Shares or Property?

25 Jun 2020

The age-old question facing investors.

When looking at the global pandemic’s impact on real estate and the share market, it’s difficult to see light at the end of the tunnel.

Amid the spread of coronavirus, the past few months have seen increased expectations of an Australian recession, a slowdown in business activity and trillions of dollars wiped off global share markets. It has many asking what the impact of the coronavirus would be on Australian residential property.

In assessing the impact of the current slowdown on property, it is worth exploring how property has historically responded to negative economic shocks.

Major share market losses and recession are not necessarily predictors of declines in housing values. This 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 Australian industry.

As an example, the 1987 ‘Black Monday’ stock market crash was a negative shock, in which the Australian share market lost approximately 23% of its value in a single day.

But housing values were largely unaffected. By October of 1988, residential property values experienced double-digit growth, as financial deregulation contributed to asset value inflation.

In the 12 months to January 1988, the Australian unemployment rate declined 60 basis points. The Hawke government also reinstated negative gearing as we know it today, after temporarily quarantining any losses associated with rental property between 1985 and 1987. This may have provided an extra boost to Australian property investment at the time.

By the early 1990s, Australia experienced a recession and property values declined, but only by -4.4%, from June 1989 to October 1990.

In 2007-08, when the Global Financial Crisis began, the Australian economy was more globalised. A slowdown in the global and domestic finance sector affected employment, incomes and subsequently borrowing capacity for housing.

The national dwelling market declined -7.5% from February 2008 to January 2009. However, an uplift in mining-related investment, the start of a rate cutting cycle and government stimulus saw a fairly swift recovery.

Recently, values been more reactive to structural changes in the lending space. Between 2014 and 2017, a series of policies limiting investment housing lending catalysed one of the largest and longest property market downturns since the early 1980s. However, further rate cuts and eased serviceability assessment prompted an owner-occupier led rebound.

The share market and housing market perform differently.

Aggregate figures on the housing market suggest that the slowdown in economic activity from the coronavirus 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.

There are a couple of reasons for this:

The relative illiquidity of housing (high transactional costs and long settlement periods) means it takes longer for property to transact, which makes ‘flights to’ or ‘sell-offs’ of property less likely amid economic uncertainty; and,

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

The latter point is a particularly insulating factor at the moment. Since the start of the property market upswing in June 2019, investors comprised 28.2% of the new finance taken out to buy property. This is down from 39.5% in the previous upswing.

In other words, the retreat of investors from residential property will not have as large an impact as it would have two years ago.

The relatively low levels of foreign interest in the Australian dwelling market over 2019 also means there is less risk to the market from declines in this buyer group.

According to the latest NAB residential property survey, foreign buyers in the December quarter of 2019 made up 7.0% of new property purchases (down from the survey average of 10.2%), and 3.8% of established property (down from the survey average of 6.1%)

Some will be exposed to a downturn in international market participants from travel bans. These include new unit projects targeting foreign buyers, and landlords who are reliant on foreign students or tourists for rental occupancy.

Property is not completely insulated from economic events. Depending on the extent of spread of coronavirus and institutional responses, reduced business activity could materially slow the flow of income and credit. To date, government financial stimulus and the enactment of emergency response measures have contained the health and economic impacts of the pandemic.

In light of these measures, the outlook for a buffered impact to the property market is promising, and will continue to play out over the second half of 2020.


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