State of Play: Latest on the Australian Property Market
Published 5:11 am 8 Feb 2021
Hi there, and welcome to our State of Play. I thought today we would have a look at the property market. It’s funny, there’s always extremes. One extreme view of the property market is that prices are going to drop from 50 to 60%, so the doomsday prepper type talk, and the other end of the market, there was an article today in The Australian saying that our property prices are going to go through the roof because foreign investors are just flocking here to snap up bargains.
And at the end of the day, it’s probably going to be somewhere in between, but there’s no doubt that we are operating in a time of extreme uncertainty and there is no doubt that our property market will be affected. You can’t have the whole economy stop. You can’t have unemployment rise and you can’t have most of our wealth, which it is, stored in residential property that is funded by a whole lot of debt and not have an impact.
All of those competing interests are going to result in a critical mass when it comes to property. It’s just that property feels it a lot slower, so the end game with property, whereas joblessness happens really fast, 600,000 jobs lost last month, that knock on effect and the feeding of that unemployment into the property market is going to take many months to come. And the reason for that obviously is a few things happening. We’ve got job keeper. People are all being subsidized by the government and we’ve also got banks giving loan holidays. The real pain will be felt in a few months time, a couple of months time.
We should be working, though, in these uncertain times off possibility and not probability. A famous, very clever mathematician at the end of the century said in the late 1800s, made a prediction, a bold prediction in 1885, he said that by 1920 New York would be uninhabitable and he said that because he calculated the population growth with a lot of immigration around that time, and he was right. The population in 1920 was pretty close to where he thought it would be. But what he couldn’t foresee at that time, what he said is a population that size will need so many horses and carts to service it that the manure in the street will be as tall as a 20 story building, so New York will be uninhabitable. Of course, he didn’t foresee the invention of the motor vehicle and what was a perceived massive problem didn’t come to pass.
Similarly in the eye of the storm right now as we move back to what they’re calling a new normal out of coronavirus, we don’t know the damage and we don’t know the opportunity that will present itself, so often we use current information and we look in the rear view mirror to history and try and predict that, forward pace that into the future and it doesn’t work that way. Out of crisis often comes opportunity. A lot of great companies, behemoths of industry were forged in times of crisis and change.
Over 120 odd years ago, we had a time of huge crisis. There was [inaudible] then there was the World War One, then there was the Spanish flu, so a massive pandemic when all the soldiers came back from war. Then after that, they had the Great Depression in the late ’20s, and then they had World War Two. A lot happened then, but during those years of high crisis and drama and a lot of pain came the ideas and the pioneering spirit, the resourcefulness and the entrepreneurial mindset that started up industries that just came at the right time to fill a need in the market.
Again, there will be different ways of doing things post-coronavirus, and that applies to property as well. There is no good or bad. As Shakespeare once said, “It’s thinking that makes it so.” Our perception becomes our reality. If we think the property market’s bad, we’ll see bad deals everywhere. If we think it’s going to be good, we’ll see opportunity everywhere. At the end of the day, the property market is a fact. Markets are facts. They’re not good or bad. The emotion we attach to them is our perception.
History has brought us good and bad markets over time. The last official recession in Australia was the early 1990s. Paul Keating, the prime minister at the time, called it the recession we had to have, but we had the global financial crisis a little over 10 years ago and now we’ve got this pandemic. It’s not good or bad. They’re just facts. They’re totally objective. These crises don’t care about us, so we have to figure out what we can control. And the one thing we can control is how we respond and how we respond is dictated by the cold hard facts.
Today I wanted to look at the facts. And now when we have times of change, people turn to experts to say, “Well, what’s happening? Tell us the numbers.” We know with COVID-19, we’ve had the epidemiologists, so doctors and the medical profession, the government has turned to them to give us advice. And that’s where we usually start, with the experts, so probably the respected economists with the big banks, people like Tim Lawless from CoreLogic … some of you may have been in our live stream on Saturday where he talked about the market … they seem to accord at the property market dropping about 10%.
