COVID-19 property plunge: why the worst is yet to come

Don’t be fooled by the buoyant spring property market in some Australian markets. We haven’t magically escaped the fall-out of COVID-19, and an economic day of reckoning is coming. DG Institute Founder and CEO Dominique Grubisa explains how to avoid the worst of it.

Pandemic? What pandemic? Reading reports about the recent activity in Sydney’s property market, you could be forgiven for forgetting Australia is in the depths of a coronavirus-induced recession. At the end of September, the city recorded its highest auction clearance rate since March, with a shortage of stock and strong demand leaving people literally clamouring over each other to buy property.

While it may sound like the property market in Sydney and other parts of the nation has somehow inexplicably escaped the impacts of the biggest economic upheaval since the Great Depression, don’t be fooled. Despite CoreLogic figures showing national dwelling prices dipping just 1.7 percent through the last quarter, experts are warning we are on the precipice of a major fall that will threaten both our economy and the livelihoods of individual property owners.

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The facts are simple. Around a million people lost their jobs as a result of the initial COVID shutdown of the economy, with countless businesses finding their turnover reduced to near zero overnight. The second wave of coronavirus in Victoria, while now under control, has shattered expectations of Australia achieving a speedy recovery from the economic downturn and the nation is officially in recession. Independent research suggests 40 percent of households are experiencing mortgage stress, meaning they are having difficulty finding the money for rent or mortgage repayments.

So, if things are so bad, why haven’t property prices tumbled down already? Why are people scrambling to buy properties? The answer is that the economy and countless businesses, workers and property owners have been artificially supported by government and banking industry measures to soften the effects of COVID-19.

Some 3.5 million workers have availed themselves of the $1500 fortnightly JobKeeper payment, pumping billions into the economy. Meanwhile debtors have leapt at the offer by banks to temporarily defer repayments during the worst of the pandemic. Repayments on an astounding $240 billion in loans – fully 9 percent of total lending in the country – have been deferred, with $167 billion of that coming from home owners and $55 billion from small business. Hundreds of millions in government subsidies for businesses, special grants and other concessions have kept businesses afloat. So too have special ‘safe harbour’ concessions for company directors that have allowed them to keep trading even though their businesses are technically insolvent.

But all good things must come to an end. JobKeeper payments are being decreased this month, with the plan to cease the scheme entirely in early 2021. While the mortgage deferrals being offered by banks were recently extended by four months, these too must come to an end in the new year. And while safe harbour laws have temporarily deferred company closures, an avalanche of insolvencies is expected in 2021 as so-called zombie companies – active in name only – finally give up the ghost.

When these changes take effect, you can be sure the property market will feel it. While limited amounts of stock have kept prices relatively high, the first distressed sales will start to drive prices down. As The Sydney Morning Herald recently commented, “It only takes one distressed seller in a local area to set a lower benchmark price expectation for all buyers. Once they smell blood in the water, buyers can pounce with low-ball offers. If sellers are desperate enough, they will accept.”

The sentiment has been echoed by experts such as those at S&P Global Ratings who not long ago predicted a 10-percent national price plunge in response to COVID-19.

Such circumstances are bad news for home owners who have geared their mortgages for rising property prices. Instead of reaping capital gains, some may find themselves “underwater” with their mortgage, owing more than their property is worth. Many will lose their homes, their livelihoods and their savings.

In such times, it can pay to proactively protect your assets. By acting before the crash you can take measures to ensure creditors aren’t able to strip away your home and other valuables should you find yourself in difficult times.

The DGI institute’s Master Wealth Control service provides individuals with a means to lock their assets away against certain creditors should an economic crisis arise.

To find out more, book an appointment with one of our asset specialists.