Clearly the media is having a great time as it always does with any negativity – especially around the coronavirus, its consequences and impact in the global economy.
This year through January and February, we’ve seen prices rise very quickly in areas and cities where we regularly buy for clients – particularly Sydney and Melbourne. For a period, we had been somewhat concerned that buying well for our clients would become more difficult. While it’s great to have good growth for our own portfolios and clients that have already bought, it does make it very hard for clients wanting to buy as we don’t want to compete with people in the heat of the moment paying tens of thousands, even $100,000 and more over what a property is really worth.
Regarding the current market, I firmly believe that any softness we’re seeing will be a temporary reprieve and those that take action over the next few months will position themselves far better versus those that are waiting, sitting on the fence.
I’ve personally been a property investor for 30 years and our recent history is littered with easy reasons not to buy now. These include the Y2K scare, the 9/11 World Trade Centre Attacks, the dotcom tech crash, global outbreaks and pandemics of viruses like Avian flu, Swine Flu, SARS, MERS, Ebola, Zika and also more local issues like the Banking Royal Commission.
Hesitating, doing nothing and procrastinating is always the easiest course of action as it keeps you in your comfort zone where you’re surrounded by others doing the same. Taking action invites criticism and poor advice from relatives, friends and pessimists. It requires courage, however it also provides you with the greatest rewards.
Lets examine some important points about our current situation –
~ The Federal Government has acted to minimise the economic impact of current events by injecting significant stimulus into the economy with a particular focus on supporting employment continuity. This, in turn, is positive for residential property;
~ We’ve seen the Morrison government signal a second round of stimulus is coming for particular industry sectors including airlines, tourism, events, sport and the arts.
~ Demand for property historically increases in Australia when international stock markets are falling and our dollar weakens in response to global financial instability, which in effect increases the attractiveness of Australian property from an international perspective;
~ The RBA has cut interest rates once again to help provide a buffer to the current short-term impacts of the volatility globally, improving housing affordability and stimulating investment;
~ History has shown that even through previous global crises and global outbreaks of illness, the Australian property market remained resilient.
Interest rates look like they will remain very low for the foreseeable future based on market expectations and according to many Economists including ANZ Economics who provided this chart which shows the market expects the cash rate to average less than 0.5% over the next five years based on the 5 year Overnight Index Swap Rate.
~ We have charted over many years the very clear historical correlation between interest rate drops and accelerating property price growth.
~ Rate drops are excellent news for landlords where on purchases, we’ve been buying recently at close to cash flow neutral in great areas with terrific growth prospects; and also great news for home owners providing increased repayment affordability.
For those of you who have attended any one of our events, watched our videos and have heard us speak about the 18 year property cycle, it’s really quite remarkable how much of a repeat of cycle history this all is.
Everything that has happened in the last few weeks is kick-starting the process off into the second half of the cycle – the forthcoming second upswing/boom phase of the cycle.
In addition to that, there is also another very important factor that will help to support the economic turnaround into the second half of the property cycle and that is the recent fall in oil prices. What’s happened with oil is a major issue that has also had very a significant contribution to the recent stock market panic. In case you missed it, last week OPEC failed to agree a plan on production quotas, which means that all the major oil producers will be increasing production at a time when demand is dropping from a slowing economy. This caused oil prices to collapse to under $30, a level it has not been at for quite some time.
Oil prices at this level actually represent a further significant stimulus to the real economy because oil is an input into many production processes and for transportation. Therefore, a low oil price represents a windfall to consumers and businesses, which can then be spent. And much of it will be spent around the world on real estate. However, since oil companies form a large component on stock market indices worldwide, the fall in oil prices affect all stocks. Once panic takes hold, markets fall, which is exactly what we’re seeing.
Yes, the global economic and public health situation is somewhat challenging and the stock market has fallen significantly. But after several years of expansion and, crucially, no problems in the banking system and property market we see the cycle unfolding as we’ve always expected with another forthcoming boom.
Not only in Australia, but all significant economies around the world have put forward adjusted budgets, tax concessions, government stimulus packages and immediate spending pledges to deal with the fallout from the virus.
All the major central banks are now cutting rates and pumping liquidity into the system and governments are spending money.
Eventually this will address any slowdown that we’ve been getting from corona virus and other issues. Remember though, this kind of market panic will not last forever. And remember too that underlying all of this, the economy will start to turn around, setting us up for the second, and bigger half of the cycle.
Economic stimulus and additional liquidity ends up largely capitalised into land value and property prices. This time will be no different.
Warren Buffett has famously said that investors “should be fearful when others are greedy and greedy when others are fearful.” And its particularly at times like these that this is wise advice to follow and take action on.
As buyers agents working across Sydney, Melbourne, Brisbane, Perth, Canberra and Adelaide, its become increasingly difficult recently in Sydney and Melbourne to buy homes and investments pre-auction due to more and more competition and a lack of stock on the market. We firmly believe it will become even harder in the next 4 to 18 months and that we will see this spread across other capitals too.
If you delay buying now and wait until the dust settles, you wont be alone. You will be part of a very big crowd. We will see a huge flurry of investors and home buyers collectively enter the market on the first signs of optimism. Don’t expect discounts if you wait for optimism. In fact expect the opposite. We know from plenty of previous experience that prices will then go on a run, negotiability will be far more difficult and sellers will dictate the pricing and the play. The smart money buys on weakness. Buy when others are fearful.
This temporary uncertainty is creating a break in the market momentum and the next upswing. History will show that this represents a great time to move forward with courage to secure a great home or investment property at a great price.