What developments can we expect in the Australian property market in response to COVID-19?
Much of the Australian economy is in turmoil as a consequence of the coronavirus outbreak, with uncertainty across all sectors, including the housing and property investment markets. Overall, there is a general sense of stasis as investors wait to see when and how the economy will respond to the many challenges the country is now undergoing.
Despite national rises in house prices across the whole of March of 0.7%, there was unsurprisingly a slowing in the second half, which meant that March saw the lowest monthly gain in prices since July 2019, according top the latest data released by CoreLogic.
There were, however, overall rises in all capital cities except Hobart, from 0.6% in Darwin and Adelaide, to 3.9% in Sydney.
Nevertheless, this moderately positive news needs to be weighed against the fact that the housing market is entering one of its greatest periods of uncertainty since the GFC over a decade ago, and which may see Australia go into recession for the first time in more than a quarter of a century.
What will be the short-term impact of COVID-19?
The full effects of the stimulus packages brought in by both the federal and state governments also remain to be seen, in particular how these will affect the residential and investment property markets. Ultimately, it is thought that the longer the economy is in ‘hibernation,’ the greater and more long lasting the impact will be on the value of housing.
At the same time, however, it is nevertheless important for investors to bear in mind how the property market has rebounded after other periods of financial turmoil.
Australian property prices tend to remain resilient
It may be helpful to note that when Australia has experienced other severe shocks to its financial infrastructure, the impact on real estate investing and the property market as a whole has not necessarily been as dramatic as on other investment markets, such as shares (although this comes with the caveat that none of these previous crises were the result of global pandemics).
Data from the CoreLogic Home Value Index suggests that the housing market does not fall as far, and rebounds more quickly, than other investment assets, even in times of great financial upheaval. This is likely because property values are generally speaking less volatile than shares, plus the fact that regional and local factors play a large role in property investment in Australia,
i.e., values can be falling in one state or city while rising substantially in another.
What this data therefore suggests is that prolonged falls in share values on the ASX, or even a technical recession, do not necessarily mean that there will be a corresponding drop in the long-term value of Australian property.
Should I still be thinking about investing in property?
Nevertheless, it is important to remember that the economy in general — and the housing market in particular — will both start to grow again once more when the health crisis stabilises and the country gets back to work.
This could in all likelihood be accompanied by a surge in demand for housing stock, as investors look to get their assets back working for them, and the rental market comes back to life as people re-enter the workforce or resume their careers.
Therefore, this could (somewhat counter intuitively) be the ideal time to start or grow your property portfolio.
This means that if you have been thinking about real estate investing and are still in a position to do so, don’t let the current economic outlook make you change your plans. In our view, and that of most industry professionals, successful property investment is more dependent on the length of time that you hold an asset rather than the point in the housing market cycle at which you purchase it.
By waiting until there is more overall economic certainty, you may in fact simply be deceasing the amount of time you own your asset, while also missing out on some of the incentives developers are offering investors at this time to get the market moving.
One of the keys to real estate investing is making your property cashflow neutral or cashflow positive (i.e., an investment property that pays you a monthly income over and above holding costs), and purchasing at this stage of the cycle could present an ideal opportunity to achieve this.
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