We all know that the coronavirus is infecting the Australian economy as we speak. Coronavirus cases just surpassed 1.3 million and are showing no signs of stopping. The exponential rise in COVID-19 cases and deaths is causing global lockdowns, surges in unemployment, and widespread fear of a possible recession. The government is trying to put out the economic fire with its liquidity hose as they deliver stimulus after stimulus.
The COVID-19 crash is drastically different to that of the GFC. Because one is a health crisis whereas the other is a financial crisis. However, the current virus could manifest into a financial crisis if we saw the property market crash.
Insight into the Property Market
1) The Overall impact on the property market
Chief economist at the REA group, Nerida Coinsbee, recommends that people should ignore any property forecasts. Because the unpredictability of the virus and the estimated time for economic recovery renders any property assessment meaningless.
Australia’s considerably low cash rate of 0.25% and the freezing of mortgage payments for six months should reduce the number of distressed sales. In turn, the property market did not fall in March. However, property prices are likely to fall for April, considering the current economic climate.
2) Tough times for renters
Renters are feeling the brunt of the crisis as the virus infects the property market. Why? Because the demographics of renters mainly consist of young adults working in tourism, entertainment, and hospitality. With the government’s lockdowns forcing these industries to close their doors many renters went from a regular income to nothing (unemployed or temporary unemployment) overnight.
In turn, flatemates.com.au is experiencing a high volume of customers. Showcasing the damaging effects of the virus on the disposable income of renters. Nerida Coinsbee suggests that if the government does not alleviate the rental stress, then it could pass onto the investment side of the property market.
3) Buying activity
While renters are suffering, buyer activity is looking like Christmas when everyone is in holiday mode, and property activity is low. Buying for March 2020 is down 6% from March last year, however, on the bright side, there was no distressed selling.
According to analyst Nerida Coinsbee, buyers are still looking at expensive areas such as Hobart and Canberra because the land is more valueable in those areas. Thus, the premium market is looking good for now.
Furthermore, first home buyers fell off the cliff, dropping by 20% last year. However, Nerida Coinsbee highlights how first home buyers tend to purchase property during a weak market. Meaning, first home buyers should climb their way back up the cliff and report a positive result during the virus.
4) Investor activity
Lastly, the investment aspect of the property is dropping and will take some time to recover to pre-COVID-19 levels.
What would happen if the property market crashed ?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
In short, if the property market crashed, then the economy would likely plunge into a recession. Bear in mind that for the property market to plummet, millions of people have to default on their mortgages just like we saw in the GFC.
For millions of people to default, unemployment must go up significantly, and the income of mortgage borrowers must tumble.
While the banks are not signing away mortgages to your taxi driver like they were in the GFC, the virus could still cause widespread defaults. If COVID-19 continues to wreak havoc on the economy, then unemployment and underemployment go up, more businesses fail, and the real estate market crashes.
However, if the economy comes back to life, then the risk of borrowers defaulting vanishes. Resulting in the thought of a property crash disappearing from our minds.
Now, as you have heard time and time again, we are living in unprecedented times, meaning any prediction on the future economic outlook is just that a prediction.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Thomas He, Associate of YIG.