Now, there are extremes, so Commonwealth Bank came out last week and said the market will drop 32% on an extreme scenario. And that was, they looked at the economy shrinking by over 7% this year, a further 0.8% next year and then growing by 2.3% in 2022. And they said if that happens, the knock-on effect to the property market will be a 32% fall in property prices. But then they had a more conservative model, so less extreme, less dramatic impact on the economy and they said that the economy if it shrinks only 6% this year and then bounces back more rapidly next year, another 6% bounce back next year, and then it grows 3% in 2022, then the property market will fall about 11%.
NAB’s extreme outlook was a fall of 30%, whereas Westpac said 15%. Tim Lawless’ view, for those of you who joined us on Saturday, was around the 10% mark as well. But he said there’s just so much uncertainty. Who knows? And the fact is that the market has not fallen yet. High level, what Tim told us, and he is the go-to guru for the Asia Pacific region, and just to run through his predictions and the metrics he was looking at, definitely based on the uncertainty and the fact that a whole lot of Australians have a whole lot of wealth in residential property. Whether it’s investment property or just their own homes, most Australians store their wealth in the form of equity in property and most Australians have a mortgage.
What we’re dealing with now is mortgage rates really, really low, really low interest rates and in fact, about 50% of economists who are polled are talking about the Reserve Bank potentially dropping interest rates next month a quarter of a percent, and other countries obviously around the world have gone to zero rates before. The Reserve Bank did say, the governor of the Reserve Bank, Phillip Lowe, said, “We’ll never go to zero. We’ll never go negative,” but never say never in uncertain, changing times. Economists are predicting that rates may drop another quarter of a percent to 0% next month. It’s still uncertain because we just don’t know how it’s going to play out.
Tim looked back at other shocks and crises over the past and he said usually financial shocks, so economic shocks, don’t really have an impact on the property market, but what does is credit shocks. When people can’t get their hands on money, like the global financial crisis, when banks aren’t lending or can’t lend, that has an impact on the property market. But other crises, for example, the stock market crash in ’87, the black Monday, didn’t really impact the property market. Availability of credit like the global financial crisis, though, did see the property market dip.
I’m not sure how much we can take from past crises. This is holistic. The takeaway, Tim said, is that high unemployment as a result of coronavirus is going to have an impact because if people aren’t earning money, then they’re unable to spend. Similarly, if we bounce back, if we snap back really quickly and people start spending and then employers start employing more people and growing their businesses again and everyone has jobs and everyone has money, then we won’t feel it as keenly. That is unlikely, though. It’s going to be slower. Remember, when jobs are lost and economies fall off a cliff, it happens really fast, the express elevator to the basement and the stairs back up. Most economists are saying it will be at least until 2022 that we come out the other side of this impact, which means a dip in the housing market.
Our housing market peaked late last year. Remember it was very uncertain coming into the federal election in May last year because there are going to be changes to negative gearing and that would have meant that investors would flee from the property market demand and supply issue. There’d be abundance of supply, prices would fall. Instead, a liberal government got in, we didn’t change negative gearing and the property market just took off again. Traditionally, it’s slow over Christmas and then coronavirus, when the market normally comes back late February, coronavirus really hit its straps, so that didn’t happen here.
The market moved through its peak growth late last year, and the market has been weakening since then, though it hasn’t fallen off a cliff yet. We’ve seen it losing momentum. And that’s just because there’s not as much stock on the market. People are comfortable to just sit back and wait and see. Remember in times of uncertainty when we’re on a high alert, when we’re afraid, we’re kind of like rabbits in headlights. We do nothing. When in doubt, do nothing. People aren’t selling. There are still a lot of demand and not much supply.
