Bricks and mortar offer protection from crises volatility

As the world seeks shelter from a deadly contagion, you’d expect health to be everyone’s number one priority.

But international surveys consistently reveal that more people are worried about their finances than the health implications COVID-19 coronavirus.

Global crises inevitably have a massive impact on financial security, investments and wealth accumulation, and the stock market crash of recent weeks has only underlined the vulnerability of equities, superannuation and even bank savings, as interest rates near zero.

Along with gold, the asset class in Australia that has proven most resilient in times of financial peril and crisis has been property.

From the Spanish flu of 1918 through to the global financial crisis (GFC) of 2008, house prices have either held their ground or risen as other investments have collapsed.

Defying the expectations of many, house prices in Australian capital cities rose 13.6 per cent in 2009 and a further 6 per cent in 2010. The Australian share market by comparison took ten years to retrace its steps back to pre-GFC levels.

During the 1987 Black Monday stock market crash, the Australian share market lost 23 per cent of its value in a single day but housing values were largely unaffected. Prices instead rose by double-digit margins a year later as financial deregulation drove up asset prices.

John Lindeman, CEO of Property Power Partners and respected property investment commentator, said the 25 per cent rise in the price of gold in the past few months was a sign investors were turning to the “investment of last resort”.

“Gold is always a reflector of how the economy is travelling, rising in times of uncertainty, but gold is also volatile in its own right and unlike property, does not deliver regular yields like property or dividends like shares, so it has its own inherent risks,” Mr. Lindeman said.

Herd mentality

Few crises of the past three decades – from Black Monday through to September 11, the Asian tsunami, SARS and the 2008 GFC – compare to the prolonged economic impact of the coronavirus.

Unlike shares, property has generally performed relatively well in troubled times.

Real Estate Institute of Australia (REIA) President Adrian Kelly said property had the benefit of being less liquid than shares that could be offloaded at a moment’s notice.

“Nobody knows the impact this will have on property prices but, while I do expect transaction volumes to decrease, I would not expect massive value changes,” Mr. Kelly said.

“We are in uncharted territory but 70 per cent of sales are for people who are basing their decision to buy on where they want to live, not as an investment.

“Most vendors will be in a position to sit tight if they feel the market is slowing and there will still be opportunistic buyers looking to take advantage of any easing of prices.

“If I had a crystal ball, I’d be predicting that when this passes in a few months, the markets will be back with a vengeance,” he said.

Mr. Kelly said consumer sentiment would drive the market as herd mentality took over from fundamentals.

“If you look back to pre-election times, market sentiment was down and the major property markets had taken sizeable price hits but soon after the election market sentiment turned and prices in Sydney and Melbourne soared,” he said.

“There will be a lot of herd mentality influencing the market in coming months – we only have to look at the toilet paper situation to see how people are capable of reacting!”

Dr. Sam Tsiaplias, Senior Research Fellow in the Macroeconomics Research Program at the Melbourne Institute of Applied Economic and Social Research, said property’s inherently slow-moving transactions, compared to stocks, would cushion the impact of the coronavirus crisis.

“Housing markets are not immune to the impacts of shocks but are subject to significant rigidities that slow down any falls,” Dr. Tsiaplias said.

“The GFC strained credit markets and the banking sector in a very different way to the current crisis.

“In terms of how the housing market will respond, on the one hand, housing markets have already been pushed up by low interest rates and the search for yield but the coronavirus is still in its infancy and will heavily curb economic growth going forward.

“This will have significant ramifications for investment and the labour market and when these kick-in, growth in the housing market will also start to slow down but I think the property market will be more insulated to the effects of the virus than share markets.”

A time like no other

The GFC, brought about by seismic fractures in US bank lending practices, was brutal but relatively short-lived compared to the unknowns around this pathogen. As Australia engages in toilet paper wars, barricades the country, shuts down entire industries and dictates how far we stand from one another, world stock markets have plunged, forcing world banks to cut interest rates and governments to embark upon debt-inducing stimulus spending.

According to Mr. Lindeman, to come to terms with the current crisis, you need to travel back not decades but more than a century, to the Spanish flu that reached Australia in 1919.

When an estimated 50 million people died in Europe the previous year, Australia closed its borders (which was easier when ship was the only means of travel). Despite the flu causing stock market chaos in Australia, property prices actually rose 10 per cent and more again when population growth returned in the coming years – a situation Mr. Lindeman said could be replicated today.

“We have population growth of 1.5 per cent that is being temporarily stalled but Australia may actually benefit from even higher population growth if we weather this storm effectively, which could present more positives than negatives for the property market.”

Steve Douglas, Executive Chairman of the SMATS Group, said irrational behaviours would have an economic impact but also present opportunities for those who retained a clear sense of perception.

“I am in no way underplaying the importance of early action or prudent medical and containment practices as this virus has a potentially fatal outcome, especially for the elderly, but I have no doubt that we will be moving on from this, either through physical containment or mental acceptance, in the not too distant future,” he said.

“When we do start to want to move back to our normal lives, then so too will the global economy start to quickly heal itself.

“The Australian property market showed great resilience through SARS and the GFC largely as it was a safe haven for a long-term living destination for expats and potential migrants.

“This may well be the case this time around as well, but it remains important to focus on genuine living accommodation that would appeal to this potential buyer pool if you intend to acquire property,” Mr. Douglas said.

Risk zones

While property is expected to avoid the sort of carnage seen on stock markets, there are still areas at greater risk than others, with tourism centres being the most obvious areas of concern.

Tourism operators in Queensland’s north say bookings are down to less than 30 per cent of regular levels. On the Gold Coast, restaurants are reporting booking cancellations have reduced trade by 80 per cent, with hotels, airlines, and businesses on edge.

As tourism is literally halted, the jobs that drive population growth and fuel local purchasing power are similarly dried up, with an inevitable impact on the attraction of local property.

With much of regional Australia already struggling from bush fire damage, any global downturn that adversely affected mining and agricultural exports could also wreak havoc on regional property prices.

University of Melbourne’s Dr. Tsiaplias said Australia’s biggest and priciest property markets were also potential losers in the property stakes.

“I suspect Melbourne and Sydney will be most exposed to the effects of the coronavirus.

“Research has shown that these are the two cities that are most prone to over-react to market conditions, as was seen with the recent charge towards record median price levels,” he said.

The recovery

With normal rules of engagement thrown out the window, the RBA has resorted to printing money and slashing interest rates, and lending approvals are becoming slightly easier, with a softening of servicing guidelines for many lenders in particular in the competitive owner-occupier market.

As the government deals with the economic fallout of COVID-19 in the months to come, many expect that first home buyer and other incentives will be introduced. But whether they arrive in time to help the distressed or simply fuel a property market surge as the virus concerns eventually abate is yet to be seen.

“I’m expecting to see a V-shaped rapid recovery from any price falls once people become mobile again and re-enter the market, a market which may well be buoyed by a raft of government incentives and schemes aimed at reinvigorating the economy,” Mr. Lindeman said.

“The three Ps – population, purchasing power and property supply – will be the fundamentals that will return to the market rapidly, and bring with it a recovery of any price drops,” he said.