Will Coronavirus Effect the Australian Property Market?
The short answer is yes!
The Coronavirus certainly does have the potential to impact the Australian housing market. This new virus has been spreading and is only partially understood by scientists. It could disrupt many aspects of Australian domestic economy, as it could the broader global economy.
That’s very much the scary part. However, the key word here is ‘potential’.
Worst case scenarios, do not need to happen and damage to economies may be avoided, mitigated, or even not materialise at all.
It’s a far from certain picture, at an early and evolving stage. What exactly will happen with this new global health threat, is not known, even by top scientists, as they battle to combat this fast-moving and very fluid threat.
On that basis, the impact on the Australian housing market is, also unknown. It’s simply too early to say and it very much depends on how drastically the virus develops and how successful governments are in combating it.
What’s not in doubt is the seriousness of the situation and its potential to impact society and economy around the globe. Although the future is unclear, it’s possible for us to look at some known facts and make some reasonable assessments about what the potential impacts of this health emergency might be. In understanding this, investors can at least be sure they have considered the information, and make educated decisions going forward.
The Virus
Coronavirus, also known as COVID-19, is a new and rapidly evolving global health threat, that first emerged in Wuhan province, China in late 2019. Within Wuhan province it has spread rapidly, and it has also been transmitted in small numbers to several other countries, including Australia. Coronavirus is a complex and evolving respiratory virus, that scientists are fighting hard to understand and contain. It currently presents a serious global health challenge that is changing in scope, almost daily. Much of the current global attempt to combat the virus is focused on containment and this has resulted in ongoing travel bans of Chinese nationals to Australia and some other countries.
If you want to know more about Coronavirus, you can keep up to date by reading the World Health Organisation (WHO) Situation Reports on Coronavirus.
See also the official government advice on the virus via the Australian Department of Health website.
The Australian Property Market
So, what’s been happening in the Australian property market?
Well, in recent months the market can be characterised as having picked up since mid 2019, after a marked downturn. Strong signs of recovery were in evidence and market confidence was no doubt helped by three government rate cuts in the latter half of 2019. Last year closed with national average dwelling prices in most Australian cities rising on average 1.1% in December and 2.3% over the course of last year. As recently as January 2020, before external factors started to impact confidence, the national property market was steadily strengthening. Indicative market practices, such as the widespread discounting of homes in Melbourne and Sydney (a real feature from the depths of the slump) were disappearing as sellers enjoyed renewed confidence. It was not just the powerhouses of Melbourne and Sydney that were doing well, with all regional capitals reporting gains, though with significantly varying degrees of strength. However, that recovery was still somewhat tentative and the market was still well below its historic heights.
All that was before the emerging impact of Coronavirus.
Economic Impacts of the Coronavirus
The essential threat to the property market and perhaps even the Australian economy as a whole, comes from our close economic relationship with China.
In a nutshell, China is Australia’s most significant trading partner. Australia is China’s sixth largest trading partner and its fifth biggest supplier of imports, as well as its tenth biggest customer for exports. An estimated 25% per cent of all Australia’s manufactured imports come from China, with 13% of its exports to China being thermal coal. A two-way investment relationship is also very valuable and includes commercial and domestic property markets. In 2018, it was estimated that China invested $8.2bn in Australia, across all sectors. Put simply, Australia is reliant on its economic relationship with China.
If the current health threat, destabilises the Chinese economy in any kind of sustained way, then there is likely to be major implications for Australia and the wider global economy. Although it’s too early to know, a full economic slowdown in China is not unimaginable and could result, not just from the Coronavirus, but also as a compounded factor to the already slowing effects of Chinese/US trade tensions.
In recent decades, China has made itself the factory of the world. As a major supplier of goods and parts for the global supply chain, the virus lockdown within China has already seen production and global supply chains impacted in several sectors. Just recently Apple announced that its sales would be impacted due to the production slowdown of smartphones. Other global industries, such as the automotive sector, are already flagging fears over future supply of parts. So, the potential is there for real impact to the global economy.
Closer to home, direct Chinese Investment into the Australian commercial and residential property markets have long been a significant source of foreign investment. In 2018 China was estimated to have invested $8.2bn across the economy. Of that, property was the second highest investment for Chinese nationals (after healthcare), accounting for 35.8% of totals. Although we have seen downward fluctuations in recent years, Chinese investors still have a strong appetite for Australian property, with small investor focus centred on the apartment and private rental spheres.
But at the moment there are early signs that the ongoing travel-ban is putting pressure on this investment stream. Indeed, this is resulting in a slowing of activity in a number of overseas markets for Chinese investors, though once again, this is too early to accurately quantify.
