COVID-19 and The Real Estate Industry

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.

Australia’s leading real estate researcher and analyst CoreLogic explores fundamentals of housing to better understand outcomes in the current climate. It has found:

  • Housing has performed relatively well against negative economic shocks, but the unique conditions of a pandemic-induced economic slowdown must be considered;
  • Housing is an illiquid asset and a consumption good, which shows far less volatility and decline than share markets;
  • In the coming weeks, property transactions may fall significantly but the impact on values is unclear; and,
  • 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.

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.

Conclusion:

The coronavirus outbreak clearly presents some downside risk for the Australian housing market, but ultimately, the impact remains highly uncertain. New information and policy responses are unfolding daily, making it impossible to provide a reasonable forecast of capital growth. Some added context; however, is remembering the fundamentals of the property market, and idiosyncrasies of a pandemic-led downturn.

Property is less volatile and slower to respond to market shocks than equities, it is a consumption good and it is tied to fundamentals of employment opportunity and income growth. In the current climate, the Australian housing market is more insulated from foreign demand and investment speculation than it has been over previous years.

Transaction activity is likely to be impacted more than market values.  As consumer confidence reduces, and labour markets are disrupted, more Australians are likely to put high commitment decisions on hold until there is more certainty around the economy, jobs and household finances.

Additionally, stimulus measures including emergency level monetary policy settings and a surge in fiscal spending should help to cushion the impact of reduced business activity, but a recession in the first half of 2020 still looks likely.

The current high level of household debt amplifies the risk of unemployment on housing market conditions. However, areas severely impacted by social distancing would be less resilient than others in rebounding from the coronavirus pandemic.

Source: CoreLogic.   To read the entire article click here.