One thing that we have seen since we’ve been in shutdown is that auction clearance rates have fallen. But Tim was saying on Saturday that this data is not really indicative of anything because what happens is they measure PRI properties that are listed, so late February, early March, people listed their properties for auctions in March, late March and April, without knowing that the auctions would have to be called off. The data measures how many properties were listed and how many actually sold. A lot of those properties actually didn’t go to auction. They were withdrawn, but these metrics don’t show that.
There’s been a dramatic shift in auction outcomes because of social distancing and people pulling their properties from auction, and that has just started to clear over the last week because people have been allowed out again and people have gone to auction. The sentiment is picking up, but the sales volumes have declined because people aren’t listing. Consumer confidence is low. People basically are feeling badly.
And we looked at Roy Morgan Polls in these sessions last week, and Roy Morgan Polls measure business confidence and consumer confidence in the economy and people generally feel that it’s not as bad as it could be yet and it is going to get a whole lot worse. People feel, Australians in general, that there is at least 12 months more of pain that’s worse than where we are now. And that’s probably right, given that government stimulus packages are going to run out in a few months and similarly, bank holidays, where mortgages have been frozen, people don’t have to make repayments, people aren’t paying their rent, all of that has been put into an induced coma effectively, into hibernation as they were calling it, but there will be a day of reckoning. Later on this year, all of those debts will have to be met and something will have to be sorted out. That’s when the real pain will start.
Sentiment is down. We haven’t had sentiment this bad since the early 1990s. Remember when interest rates were like 18, 20%? what people are doing is nothing. Sellers are saying, “Well, I may feel pain later, but I’ll sell my property later. I won’t sell it now,” and they’re not feeling their feet to the fire yet. Even if they’ve lost their jobs, they’ve got job seeker or job keeper so they’re getting $1,100 or $1,500 a fortnight respectively from the government and they’re also probably not having to pay their mortgages. Most banks are giving holidays on mortgages. That may start to change now. As the market’s picking up a little bit, maybe sellers will start to list their properties, especially investors who are not getting a return on investment, tenants aren’t paying the rent, there’s not much in it for them, they may start to want to build a war chest and stockpile some cash.
Our economy up until very recently has been strong. We were expecting a budget to be delivered last week that was going to deliver our first budget surplus in a long time. That didn’t happen and instead, we’ve got a massive budget deficit. In fact, our government is amongst the top in the world in terms of economic stimulus for our economy, 16 and a half percent of GDP, so 16 and a half percent of what the government earns rakes in with taxpayer dollars and everything else, has gone back to us in stimulus, so huge stimulus package that other countries haven’t been fortunate enough to have. That’s masking a lot of pain at the moment.
Also, our Reserve Bank, it has lowered rates off the charts low to .25%. They’re buying government bonds, so with their monetary policy, quantitative easing, getting more money in circulation for us, and they’re also talking about or the economists are predicting, some of them, a further rate drop to 0%. All the powers that be are supporting us, and that is lending support to the housing market.
Unemployment would have been at 17% but for job keeper, so they’re predicting by next month, it’ll be at about 9%. Now, the unemployment figures out last week were only at 6.2%, so we haven’t felt that pain yet. Job keeper has masked that as well. People still have money and people’s property prices, the wealth effect, because remember, if we store a lot of our wealth in property, we’re still feeling wealthy. If I’ve got a house and the agent valued it six months ago and told me it was worth a million dollars and I’m looking at these figures, I’m going, “Well, it’s still worth a million dollars. I don’t feel poorer. If the market drops 20% and suddenly my house is only worth $800,000, I’ve just lost $200,000 effectively. I feel poorer.” And if we all feel poorer, we all stop spending money, and if we all stop spending money, the economy shrinks. And that’s what they’re scared of.
As Roosevelt said, President Roosevelt in the Great Depression, “We have nothing to fear but fear itself.” That’s why they measure consumer sentiment, because if we’re all scared, if we’re all feeling bad, we’re going to stockpile our cash. We’re not going to spend. There’s going to be fewer jobs. The government’s going to earn less from the taxpayer dollars and we all shrink a little bit. That’s why global domestic product, the amount we earn as a country, if we were a business that would be our revenue, is going to shrink by eight and a half percent, they’re predicting and that’s through to the June quarter this year and a further .6% through to the September quarter and then it should come back again.
