Amid stock market volatility and sensationalised news spreading rapidly, there is widespread speculation about the impact of Coronavirus (COVID-19) on the Australian residential property market.
COVID-19 is having a serious health impact on many, which will continue to play out over the coming months. Now is a time to be considerate and careful. It's not a time to panic.
The exact economic impact on the global and Australian economy is unknown to all. While certain industries have already been impacted by the spread of the virus, especially tourism, education and hospitality, the major impact on the property market is likely to be linked to consumer confidence and sentiment.
What will happen in the short term?
In the short term, the drop in sentiment will likely lead vendors to hold back their property from the market. As of March 2020, there hasn't been a reduced demand from buyers.
It's important to note that record-low interest rates are still encouraging demand, evidenced by continued, strong auction clearance rates over recent weekends.
The recent strong performance of the property market over the past 9 months to March 2020 has been driven by home-buyers, not investors.
This demand is expected to continue due to the high affordability created through 4 interest rate cuts in the past 8 months, and the emergency rate cut on Thursday 19th March, which saw rates cut to just 0.25%.
Past market volatility
In previous times of share market volatility, there is a flight by investors to less volatile asset classes like property.
Markets where rental yields are strong and capital growth prospects for the medium to long term are high, are the ones in demand.
During the Global Financial Crisis (GFC) in 2008, property prices had a very minimal reduction. In fact, following the GFC property had one of the strongest growth runs on record for the next decade.
The share market is very heavily sentiment driven and prone to volatility, as it's 100% investor owned.
How will dwelling values change?
The Australian property market is made up of 70% owner-occupied property. Arguably, the last asset that is sold by a homeowner in times of financial uncertainty is their home.
Hence dwelling values remain protected in turbulent times like GFC and the COVID-19 pandemic.
The underlying fundamentals supporting the property markets we at Meridian Australia are currently targeting have not changed.
There have been many reasons to be fearful in the past from volatile national and/or global events such as:
September 11 (2001)
The GFC (2008)
Drought and Bush Fires (2019)
The more recent events have been further sensationalised through the emotive power of social media and news coverage.
What do intelligent investors focus on in stressful times?
Intelligent investors are not deterred by times of economic uncertainty. Instead, they are focused on their comprehensive strategy, spending their time analysing the fundamental drivers for capital growth markets.
They will target markets with low risk, and strong medium/long term growth prospects, with:
Strong population growth. Growth that's seen on an interstate and international level.
Strong and diversified employment base. Suburbs reliant on a single industry, like tourism, will experience volatility now with the COVID-19 pandemic. This is similar to the mining towns in the recent wind-down of the resource sector.
High owner-occupied suburbs. Suburbs with new infrastructure spending in progress to improve livability and create future employment.
High rental yields. A minimum gross rental yield of 4.5% is suitable.
Low vacancy rates and established suburbs. Suburbs with a lack of available land for future development and restrictions on height limits to reduce the high future supply of apartments.
High affordability suburbs. Suburbs where the percentage of disposable household income spent on the average mortgage repayment is at a comfortable level.
Once a suburb is identified, intelligent investors will target specific properties that have low risk to cash flow, which include the following factors:
Low vacancy risk.
Suitable type of property. For the prevailing professional, strong income earning demographic.
Modern, high quality property. With a low risk of large repairs and maintenance requirements.
This approach will yield results in times of economic uncertainty and in times of blue skies and positive news headlines.
What you should be focusing on as an investor
Now is a time to be careful; protect yourself and others, practice good hygiene, wash hands frequently, avoid large gatherings and minimize physical contact.
It's not a time to panic about the property market, which is robust enough to weather this storm.
COVID-19 will be another event that will pass and have minimal impact on the strong, fundamentally supported suburbs of Australia, nor the investors who don't panic and stick to their long term plan.
Adam Duffy - Partner at Meridian Australia
P: (02) 9939 3249