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Royal

Content Editor at Justprop.com.au, Sydney

Australian Property Market report amid Coronavirus crisis

3Mo ago 0 Replies 85 Views
Amid the spread of coronavirus, the past few weeks have seen increased expectations of an Australian recession, a slowdown in business activity and trillions of dollars wiped off global share markets.
It has many asking what the impact of the coronavirus would be on Australian residential property.

This note explores fundamentals of housing to better understand outcomes in the current climate.
It found:
  1. Housing has performed relatively well against negative economic shocks, but the unique conditions of a pandemic-induced economic slowdown must be considered;
  2. Housing is an illiquid asset and a consumption good, which shows far less volatility and decline than share markets;
  3. In the coming weeks, property transactions may fall significantly, but the impact on values is unclear; and,
  4. Existing economic headwinds, including high household debt, make the property market particularly susceptible to a fall in demand. However, Australia does not have ‘one’ property market, and a decline in demand will be tempered by the composition of the local workforce, and the state of household finances.

Australian residential property has historically fared well against negative economic shocks
In beginning to assess the impact of the current slowdown on property, it is worth exploring how property has historically responded to negative economic shocks.
Major share market losses and recession are not necessarily predictors of declines in housing values.
This can be seen in the figure below. When significant, negative economic shocks occur, the effect on the housing market varies.
Property value changes depend on the level of impact on Australian industry.
As an example, the 1987 ‘Black Monday’ stock market crash was a negative shock, in which the Australian share market lost approximately 23% of its value in a single day.

The share market and housing market perform differently
Aggregate figures on the housing market suggest that the slowdown in economic activity from the coronavirus has not impacted housing markets in the same way as equities.
This is nothing new.
Historically, comparing the S&P ASX 200 index with the CoreLogic home value index, suggests that property responds to macroeconomic conditions at a lag, and avoids the same extent of decline or volatility.

Sales activity likely to decline, while the impact on values is less clear
Property transaction volumes are likely to fall in the coming months, but the outcome for values depends on temporal expectations around coronavirus, and longer-term employment conditions.
In the short term, the coronavirus and subsequent share market declines have already had a significant impact on consumer confidence.
This may lead to postponed dwelling purchases, as housing is an expensive, high commitment purchase decision.

Property values may not be impacted the same way.
One important facet of the unfolding economic slowdown, is that it is led by institutional responses to the coronavirus pandemic.
This is a unique cause for halting production and consumption.
Vendors may view the current pandemic as a temporary economic condition.
If monetary and fiscal stimulus can adequately support business and household income amid the slowdown, then the next few months could see a sharp contraction in sales volumes, but not necessarily dwelling values.
This is because the expectation would be for market activities to return. Influenza periods for example, typically last 3-4 months.

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