It is official, Australia is in its first recession in nearly 30 years. Although, this recession is different from any before it.
It was only a few months ago when the media was littered with headlines warning us of an impending property market collapse, and preparing for falls of up to 20-30%.
In this case, the media were supported by some normally reliable economists.
Yet despite Australia being in a recession and the increasing unemployment rates, property values have remained very resilient, declines have been mild, and in some cities, prices are now increasing again.
With many notable economists such as Commonwealth Bank and UBS Investment Bank revising their bearish forecasts upwards.
In our previous articles, we have covered in detail the reasons why property as an asset would always prevail.
The key reasons for the strength of the property market amid a global pandemic including:
Stability of our banking system and mortgage pauses which removed any stress selling. The banks are being supported by APRA, and are not expected to remove their support anytime soon.
Australian residential property is made up predominately of owner-occupiers. Approximately 70% of all property in Australia is owner-occupied. Those who live in the property that they own are more likely to hold onto their property at all costs. Many homeowners have substantial equity positions in their homes already after long term ownership, hence it would not make sense for them to panic sell.
Interest rates were reduced to historic lows. These lending conditions have led to improving home affordability for all owners.
Improved affordability. According to Domain.com.au, due to improved affordability, 2020 has seen a higher buyer interest as compared to 2019 [1].
Substantial stimulus. The large amount of federal government stimulus packages injected into the economy has supported first homeowners get into the market - through the support provided in the HomeBuilder grant. This has also helped people with ongoing weekly income through packages such as Job Keeper and Job Seeker.
Why Property Values Won't Collapse.
The reality is, there are too many vested interests in Australian property values for them to be left to collapse.
Consumer confidence is the engine for economic growth, this is well known by the government.
When house prices are rising, consumer confidence and spending increases with it due to the wealth effect - if our assets are growing in value, we are more inclined to consume.
The government has many levers available to stimulate where necessary. As we have seen over the past months.
On top of this, our banking system is supported by property lending. Banks have no appetite in seeing property values plummet, and have clearly shown through the last few months, they will support customers in need.
What You Should Know As An Investor
As an investor, when it comes to property market forecasts and analysis, it is very important to look past mainstream media.
The overriding economics of supply and demand will determine how property values will perform.
While there are many things, which influence supply and demand, the fundamentals remain very strong in many markets across the country today. At the moment there is pent-up demand from both buyers and sellers around the nation. Once consumer confidence returns (which it will) the market is expected to experience a strong rebound.
As always, it is important to remember that Australia has many property markets in a variety of areas, metro and regional - there is no singular Australian property market.
This recession will not mean much for well-selected property markets, predominantly populated by owner-occupiers, diversity of income sources and employment, and established, not brand new, suburbs - they are likely to hold value through the next 12 months, or increase.
However, suburbs with high investor ownership, experiencing increasing vacancy rates, and have a reliance on tourism, hospitality, or student accommodation will struggle, and likely to continue to trend backward in value for the next 12-48 months.
To stay up-to-date make sure you join our Property Market Pulse Newsletter here.
Adam Duffy - Partner at Meridian Australia
P: (02) 9939 3249
References
[1] Domain.com.au