Yet, “every cloud …” as the saying goes, and here it’s worth noting that major challenges to the market status quos, almost always bring business opportunities. This chain of thought here goes, that as Chinese investors start to get nervous about their own domestic economy in the grip of Coronavirus disruption, they might seek, relatively safe investment havens in Australia to park their money. Again, it’s too early to call this, but it’s worth flipping the scenario to look at positives as well as negatives. One thing to always bear in mind though, is that if the Chinese economy ever does seriously falter, it will be easy, if not likely, for the Chinese state to ‘switch off the tap’ and regulate investments leaving their country. This has always been a risk, long before the current crisis.
Looking at the wider Australian economy, the Australian University sector, which some have accused of being over-reliant on Chinese students, is starting to face real uncertainty for the new academic year. A recent article calculated the possible cost at $1.2bn across just 10 leading universities in the year ahead. The potential cancelation of up to 100,000 high-value, fee-paying students and tenants for the rental market, will have a significant impact on local economies, and could create real rental disruption, that might spill to the wider property market (see below). It is predicted to centre on timing, as if Chinese students cannot begin their academic studies in time, there’s a chance they may not come at all for 2020.
In tourism also, the picture is concerning with the current travel ban effecting the very large numbers of Chinese tourists (up to 1.2 million), that Australia relies on each year. Let’s remember that tourists not only spend on travel and accommodation, they are also crucial to the hospitality and retail sectors, which in themselves feed into many other areas of the economy like food, farming, services and others.
So why is all this important to the property market? Well, put simply, hard-hit Aussie businesses, mean hard hit business owners and employees. This is where the slow-down could really bite. A collapse of employment, income and market confidence would certainly turn off the flow of available buyers and would mean a real crunch for the market.
We simply don’t yet know the extent to which the above will bite. It all very much depends on the development, scale and containment of the virus. What is concerning though, is a scenario in which the virus and travel restrictions roll into many months, as there is then a real potential of significant market disruption.
A Perfect Storm?
No event stands in isolation and we all know that Coronavirus is not the only disruptive event that Australia has faced in what has been a very challenging summer. Coming almost on top of the bushfire crisis, is there is a chance that this could be the perfect storm?
It’s no secret and the double whammy of the bushfires and the Coronavirus has hit the tourism industry particularly hard this year. Its not even known yet, how big a hit this will have on the Australian economy, but it’s estimated that the fires alone could cost anything up to $4bn across the economy as a whole. That’s a big number!
Indeed, its effects across the tourism, hospitality and the property industries are all significant and to an extent, interlinked. All industries exist within complex eco-systems and the property sector is no exception to this.
For example, there is emerging signs of disruption to the short-let rental market as too many landlords chase too few tourists, short-stay visitors and student renters. You might think that this is a different market to long-term domestic lets, but there is already evidence that short-let landlords, on platforms such as Airbnb, are under severe stress and may be realigning into the longer-term rental market.
That means more competition and that drives rents down. This could be great news for the estimated 1 in 4 Australians that currently rent their property. However, if conditions persist, it might mean the numbers just don’t add up for current landlords and that could see them ‘dumping’ properties as they’re forced to exit the market and remodel portfolios.
Of course, any dumping in the rental sector, would depress values in the wider property market, as competition amongst vendors would heighten and impetus swings towards a buyers-market. As always, there would be winners and losers in that scenario. With affordability, being a long-running issue in the Australian market, it might not be all bad and could act as a stimulus, drawing new buyers into market. From an investor, point of view it might also present the perfect opportunity to grow, while pricing might be keen, and bargains might be plenty.
However, it would certainly not be welcomed by those currently invested and also leveraged with loans. With property prices potentially forced down and rents destabilised by oversupply, owners might face that age-old dilemma of having to sit tight, renting out their properties at break-even or subsidised levels, or selling at a loss. No enviable set of choices!
None of this has to happen, but if the virus crisis deepens or prolongs over many months, there are bound to be those that get increasingly nervous.
Conclusion
None of the above scenarios are certain, but they are to varying degrees plausible. All scenarios bear strong relation to the ongoing virus situation and it’s how that develops, which will determine outcomes.
If you own property, or are planning on buying one, it’s important to think through the linkages and be aware as to the ‘cause and effect’ nature of the market.
Remember that sentiment, as well as actuality, are key ingredients in the mix that makes up market-confidence. A threat like the emerging Coronavirus has the potential to affect both aspects, but it’s far from clear as to what extent. It also remains true that opportunities as well as challenges might be a real feature of what we see going forward.
The world has seen and successfully combated pandemic health threats before, even in recent decades, with SARS and MERS, so there is no way of knowing yet, how deep and how long this will run. We can only hope for the best, for our loved ones and our investments.
Colin J Campbell
