Right now you will be forgiven for thinking that the roof will cave in if you buy a residential property, as the value may plummet. After all, some headlines are currently suggesting that property prices in Australia will drop by as much as 30% (or more) resulting from COVID-19. So what do you do? It’s the million dollar question isn’t it? Here’s what I think…
For many, COVID-19 is surreal and beyond belief. After all, we’ve never seen an entire world economy shut down in order to hide from a virus with possible deadly consequences if effected. It’s a unique experience like no other – no question about it.
From an economic and financial perspective, COVID-19 has created concern, fear and panic. The Australian share market is a case in point with the All Ordinaries Index dropping from a high of 7,255 on 20th February 2020 to 4,564 on 23rd March 2020 – just a month later. That’s a ~37% drop in just 1 month. At time of writing (close of trade 27th May 2020) the All Ordinaries Index sits at 5,884 – which is ~27% up from the lowest point on 23rd March 2020 (source: ASX). If you do the sums, the All Ordinaries Index currently sits ~19% below the high on 20th February 2020.
When it comes to buying residential property, for home and/or investment, the question many are asking is whether property will experience similar falls as the share market? My response to that is that it’s highly unlikely. Sure, there will be some distressed vendors that need to sell, however overall I can’t see the property market dropping – if at all. And if it does, then I think it’s an even better buying opportunity (if you’re on the market) as the best buys are when there’s fear around.
So the question begs, will COVID-19 prove to be the best or worst time ever to buy residential property?
Here are 8 key reasons why I think our residential property markets will not only survive COVID-19, but will thrive once this health crisis passes:
1. People will always need a roof over their head and will only sell if they have to, there is no substitute to property as shelter (unless you know something I don’t)
2. Governments are printing money – by the billions – and handing it over via various stimulus, designed to keep our economy alive and to ensure prosperity once we get to the other side
3. Banks and Lenders stepped in almost immediately to defer home loan repayments for those who need it, which demonstrates that they’re not interested in foreclosures
4. Interest rates are at historical low levels – mostly in the 2’s – and won’t move off the current level for a very long time, years and years in fact (as most chief economists and experts predict)
5. Property is not a liquid asset and much effort and time goes into transacting a sale which means values won’t be erratic , unlike shares which is instant via a phone call or a click of the mouse
6. Many industries are thriving from the health crisis employing millions of people, and people within these industries have secure jobs and will continue to transact in property for a variety of reasons
7. The fundamentals haven’t changed, Australia is still the lucky country and once our borders re-open, our population is likely to get a sugar hit as more overseas migrants will want to live in the lucky country for safety and prosperity
8. Banks are very willing to continue to lend (to the right people) against bricks and mortar, and still see residential property as the most secure form of investment as proven by their appetite to lend as high as 97% against its value
If you’re waiting for the right time to make your move, here’s a reminder of what you already know. No one rings the bell when the market is at the bottom, and no one rings the bell when the market is at its peak. The right time to buy property is when you have the financial means to take on the related debt and when your borrowing capacity affords you.
I have seen many property cycles since I bought my first residential property some 30 years ago, and in that time we’ve experienced many major crisis and events which were predicted to crash our property markets, to no avail. The key ones were – the 911 attacks in New York in 2011, the GFC in 2007/2008, and the Coalition surprise win in May 2019.
Yet the median house price in Melbourne performed as follows over the past 30 years – using 1990 as the base for comparison of growth:
2000 ~$160,000 (a 34% increase on 1990)
2010 ~$420,000 (a 252% increase on 1990)
2020 ~$900,000 (a 656% increase on 1990)
Do you see what I see?
The moral of the story is this. Don’t make long-term financial decisions on the last 24 hours, or on the last 30 days, of news.
Also remember one key point. The value of today’s dollar will reduce over time, meaning the value of your property will naturally increase with inflation. Yet the value of your borrowed dollar decreases as the value of money reduces over time. A key consideration that property buyers should never forget is this – play the long game and you cannot lose.
I hope my blog today gives you a different perspective to the sensationalised headlines you’re reading right now. Don’t deviate from your future plans and from your strategy as this health crisis too shall pass.
If we can help you plan your next move, please feel free to reach out as we’re ready and willing to assist.