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THE REAL IMPACT COVID-19 WILL HAVE ON THE PROPERTY MARKET



As time progresses, and more information and data come to our attention, a clearer picture can be made on the true impact the COVID-19 pandemic will have on the Australian property market.

At Meridian Australia, we endeavour to provide you with information and updates weekly in this time (March 2020). It's extremely important not to be caught up in the negative and sensationalised media articles; which are purposely created this way, to grab attention, and see media providers profiteering through the creation of fear.

Amid the current crisis, Eliza Owen, Head of Residential Research at CoreLogic Australia; one of Australia's leading and most respected property economists, has explored the fundamentals of housing to better understand outcomes in the current climate [1].


4 key findings:


1. Housing has performed relatively well against negative economic shocks.


Major share market losses and recessions are not necessarily predictors of declines in housing values, which can be seen in the figure below. When significant, negative economic shocks occur, the effect on the housing market varies. Property value changes depend on the level of impact on the Australian industry. 



2. Housing is an illiquid asset and a consumption good, which shows far less volatility and decline than share markets.


Aggregate figures on the housing market suggest that the slowdown in economic activity from COVID-19 has not impacted housing markets in the same way as equities.


This is nothing new. Historically, comparing the S&P ASX 200 Index with the CoreLogic Home Value Index, suggests that property responds to macroeconomic conditions at a lag, and avoids the same extent of decline or volatility, as shown in the table below.



There are a couple of reasons for this:

  1. The relative illiquidity of housing (high transactional costs and long settlement periods) means it takes longer for property to transact.

  2. Housing is used as a consumption good and is less likely to be speculated upon relative to equities.


3. In the coming weeks, property transactions may fall significantly, but the impact on values is unclear.


Property transaction volumes are likely to fall in the coming months (March 2020), however, the outcome for values depends on temporal expectations around COVID-19, and longer-term employment conditions. 

Vendors may view the current pandemic as a temporary economic condition. If monetary and fiscal stimulus can adequately support business and household income amid the slowdown, then the next few months could see a sharp contraction in sales volumes, but not necessarily dwelling values. This is due to the expectation for market activities to return. Influenza periods for example, typically last 3-4 months. It's unclear whether COVID-19 will be seasonal, but, after mass quarantines, the following has occurred (March 2020):

  • China is now showing a slowed spread of the COVID-19 [2].

  • South Korea is also seeing a drop-off in newly reported cases after the launch of a social distancing campaign [3].


A comparison may be drawn with the high seasonality in sales volumes usually seen around annual holiday periods.


Over the past two decades, the decline in sales volume from November to December averaged -15.9%. By comparison, the past two decades have seen an average 0.2% growth in values from November to December.


4. Australia does not have ‘one’ property market, and a decline in demand will be tempered by the composition of the local workforce and the state of household finances.


The largest and most direct industry shocks from the COVID-19 are expected in areas strongly reliant on tourism, education, hospitality and to a lesser extent retail and arts.

  • Tourism. Where increasingly strict quarantine procedures deter travel, nationally and internationally.

  • Education. Due to fewer foreign students being able to travel to Australia.

  • Hospitality. Where social distancing leads to a decline in café, bar and restaurant visitation.


Property markets supported by a diverse range of employment; are likely to be better protected from downside risk, and have a stronger likelihood of experiencing a stronger performance once sentiment is improved and confusion is reduced.


From the team at Meridian Australia, we hope you stay healthy and safe during these unprecedented times.


Adam Duffy - Partner at Meridian Australia

P: (02) 9939 3249

E: adam@meridianaustralia.com.au

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References

[1] Eliza Owens, Head of Residential Research at CoreLogic

[2] GisAndData - Coronavirus COVID-19 Global Cases by the Center for Systems Science and Engineering

[3] The Economist - Should Other Countries Copy Italy's Nationwide Lockdown?


Disclaimer: When considering purchasing a property, it's always prudent to seek the advice of an appropriately qualified professional to determine which strategy is most appropriate for your individual circumstance.