Recently Stuart Wemyss, a Financial Planner from Pro Solution, with over 20 years of financial services experience authored an interesting study and expert commentary on recently publicised forecasts relating to the COVID-19 impact on the Property Market.
Wemyss stated:
“This exercise serves as a reminder that all forecasts are inherently uncertain and tend to have limited application for investment decisions.”
Some of the eye-opening insights provided by Wemyss included:
1. Relationship With Unemployment & Property Growth.
Simple logic would suggest that if less people are employed, fewer people will be able to purchase a property and some may need to sell their properties.
As such, if the demand for property falls, prices may follow. That’s the basic law of supply and demand.
However, the chart below doesn’t support this hypothesis. The green line (average house price growth for a subsequent 3-year period) increases when the blue line (unemployment) falls. That is not always the case. The data suggests there’s a very weak relationship between property growth and unemployment.
2. The Last Recession.
Let’s look at Australia’s last recession as an example, i.e. the “recession we had to have”.
Between 1990 and 1992, unemployment rose from 5.85% to 11.2%. During this period, the rolling 3-year annual property growth ranged between 1.1% p.a. and 3.4% p.a. Inflation was circa 1.5% p.a. during this period, so in real terms, property prices were flat.
What happened was there was very strong price growth between 1985 and 1988 (over 20% p.a.) and property prices started falling from early 1989. Unemployment started to rise in early 1990. Therefore, property price falls proceed to a rise in unemployment, not the other way around.
3. A Weak Link Between Unemployment & Price Growth?
For there to be large falls in prices, there needs to be more sellers than buyers i.e. mass selling. That can happen in the share market and other asset classes with limited practical consequences. However, that is more difficult to do with property, because we all need somewhere to live.
4. Average Unemployment Period Will Likely Be Short.
The important distinction that makes this situation unique is this current recession was caused by a contraction in supply, not a fall in demand.
Normally, an economic slowdown is caused by a fall in consumer spending (demand for goods and services) and that can take longer to recover.
Today, most consumers are happy to spend (a visit to Bunnings will prove that). It’s just we are not allowed to venture outside our homes to do so and otherwise viable businesses have been forced to cease trading. Once restrictions have been lifted, demand will likely return at a faster rate compared to a demand-driven recession.
Westpac projects that unemployment will peak at 9% this year but reduce to 5.6% by the end of 2021. This is only slightly above what it was at the beginning of this year. Most of the other banks’ forecasts are consistent with this view.
In summary, the duration of unemployment will likely be relatively short for most people. Additionally, there are many support mechanisms that homeowners can draw upon to ‘survive’ a period of unemployment such as the Job Keeper payment and mortgage repayment pauses.
5. Some people will fare worse than others.
The impact of COVID-19 will be patchy. There will be some people that will be financially stronger at the end of the lockdown period because their income has not changed and their spending has reduced. Of course, we can acknowledge that some people will be worse off too.
Therefore if you haven’t been financially impacted by COVID-19 and don’t expect to be impacted in the future, then practically, your property purchasing plans do not need to be altered. There may continue to be a reasonable volume of active, willing, and enthusiastic purchasers in some geographic and demographic segments which may be supportive of prices.
6. Sales data might be impacted by motivated vendors.
Most people would not decide to sell a property today unless they had to do so for financial or other reasons. If the choice was yours, you would probably wait for the COVID-19 situation to pass before you contemplate selling your property.
Therefore, it's reasonable to assume that most people that are currently selling property have to do so. In this case, they may be motivated to drop their price to secure a sale. As such, sales data for this quarter and perhaps this year might not be “representative’ of intrinsic value.
I’m not suggesting that the data is flawed or incorrect. It is what it is. I’m just saying that if the only people that are selling are ‘motivated vendors’, then, of course, we should expect the median price to fall.
In summary…
What Wemyss believes will happen is that property sale transaction volumes will fall substantially below normal levels.
The only people selling property over the next few months are the ones that:
“Have to” for financial reasons or;
Are less concerned (motivated) by maximising the sales price. Therefore, if these sellers are dominating the market, of course, the median house price will fall.
If you believe that the value of your property/s is somehow linked to the median house price over the coming months, then yes, the value of ‘property’ will likely fall.
However, if you believe that the intrinsic value of your asset is driven by variables other than the median house price, then this statistical measure may be meaningless.
Expect ‘noise’ about property prices to get louder.
In the 18 years, Wemyss states:
“I ever read one article that was positive about property i.e. now is a good time to buy. The rest of the time, the theme of property media ebbs and flows between ‘property being overvalued’ and ‘property is about to crash’.
Wemyss anticipates we’ll probably see more negative stories this year. But reminds us that these are written to sell clicks and views, not inform investment decisions.
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Adam Duffy - Partner at Meridian Australia
P: (02) 9939 3249
References
[1] Stuart Wemyss