I have had a number of queries about the impact of the corona virus and associated economic consequences on the property market.
Volume in the Property Market
The first observation is that volumes will decrease markedly in the next few months. I have already had a number of conversations this week with buyers pulling out of contracts under due diligence or cooling off provisions and also with sellers who have withdrawn their properties from the market. In addition, a number of estate agents have reported that buyer and seller activity is down markedly. It is hard to see volume returning until well after current levels of fear and uncertainty are reduced.
Clearly, a reduction in volumes will not of itself change property prices.
Are Property Prices Volatile?
I don’t subscribe to simplistic views that property automatically goes up when the share market goes down like this author:
I also don’t subscribe to the view that property is safer than shares because property prices don’t fall by as much or as often as shares. Rather, I believe that measurements of property prices are imperfect which means that we can’t measure property prices as accurately. As an example, I attended an auction in Surrey Hills on 29 February where a property was sold for $4 million. At that time, I considered that property prices were rising and the market was stronger than most people realised. Two weeks later a nearby property regarded as superior was sold for $3.6 million. This is suggestive of a 10% fall in this market in the space of two weeks. My guess is that the price would be lower again this Saturday if we could re-run the same auction.
I also recall in the early 1990’s when I was just beginning my career a time when property prices in Toorak fell by 50%. To be fair, prices at the higher end of the market are more volatile than median values – but my point is that property prices can and do fall faster than we might realise.
Vendors tend to withdraw property from the market or delay selling when the market falls – which tends to distort property data and also mask the true extent of falling prices.
Interest Rates are Down…
The Reserve Bank has reduced interest rates to 0.25% – as far as they are prepared to go – whatever that means. There are also other substantial programs to provide further stimulus.
I don’t believe that interest rate reductions are presently as large a stimulus as they have been historically. After all, if your income is cut in half or you are worried about your job this isn’t going to motivate you to increase your borrowing, spending and investing. In addition, lower rates don’t help if restrictive bank lending criteria mean you can’t get a loan.
Also in the context of property prices, property outgoings are still on the rise – land tax, council rates, water rates, insurance and other costs. With interest rates and rental yields so low these are becoming a much more significant expense (relative to mortgage servicing costs) as a proportion of total property income.
Where to for Prices?
The immediate, short term direction for property prices is likely to be down. I believe that this has started already.
The medium term direction is harder to predict.
I have seen some historical analysis that suggests that this will be a temporary blip and prices will resume their upward trend relatively quickly. Certainly, lower interest rates and other forms of stimulus may have this effect if the economic consequences of the corona virus are mild.
However, it is also possible that we will see a prolonged downturn. If current virus fears continue unabated (and we spend more time chasing toilet paper than working) and the disruption to the world economy is prolonged and intensified we could well see even more substantial job losses, business closures and loss of overall confidence. This may result in distressed borrowers being forced to sell property which could, in a worst case scenario, cause prices to fall substantially. This is a scenario that the ‘second round’ of government stimulus is clearly designed to prevent.
It is not my intention to add to the general level of concern in the community. However, I believe that if we have better leadership we will be less fearful and if we have better quality information we can all make better plans for the future. It is a cliché that fear of the unknown is the worst fear of all.
At times like this it is important to balance Warren Buffet’s advice to “be greedy when others are fearful and fearful when others are greedy” with the old cliché that fools rush in where angels fear to tread.
Lewis O’Brien