of buyer out attending inspections.
Signals & Signposts
There are some key elements that will determine the fortunes of the market in the short term.
The banks will need to create credit flow into the market. Buyers with pre-existing loan approvals will dry up quickly in the weeks ahead. New buyers willing and able to enter the property market will be required to support prices against a sharp drop.
Many vendors will opt to sit out COVID-19, which is a good thing. A surge in stock levels would be detrimental to the market's fortunes. The bank's immediate recognition of the need to support people through COVID-19 has gone a long way to ensuring we don't see a surge of panic selling.
A seller needs a counterparty to trade. Will property buyers have the confidence to jump in? A lot will depend on how long COVID-19 and the subsequent lockdown of our economy lasts. Low stock levels across Melbourne and some pent-up demand from buyers who need to buy means there are still opportunities for property sellers to sell. The question remains for how long.
Central Banks & the AUD
Once we get to the other side of COVID-19, Central banks and Governments globally will continue to pump money into the system. They will do so by Quantitative Easing, which is code for printing money. You have no doubt heard the phrase 'cash is king' in recent times. Cash is king until COVID-19 is over and then you are likely to see a tsunami of cash race into markets as bets are placed. Markets know that Central banks and Governments will cheapen money in an attempt to fight off deflation and optimistically attempt to create inflation. They know this because it is the only path available to fight off depression.
The Australian Dollar (AUD) has been sold off in the past month, given our economy's dependency on China. From a real estate perspective, this could entice ex-pats to consider parking cash in Aussie property. In the short term, ex-pats are likely to enjoy the twin benefits of a falling AUD and softening property prices.
Survival & Recovery
COVID-19 is likely to have two distinct phases for those in the property market – the survival and then the recovery phase. Those in secure employment or those sitting on cash holdings will come out of the survival stage well-positioned for the recovery. Tragically, there are many people in our society who now face an epic battle to save their homes, their business and/or their investments. Thankfully, the Government, the banks and society at large are doing a tremendous job of helping each other through these events.
The rise in community spirit is one of the few positives to come from COVID-19.
The 'recovery phase' is likely to be primarily influenced by the length of time the economy is in 'hibernation mode' as Scott Morrison, the Prime Minister has termed it. A shorter hibernation period will result in a quicker recovery phase and vice versa.
Thanks to Peter O'Malley – author of Inside Real Estate for his input and insight.
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