Market update – Recovery lessons from recent recessions, the great depression, GFC & Spanish Flu – the market forecast (Ep.46)

In the seventh Podcast since Covid-19 took hold, we turned our thoughts to the alarmist headlines emerging, warning that the property market will drop by 20-30%. Why in all likelihood that won’t be the case by taking a critical eye to data and forecasting, and jumping in the time machine to look at the economic impact of previous pandemics and recessions on the property market. 

In this episode David Johnston, Cate Bakos and Peter Koulizos take you through: 

  1. We share our insights as to what we are seeing at the coal face with residential property transactions and buyer activity.
  2. We discuss our property market forecasts, why we hold the position that we do, and why we urge you to seek data from credible sources, whose area of expertise and skill set specialises in residential property.
  3. How property values actually increased in April across Australia during lockdown, and why this happened, despite the negative headlines.
  4. Why you should give short thrift to shock headlines that property values will drop significantly, and why you should be careful what you read, and how headlines are often diametrically opposed to the actual content.
  5. A look at the Spanish Flu and the Great Depression and how the policy and events of the time stack up to our current situation and the economic recoveries.
  6. Analyse the residential property market data from Australia’s three most recent recessions and the GFC. The results will surprise you!
  7. Why turning the finance tap off, or rising rates are the most likely key indicators to precipitate a significant reduction in residential property values.
  8. And of course, our ‘gold nuggets’! 

We wish you and your families the best of health and say a big thank you to all our health workers during this time. 

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Show notes

  1. Green shoots starting to show – Queenslanders are able to go to the beach, parks in South Australia have opened, some states have allowed face to face open for inspections and auctions are on again. Many people are wondering ‘what is in store for property prices as a result of Covid-19′? 
  2. Shock headlines emerge that prices will drop by 20-30% – but be careful who you listen to. Some journalists put forward a range of potential outcomes and ‘shock’ journalists put out ‘stories’. The data on hand, combined with the data on rate of cases shows that if we can limit our time in lockdown, the general view is that we won’t be seeing cataclysmic price falls. What we’ve found is that even if the article is predominantly positive, the headline is still negative because more people will click on a negative headline. A great example of this was an article over the weekend, that Melbourne property prices are tanking – all capital cities recorded slightly higher prices for April and Melbourne was down by 0.3%, hardly a dive.  
  3. Remember that because of data delay, the jury is still out for April – there is no doubt that coronavirus will impact our market, but we’ve seen prices holding firm and the amount of discounting is not very significant at all. Anecdotally, there’s been stiff competition on every property purchase negotiation. There are buyers out there and sentiment has changed.  
  4. The more moderated view – most economists are talking about 10-15% reductions, some 5%. Most economists work for fund managers, their interest is in the stock market which is essentially competing for money from people who put money into the property market. They are also more inclined to manage the downside, if property values drop it impacts their interests, so they look at worse than likely outcomes to stress test. Chris Joye, who we’ve found to be fairly accurate in his predictions is forecasting a 5% drop. He invented and sold the hedonic index to Core Logic, which is the most widely used index for valuing property. It is important to look at what is the skill set of the people who are providing the data, is it 20% of their expertise, and what are their vested interests? 
  5. Jump in the time machine – a look at the Spanish Flu – a major virus that impacted the whole world, it’s the closest comparison to what we are experiencing now. It was 100 years ago and we’ve almost forgotten about it. One third of the world’s population caught it and the rate of people who passed away was much higher. The Spanish Flu occurred off the back of WW1 – the following downturn was not to do with structural economic factors. The recovery was pretty quick and gave rise to a huge tail wind for the next decade, the roaring 20’s. 
  6. The Great depression: 
    1. Preceded by the roaring 20’s – everyone had a fabulous time, and then came a big crash. Fast forward to today, we haven’t come off the roaring 20’s at all, we are not falling from a massive economic boom 
    2. The economic fall out was dealt with very differently – when great depression hit, monetary policy was to tighten everything up – banks were folding, people couldn’t access money.  The austerity measures were akin to what you would do in your household. Now, the government is now throwing money at us, governments are borrowing to give it to citizens and stimulate the economy.  
    3. We are now experiencing a strong disruption – quick and intense, with the window of disruption resulting from lockdown will be way shorter than the Great Depression.  
  7. Peering into the crystal ball – *disclaimer, if case numbers continue to improve* –  If we’re able to keep the contagion under control and steadily open up the economy and loosen restrictions – then property values may drop by 5%, but no more. More government stimulus to property market will follow, construction will start up and rates will stay low – that will stay in place for however long it takes.   
  8. The big unknown – the second wave or third wave – with the Spanish Flu, the second wave was the worst.  If we can keep that under control then it won’t fall that far. The RBA’s own modelling is that we should be track for a recovery of 15-25%. As soon as people start seeing the market move again and it’s being talked about, values will go up.  
  9. PIPA research – the connections between recessions and property prices:  
    1. 1973-1975 recession – during the recession and 5 years after, no negative impact to property values. 
    2. 1982-1983 recession – during the recession and 5 years after, Perth values drop by 1.7% and Canberra 1.2%. 
    3. 1990-1991 recession – during the recession and 5 years after, Sydney drops by 6.2%, Melbourne 3.1%, no impact on Brisbane, Adelaide 1.8%, Perth 1.6%, Hobart 3.4%, Darwin 0.7% and Canberra 3.3% 
    4. 2008 Global financial crisis – during the recession and 5 years after, Sydney drops by 3.2%, Melbourne 5.6%, Brisbane 5.4%, Adelaide 4.5%, Perth 4.1%, Hobart 4.8%, Darwin 2.5% and Canberra 1.8%.  
  10. The credit squeeze – during 2018 and 2019, we saw access to credit get tightened as APRA pumped the brakes on interest only and investment lending, borrowing capacities reduced, making it harder to borrow. During this time, we had a property downturn which affected Melbourne 7.6% and Sydney 8.3%. It was not a recession, but these figures are more significant than those in the previous recessions we’ve seen. Availability of finance or ease of finance is the critical influencer of property prices.  
  11. The credit squeeze was caused by pressure of government regulators scared about the level of household debt, plus the royal commission, that squashed property values. At this time government wants the banks to lend money to stimulate the economy. 

David Johnston – The Property Planner’s Golden nugget: There’s fear out there and we all have fear, the more I think about what is happening the more I keep coming back to the same fundamentals, if you buy property you should be thinking long-term, should be making decisions based on your own economy, if income is stable, you’ve got strong affordability, you’ve got a good cash flow buffer and risk management strategies, it’s probable that right now is a great time to buy, if you can hold long-term. The property reductions have not been that great, they tend to last 6 months to two years. The same fundamentals apply now and maybe even more when we’re going through downturns.  

Cate Bakos- The Property Buyer’s Golden nugget:  What I would do if I was a policy maker, I’d be thinking about how to get more money flowing in the economy, because if we’re giving handouts to people and they are saving it or paying down their mortgage, it is not serving the right purpose. We want to be supporting local businesses and getting them up and running, so my idea is that something like a book of vouchers supplied to every household, tokens that we can use out there in our local economy to stimulate recovery. 

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