Seeking Safe Havens In New Investment Landscape
Run to the hills!
It’s a phrase synonymous with panic but applied to a property market about to be severely tested by the COVID-19 crisis, it might not necessarily be the wisest advice.
As investors weigh up how they can navigate a financial terrain that was unimaginable just weeks ago, nobody really knows where to run or whether to just hide.
With a click of a button, shares have been offloaded en masse and superannuation accounts switched from equities, property, and bonds to cash.
The impact on investments such as those, and gold, has been immediate and understandable.
Property, however, remains a more enigmatic investment prospect in the face of an economic shutdown. The closest parallel that can perhaps be drawn is with the Hong Kong property market, which experienced a similar crisis to that confronting Australia and the world today.
The SARS outbreak of 2003 resulted in price falls and fewer transactions but the losses were rapidly erased once the virus was contained. The rebound actually far exceeded pre-crisis prices.
Chris Gray, Buyers Agent and host of Your Property Empire on Sky News Business, said he expected the market to dip but to return in a rapid V-shaped recovery once the crisis was overcome.
“I believe there might be a temporary window to buy 10 to 20 per cent below a fair valuation as time goes on, however, I do believe this will be a temporary situation and prices in the high demand areas will bounce back to what they were before,” Mr. Gray said.
“Just like what happened in the GFC around 2009/2010 and what just happened after the credit crunch in 2018/2019, the market will eventually recover any losses.”
Steven Rowley, Curtin University Professor of the School of Economics, Finance and Property, said nobody could know what lies around the corner but said the longer it went on, the worse it would be for the housing market. But he also agreed there would be investors ready to step in when the time was right.
“If the market does decline, there may be investors willing to take a risk and purchase in the hope the market bounces back quickly when, or if, the market returns to normality but who knows how long that will take,” he said.
Where to run?
Before any speculative buying or timing of the bottom, the property market faces serious headwinds, regardless of its status as a resilient investment in times of crisis.
Professor Rowley said an increase in supply as a result of large-scale selling resulting from increased unemployment would lead to a significant downward pressure on prices.
“Add to unemployment a lack of demand because of uncertainty and you have a recipe for disaster.
“No home opens and cancelled auctions will reduce market activity and, if sellers are desperate, will lead to significant discounting.
“For those investors who like to view before they buy, travel restrictions will also delay potential purchase decisions,” he said.
In determining which property markets will prove the safest or riskiest in the months ahead, jobs were the dominant factor, with inner-city areas widely expected to hold up best.
National Head of Sales at The Agency, Thomas McGlynn, said metropolitan areas in the capital cities were likely to fare best.
“As we saw with the markets that withstood the Global Financial Crisis (GFC), the inner-city areas of most capital cities and in general blue-chip suburbs, tend to be more robust through market downturns,” Mr. McGlynn said.
“In terms of property categories, family homes are likely to be more secure because if people are under financial pressure they are far more likely to sell an investment than their own home, regardless of whether it was an apartment, townhouse or house.
“Unlike the GFC there is less pressure for people to sell throughout the pandemic restrictions with the banks offering six months of mortgage relief.”
Rather than running to the hills, sticking with the pack might be the best alternative, according to Mr. Gray.
“If you’re around the median price where most people can afford then there’s still likely to be some demand.
“A lot of people will still have jobs or savings or have relatively wealthy parents who can still support them to pay the mortgage or the rent, even if they lose their jobs.
Mr. Gray said more remote areas and those with high supply and low demand will be hit harder, drop further and take longer to recover. He identified units in inner-city Sydney, townhouses and semi-detached housing in inner-city of Melbourne as potential safe havens.
It was only a few weeks ago that Sydney and Melbourne, Australia’s two largest property markets, were recording auction clearance results of between 70 and 80 per cent.
A government ban on auctions and home opens brought that to a shuddering halt. The latest weekend results – the first since the restrictions – recorded auction clearance rates in the low to mid 30 per cent range. Of Melbourne’s 1,404 scheduled auctions, more than 800 homes, or 57%, were withdrawn before the weekend. Similarly, in Sydney, 52% of 1061 auctions failed to take place.
The past week had been poised to be the busiest week of the year with 3,203 homes scheduled for auction across the combined capital cities, the majority in Melbourne and Sydney.
Mr. Gray saw a silver lining in the reduction in sales transactions, arguing it may not translate into an impact on prices.
“This could be a great thing as it could restrict the volume of sales and stop distressed sales from happening.
“If losses don’t get realised then they can’t be used as comparable sales with valuers,” he said.
Travel restrictions are also having an impact, in particular on the investor segment of the market. International investment has dried up but is not large enough to have a major impact on the overall residential property market if it falls away, although it may affect the suburbs surrounding universities.
Buyers’ agents services could be in greater demand in coming months, as they can access off-market properties and conduct private inspections on behalf of potential buyers.
As for the buyers, all eyes over the coming months will be on the unemployment rate and how this is likely to impact the market.