Once our three stages of coming out of lockdown are over, businesses are open again, people will eventually start to spend, but at that time, the lag effect will catch up to the property market and there will be a time difference between people losing their jobs, feeling the pain, so there’s a delayed effect of the pain because the government’s subsidizing us. The banks have forgiven or a delayed payment of loans, and we haven’t experienced that pain yet. We will experience the pain when a lot of people, like all those people who have lost their jobs at 10% unemployment, can’t make their mortgage repayments when they have to. And that’s where the damage will be done and they won’t get a new job straight away. It’s going to take a while for the economy to improve for unemployment to fall.
And the real issue is underemployment, so the way they measure employment, at least the Australian Bureau statistics for those numbers where they come up with their 6.2% ,is if you work even one hour a week, you’re considered as employed. You have a job. The underemployment rate is the real kicker. And that declined, so in other words … sorry, that rose, so people who are looking for work, who have capacity, who want to do more work, are unable to get it. And that’s where the real problem is.
Part-time workers fell to 9%, even though the rest of … and underemployment was at 13.8%. Massive job losses there and people not earning what they used to. So yeah, severe declines across most part-time jobs. When we look at all the industries, jobs have declined. The number of jobs out there have fallen by seven and a half percent in the last month, and employment fundamentals are going to drive the property market. Basically it is a direct link. If people have money, if they’re earning good money, they’re going to go out and get a loan. They’re going to buy property. If people aren’t earning, they’re going to be selling out of desperation. They’re going to drop their price to meet the market and that’s the supply and demand issue that causes property prices to fall.
The other thing affecting the property market right now apart from unemployment is also migration because borders are closed. Australia’s property market is driven by, for example, foreign students coming to Australia. When people say, “Oh, the property market’s going to take off because Chinese buyers want to buy here,” it’s not that they can necessarily buy existing homes. We have very strict laws. The Foreign Investment Review Board says that foreign investors, people who are not residents, are not local, cannot buy existing properties. They can only buy brand new properties off the plan.
Those foreign buyers aren’t going to come and snap up our whole market, but what was happening, those foreign buyers may have children, for example, who are on a student visa and can come and live here while they study, they may have bought property for them to live in while they were here. The fact that we have migration a lot lower, and we were highly dependent on our migrant, especially skilled migrants to come in to drive the economy, to earn good money and to buy property here, it boosted demand. That’s going to cause a contraction as well.
The longer term risk then, so say after September of this year, when we come off the job keeper and job seeker stimulus packages, when banks stop with the … At the moment, banks have given people holidays on their loans where people don’t have to make their loan repayments for … some banks have said three months, other banks have said six months, and the other thing that’s happening is the government have changed the laws around insolvency. Creditors, people that indebted people may owe money to, are not pursuing them right now because there’s six months of kind of like a hibernation where people can’t bankrupt you or wind up your company or anything.
The pain is not there yet. And what the RBA have said, the Reserve Bank have said that we are going to see a rise in distressed property. What they’ve said is, in the highlighted yellow bit, analysis based on loan level data and historical relationships indicates that for every one percentage point increase in unemployment,” so remember unemployment has gone up by 1% in the last month, but next month they’re predicting it to go up to 10%, so it’s going to go up another 4%. Since coronavirus started, we’re looking at 5% increase in unemployment. For every 1% increase in unemployment, there is a 0.8% increase in loan defaults or mortgage delinquencies. A lot of the banks in recent weeks announcing their profits didn’t give dividends. They’ve put money aside for what they’re calling loan impairments, because they know that there’s high unemployment.
