While it is still too early to say what impact COVID-19 will have on the residential property market, it would be remiss of us not to consider the potential knocks.
If we look at previous economic downturns, such as the 1991 recession or the Global Financial Crisis in 2007, Australian property certainly fared better than other sectors.
However, it was not immune to the downturn and hardship, and it is unlikely to be immune this time.
Consumer confidence is a big influencer
Markets thrive on confidence and wither when it dries up. This is evident through what has happened with share markets around the world since the COVID-19 crisis kicked into gear.
Share markets are extremely liquid so they are much quicker to react to negative sentiment than non-liquid assets, like property. Nevertheless, low levels of consumer confidence will eventually make a mark on the residential property market.
The time-consuming nature of buying and selling property means the market doesn’t respond to a fall in confidence as rapidly – and in most cases, as substantially – as the share market does.
Property prices could react
Right now, the broader economy is mostly faced with low confidence because of widespread health concerns, the shut down of public venues and concerns about job security.
Given this, the buying and selling of properties might not be a high priority right now, which could lead to a fall in demand for properties in the near future.
This doesn’t necessarily mean we will see a significant and rapid fall in prices – but there is likely to be a reduction in turnover.
Lower demand, reduced turnover and potentially lower prices will be a challenge for the market, but given we are dealing with a virus pandemic and not a global financial crisis, the hardship will likely be short-lived.
The 0.25% cash rate will keep credit available
This month, the Reserve Bank cut interest rates to a record low has vowed to keep the cash rate at the current level of 0.25 per cent until progress is made towards full employment.
They are confident inflation will be sustainably within the 2 to 3 per cent target band.
Even before the onset of COVID-19, the RBA had made little progress towards full employment and underlying inflation had not been above 2% for four years.
Given this – and with unemployment expected to rise – it is likely that official interest rates will remain at 0.25% for an extended period of time to ensure credit is still available.
The Federal Government stimulus expected impact
The Federal Government has delivered two major stimulus packages worth $189 billion, with a third package in the pipeline.
Both the Federal Government and the RBA say they will launch more stimulus if the need arises.
While these packages are almost entirely focused on ensuring credit markets remain open and employers retain workers, the stimulus will have both short and long-term impacts on the property market.
Short term impacts of government stimulus
Record-low interest rates mean access to finance remains available – but whether or not this will support the property market rests on buyer activity. At this stage, it’s very much a case of ‘watch and wait’.
Long term impacts of government stimulus
The cost of borrowing is likely to remain at 0.25 per cent for some time. It means buyers will have the advantage going forward, which could stimulate the market.
The RBA’s stimulus package
The four main elements of the stimulus package from the Reserve Bank are:
- The RBA has cut official interest rates to a record low of 0.25% – the lowest it can go – bringing Australia’s cash rate in line with a number of other countries.
- The RBA is for the first time purchasing Australian government bonds, targeting a three-year government bond rate of around 0.25% – that’s how long it thinks the cash rate will stay at that level.
- The RBA will fund banks with at least $90 billion at 0.25 per cent over three years, and provide additional funding if the banks increase lending to business, especially SMBs.
- Exchange settlement balances at the RBA will be remunerated at 10 basis points rather than zero, stipulated in previous arrangements. It means lenders that deposit funds overnight will now get 0.1% interest, and those that borrow overnight will still pay 0.25% interest.
The Federal Government’s stimulus packages:
Stimulus 1: The $17.6 billion package has four main elements:
- One-off $750 payments to low-income earners including all social security, veteran and other income support recipients and eligible concession cardholders
- Up to $25,000 for SMBs to cover employee wages and salaries
- $1.2 billion in wage subsidies to cover 50 per cent of an apprentice’s or trainee’s wage for up to nine months.
- $3.9 billion in incentives to encourage businesses to spend, including an increase to the instant asset write-off ($30,000 to $150,000).
Stimulus 2: The $66 billion dollar package builds on the first stimulus:
- A limited-time coronavirus supplement for eligible income support recipients, to be paid at a rate of $550 per fortnight for the next six months
- An extra $750 payment to social security and veteran income support recipients, as well as eligible concession cardholders. This won’t be available if you get the $550-a-fortnight coronavirus supplement
- Sole traders and the self-employed impacted by the economic downturn will be able to access the jobseeker payment and the coronavirus supplement
- Stimulus 1 wage subsidy to small business ramped up from a $25,000 cash refund to a maximum payment of $100,000
- Individuals “in financial stress” can access their superannuation savings, with the amount capped at up to $10,000 in 2019-20, and a further $10,000 in 2020-21.
- A temporary reduction in superannuation minimum drawdown rates for account-based pensions and similar products including a 50 per cent reduction in the rate for 2019-20 and 2020-21
- A further reduction in deeming rates by a further 0.25 percentage points, to reflect the latest rate reductions by the RBA.
- $40 billion “coronavirus SME guarantee scheme”, to support lending to small and medium-sized businesses
- $715 million package for the aviation sector
- $1 billion fund for regions “disproportionally affected by the coronavirus outbreak including areas heavily reliant on tourism, agriculture and education
There’s light at the end of the coronavirus tunnel
Once COVID-19 is under control, the housing market is likely to be buoyed by a combination of record-low mortgage rates and the prospect that they will remain at these levels for some time.
In addition to this, a slowdown in property transactions in the coming months will likely create more pent-up demand for housing, which will burst once consumer confidence begins to sustainably improve and the housing market commences its recovery.
Overall, these factors should see a fairly swift rebound in property demand once the COVID-19 crisis has passed.