Property Can't Catch Corona

We have just experienced the most catastrophic bushfires the world has seen, closely followed by the outbreak of the coronavirus pandemic that seems to have the world at a halt, yet the Australian property market is still booming. What does the future look like for the property market? Can we draw from what has occurred in the past to assume what may unfold in the months to come?

There are certain types of unexpected events like viruses, terrorism and financial crises, that induce world-wide fear and concern. The greater impact of such events is unknown and as we are seeing today with the coronavirus, what the future holds is uncertain.

When it comes to the property market in Australia, history shows that these kinds of shocking events hardly have an impact on bricks and mortar (unlike the impact they have on other types of investments). Is property a more stable investment because it is not as liquid as shares and not as easy to access? Has property in Australia been immune to viruses, terrorism and financial crises in the past?

We've taken an extensive look into the impact that the SARS virus, the 9/11 attacks, and the Global Financial Crisis in 2008, had on Australia's property market. Looking back over history may assist us to understand how the coronavirus pandemic could impact the property market in the months to come.

Severe Acute Respiratory Syndrome (SARS)

The SARS epidemic in 2003 lead to a drop in GDP during the first quarter. Economic growth accelerated as the Chinese Government pushed forward a stimulus program to get the economy moving again. If the economic impact of the coronavirus is similar to the influence of the SARS epidemic, we might suggest the impact on property pricing will be quite minimal. One quarter of economic decline in China, followed by a sizeable rise would result in a substantial loss of employment in Australia. If the impact of the virus is more severe and we see unemployment rates rise, this would likely have a negative effect on households and property prices. 

The 9/11 attacks

The attacks of 9/11 left the entire world in shock. The economic impact of the attacks caused global stock markets to drop sharply, yet the property market in Australia continued to boom. 

During 2001, the property market continued on a steady incline. Between 1995 and 2005, property prices in Australia increased by more than 6 per cent per year, with an average annual increase of almost 15 per cent from 2001 to 2003. This was well above the average annual increase in the 20 years to 1995 of just 1.1 per cent and the 50-year average (from 1960 to 2010) of 2.5 per cent per year. Between 2000 and 2004, Australia had the third highest rate of house price inflation among OECD countries, ranking behind only Britain and Spain.

Global Financial Crisis (GFC) 2008

House prices rose after the Global Financial Crisis in 2008.

Before the GFC, interest rates were on the rise in an effort to control strong inflation and as mortgages were getting more expensive, property prices were falling. Australia's national median house price rose by just 0.8 per cent in the March quarter of 2008, in comparison to a price increase of 3.7 per cent in the previous quarter. During the June quarter, the national median house price fell by 1.4 per cent, followed by another 2.1 per cent drop over July and August. During this time, the Reserve Bank Australia increased interest rates 3 times, holding at 7.25 per cent until just before the crisis came about in mid-September 2008. Interest rates were cut to contain the emerging crisis, landing at 3 per cent by April 2009, and property prices began to pick up.

During the March 2009 quarter, the national median house price began picking up, and jumped up 3.5 per cent in the June quarter, another 3.9 per cent in the September quarter, and 4.6 per cent leading up to December 2009. After bottoming out in the first quarter of 2009, the property market took off.

According to NAB's chief economist Alan Oster, the forecast for the property market remains unchanged in consideration of the impact of the coronavirus - property prices are expected to continue to rise by 0.5 per cent every month, reaching around 7.5 per cent growth in Melbourne and Sydney.

Buyer Confidence

The biggest impact is likely to be on buyer confidence as a lot of the outcomes of the virus revolve around how much containment we see. As the coronavirus continues to spread, confidence will undoubtedly be impacted. What we are seeing at the moment in Australia's housing market is that domestic demand is strong, particularly from owner-occupiers. In that sense, the impact of coronavirus may indeed be quite minimal. 

However, flow-on effects to the economy from less migration, less tourism and fewer education and commodity exports could start to filter through to the labour markets, which in turn could further affect confidence and have a dampening effect on the rapid rate of price growth.

Although, the fallout of the coronavirus may have some benefits for the property sector as there are big shifts in where we have equity, whether that be in shares or in any other type of portfolio. However, bricks and mortar offer a more stable investment opportunity.

Australia's property market is on the rise after bottoming out in mid-2019 and there is no doubt that the interest rate cuts in response to the feared impact of the coronavirus will influence the continuation of this upturn.

As for the virus, its effects on Australia's property market are currently minimal, however, if the virus is not contained, we could see negative effects on the market in the future.

Over the past century and beyond, the world has seen a plethora of natural disasters, terrorist attacks and financial crises. The economy has gone up, down, and around, property prices have risen and fallen over and over again, but one thing has remained the same - property prices in Australia have steadily risen over time. There is a lot to be said about the resilience of the property market.

To avoid getting thrown off a long-term investment strategy, it’s best to turn down the noise during times like this and keep our eyes on the bigger and broader picture.