Remember, the banks have been getting all the hardship letters. The banks have paused loans for three to six months because people have said, “We’ve lost our job. We’re not earning as much. We’re underemployed. I can only get six hours work a week. I need to get 40 hours or whatever,” and banks have looked at their books, looked at their borrowers and they know that for every 1% increase in unemployment, there is going to be a 0.8% increase in people defaulting on their loans. They’ve worked out their numbers and their modeling and that’s how they’ve come up with that data of extreme fall in the property market of up to 30 odd percent to about 10%, but definitely a downward trend in the property market mainly driven by mortgage arrears, so an upward trend in people defaulting on their loans.
What the banks have talked about is lowering their capital ratio, so APRA, the Australian Prudential Regulation Authority, said to banks, “You have to keep this much in reserve. If there is a run on the banks, you have to be able to bail yourselves out.” And then they said, “You know what? Now, because people are in trouble, you’re allowed to give them a bit of leniency. We’re not going to insist that you keep all that money in reserve.” Banks have offered people a reprieve. Commonwealth Bank is up to six months. Westpac have said three months and we’ll review. NAB have said six months and ANZ and have said six months. People have all got those loan holidays and they’re going to run out come September, so that’s when we’ll hit that slippery slope and things will get interesting.
High level takeaway, and I’m quoting Tim Lawless because he is the go-to guru, RP Data measure markets. They’ve got their finger on the pulse. It’s who the Reserve Bank looks to for their data. It’s who the government looks to because the Australian Bureau of Statistics with all their surveys, it’s kind of backwards-looking. RP Data is getting the Ochram rates and publishing the data on the day, on the Saturday. What they’ve said is in summary that we were on an upswing in late 2019. We’ve been derailed. Property has a lag effect, so it’s slower to respond to changes in the market. And what we’ve seen is probably not the worst of it because no one’s selling. It’s not like everybody said, “Oh my God, coronavirus, take all my properties, get whatever you can get for them. Just sell, sell, sell.” Everyone has said, “Well, I’ll just wait and see,” so we haven’t seen properties selling for a lot less at the moment. People have just done nothing because they haven’t had to because they’re being given loan holidays and money from the government.
Transaction activity, people buying and selling properties, is a whole lot lower, but there is obviously clear downward risk, anywhere from 10 to 30%, and that’s where the trend’s going to be. But with every crisis, there is opportunity. We can’t change this. Maybe it won’t happen. Maybe it’ll be like the horse and cart. Maybe something else will come into play. But if it doesn’t and if we’re on that collision course, the definition of insanity is doing the same thing over and over again and expecting a different result, as Albert Einstein once said. Doing what we used to do and hoping for the best is not the solution right now. The winds of change have blown. We need to adjust our sails. We have to do things differently. There will be a real opportunity in property if you buy right, but you need information, you need knowledge, you need systems and data.
For those of you who are looking for that sort of opportunity, I’m holding a live event, a special briefing on Thursday. Now, I’m going to put the details of that in the comments section there so you can go to that link and register for that and we’ll talk more about the opportunity then on Thursday night.
That’s it for our State of Play today. Follow us on Facebook and share this information, share the data, share everything with friends and family, just tag them in. And if you’re on YouTube, don’t forget to subscribe and hit the bell so we can send you updates and let you know in advance when we’re going live. Otherwise, stay safe, take care. We’ve got our Ask Dominique session on Thursday, so don’t forget. Keep asking questions. Even if you’re watching the replay of this, still leave your questions there and I’ll answer them live on Thursday and we’ve got our 402 again, our State of Play on Thursday night and we’ll update you what’s happening in markets around the world and in the general state of play on Thursday at 402.
And for anything that you need to know in relation to the current crisis, we have created on our website, DGInstitute.com.au, if you go on the COVID-19 tab there, you’ll be able to see all of our daily huddles, our State of Play, the slides for these sorts of things and anything else that you might need. We’ve made that very resource-rich, including online courses and programs that we’d normally charge for that we’re gifting there for free. For more on this and the opportunity in the property market right now, register on that link there on your screen. We’ll catch up for that on Thursday night. Keep safe and talk soon.