What the coronavirus downturn will mean for the property market
There's no doubt that the recent market sell-off from the coronavirus will have an impact on real estate. The question is, how large and how long.
The most honest answer is - we don't know. Markets don't move in a straight line. The recent stock market selloff is one of the sharpest on record. The 2008 downturn was larger, but this has been quicker and more ferocious.
Australian residential real estate prices have yet to fall, but they will fluctuate in the next few months. The government has imposed a ban on open homes and auctions. This could reduce the amount of stock coming onto the market. Vendors will think twice about selling with such restrictions, opting perhaps to wait and ride it out.
Prior to the coronavirus pandemic, the market was in recovery mode following the 2019 election and the end of the banking royal commission. This means that if we do see residential real estate price falls, it will be from a strong base.
The biggest risk to residential real estate prices is prolonged and systemic unemployment. Defaulting on your home loan is usually a last resort. What we're seeing from the government is an effort to avoid this by allowing mortgage repayments to be frozen and insolvency actions to be delayed.
This is very important. Banks have realised that foreclosures are costly and ugly, so it's easier to allow stressed buyers to roll over their debt as long as the government is there to support them. The Reserve Bank of Australia (RBA) and government are providing liquidity to the banks to allow them to do this.
So where does investor sentiment come into this?
This downturn is different because interest rates are already at record low levels. Investors with cash who can ride out this short-term downturn will want to use it as an opportunity to buy residential real estate. Money was expensive in 2008 and interest rates were falling from high levels. Loans were difficult to get from banks.
This time money is cheap, central banks are providing liquidity and residential real estate supply is starting to fall off a cliff, particularly new home construction. Investors who have lost again on the stock market will see real estate for what it is - a solid long-term asset class that gives reliable earnings and adjusts with inflation.
Which brings us to the most difficult question - how long will this last? If we look to Italy and South Korea, data shows that residential real estate transactions are down around 80%. This means fewer homes selling and fewer listings hitting the market. During the 2002 SARS outbreak, Hong Kong residential real estate prices suffered for six to 12 months. Once the pandemic was under control, the market roared back and set new records.
While I'm positive about the outlook for residential real estate, the outlook for commercial property is less certain. Record low rates have caused a huge flurry of investors moving into the commercial and office space. The coronavirus has disrupted the way we work and it will have a profound impact.
We've already seen the effect of the WeWork failed IPO and the flow-on effect on commercial assets. Commercial properties will likely struggle over the next six months. Co-working spaces will be hard hit as many of their tenants - small to medium businesses - opt to work from home and scale down their fixed costs.
Well-diversified industrial property portfolios will probably outperform, but it depends on the tenants are and how each lease is structured.
New industries will emerge from this downturn and will disrupt the way we each, shop, travel and work, but people will still need a roof over their heads. Residential real estate is the largest asset class in the world, has been a consistent wealth generation vehicle for thousands of years. It will come out of this downturn with the same fundamentals as it had going on.
If you see price weakness in quality residential real estate over the next few months, don't hesitate to buy. Buy straw hats in winter and sell in summer.
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