La Trobe Financial
How Australian property has shown resilience in the face of a pandemic
The year 2020 was one like never before for financial markets. The onset of COVID-19 ushered in a period of record volatility, the effects of which will continue to be felt well into the future.
While the world has celebrated the end of 2020 and the arrival of the new year with enthusiasm, savvy market watchers remain cautious. Sporadic viral outbreaks across the globe serve as an ever-present reminder of the heightened risks facing markets, communities and the broader economy.
That is not to deny the genuine case for optimism in 2021. Financial markets have largely returned to pre-COVID-19 levels and vaccine rollouts are commencing worldwide. But volatility remains elevated and interest rates are at emergency levels globally. In this context, investors remain focused on identifying low-volatility, income-generative assets.
This article, the first of a two-part series, will examine the performance of Australian residential property through 2020, its resilience and its position as an asset class of choice for many local and international investors.
As an asset class, the Australian housing market is $7.5 trillion in size and represents 53.9% of Australian household wealth. It is more than three times the size of the ASX and is deeply ingrained in the Australian psyche.
Property forms the backbone of the investment strategies and retirement plans of millions of ordinary Australians. It offers investable opportunities both as equity (home/investment property ownership) and via credit vehicles (mortgage-secured loan portfolios backed by the $2.5 trillion residential and commercial mortgage market).
The COVID-19 period has been no exception.
As the pandemic took hold, there was much speculation about how its effects would be felt in the property market. What was notable, however, was the incredible resilience shown by house prices through the turbulence.
Far from the 30-40% correction seen in the stock market, house prices cooled gently for five months (May - September), then returned to steady month-on-month growth. In fact, the largest single monthly national house price decline for 2020 was just 0.7% in June.
The ongoing resilience of Australian residential property was indeed on display throughout 2020.
Notwithstanding a global pandemic, unmatched stock market volatility and rolling lockdowns, capital city residential property fared well through 2020 with only Melbourne in negative print, by just 2.1% for the 12 months to January:
This performance profile stands in stark contrast to the volatility exhibited by other asset classes. It speaks volumes to the position of the residential and granular commercial market as a fundamental pillar of wealth generation for Australian households and investors.
Put simply, when times are tough Australians tend to look to preserve their wealth through their home and this provides enormous ballast for the asset class as a whole.
Property credit markets also are a leading indicator of the direction of the economy.
Residential lending (excluding refinancing) has increased through the second half of 2020, as unemployment figures improved, consumer confidence increased, household savings reached new highs, and latent demand was realised. Lending for new home building has, in fact, hit new record highs.
For these reasons, property investors can start 2021 with guarded optimism. With ongoing volatility likely to remain a feature of markets in 2021, asset classes and portfolios which protect against volatility while providing an income become more important than ever.
In part two of this series, we will review the headwinds and tailwinds set to influence economic and portfolio outcomes in 2021, together with those key indicators to watch as the year unfolds.