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How are we doing? Hope you’re not going stir crazy cooped up indoors all day!
Lately, quite a number of people have asked what the impact of the Coronavirus will have on our housing markets.
I wrote a very short paragraph in an earlier post Blueprint For Investing During The Coronavirus Pandemic but I feel like it deserved a post on its own.
So here goes.
“Takes a deep breath”.
This is an economic crisis as much as a health crisis.
So firstly, it is important to look back on history and have a look to see what impact economic crises have had on our real estate market.
Courtesy of our friends at Corelogic we can see the results are mixed:
There were a few periods of inherent stress in housing – the 1990’s recession we had to have, the GFC of 2008-09, Eurozone crisis of 2011-12, and most recently the APRA changes, Banking Royal Commission and Labor’s unloseable election of 2018-19.
But you can see there were significant periods in recent economic history in which housing performed well or at least relatively well compared to the underlying conditions.
Indeed, after “Black Monday”(US stock markets dropped 23%… in ONE DAY), our real estate markets boomed.
Housing vs Stocks
Speaking of stock markets, how does real estate compare?
Hm, so real estate values have typically tracked equity values, however do not experience the same level of volatility nor extreme ups and downs.
There’s a couple of explanations for this.
The main one is that real estate is an illiquid asset.
This means that the time it takes to transact, is significantly longer than most asset classes.
Take buying/selling a house or apartment for example.
From the time the property lists, to home opens, to finding a buyer, to negotiating, to conducting due diligence, to settlement (standard 6 weeks)… you’d be looking at a MINIMUM of 3 months.
There are exceptions of course, when the market is booming or when you have desperate sellers, but even then, it’s still measured in weeks.
When it comes to shares, you can buy and sell so long as the market is open, and takes about 3 days to settle an account.
The second reason, is that real estate is a basic need.
For example, if the economy is hurting and you need cash, you can sell your shares, but you won’t sell your place of residence (except as a last resort).
People always need a roof over their heads.
What About Now?
I think it still holds true in today’s climate.
We’re going to do everything we can to maintain that roof over our head.
Which is why there’s one crucial factor I think which affects real estate values more than any other.
By that I mean…
There’s no doubt unemployment will spike because of COVID-19.
The main industries affected so far are:
- Tourism (which includes aviation and accomodation)
- Retail and hospitality (social-distancing)
- Arts and recreation (everyone staying indoors)
And with impending lockdowns looming, more and more of us will be affected.
But y’know, despite this, I think real estate values will hold up OK in our capital cities for the moment.
This is because the largest employment sectors are still plugging away.
Take where I live, Sydney, as an example.
Sydney has more than the average share of white-collar IT, professional and trade services as well as healthcare and education workers.
These jobs (apart from healthcare) has migrated from the work office (or schools), to be conducted online.
A shift in working arrangements for sure, but people are still employed.
Similarly in Melbourne as well.
The next biggest population centres of Brisbane and Perth are more tied in with the mining and construction sector – and to my knowledge, these sectors are still going OK.
With rumours of a China stimulus package to be announced, it could actually be beneficial to the mining sector.
Adelaide’s market is steady as she goes historically, neither booming nor dropping irrespective of the economic conditions and I’m expecting more of the same Steady Eadie.
Canberra is heavy on the public and government sector, and I haven’t heard of any significant job cuts. They are probably working harder than ever to keep the country running.
I’m sorry to say that the job losses have been heavily skewed towards those industries traditionally lower on the pay scale. They also seem to be a younger demographic too.
Hence their initial purchasing power was limited.
Which is why I think despite the negative headlines and rising unemployment, currently the impact to housing values is cushioned.
BUT if there are substantial job losses in the aforementioned sectors, then expect real estate prices to tumble.
What About Social Distancing?
Ah yes, of course.
We’re seeing news articles about new ways of conducting real estate – from online auctions to virtual tours and 1 on 1 private inspections.
But fundamentally, real estate is a tangible asset.
This means it is real, not pieces of paper or numbers on a screen.
Which is why the overwhelming majority of buyers physically inspect a property before putting an offer in.
However why would you go to an inspection when there’s a chance you’ll catch COVID-19? Or when your income is not stable? Or when the economic outlook is uncertain?
Which is why transaction volumes will be hit hard.
But transaction volumes doesn’t necessarily mean price falls.
Because as a seller, you determine what price you want to sell.
And you’ll only drop your price if you want to move it on, or you need cash, or you’re desperate.
And why would you do that?
Maybe because you just lost your job.
Everything comes back to jobs.
Watch it closely.
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P.S. This is my opinion only of course, just because I say something doesn’t mean that it will happen – just ask MrsFrugalSamurai!