March 21, 2020 09:14:52
Global markets have lost trillions of dollars, central bankers are rolling out extraordinary measures to stop the financial system collapsing, and even the usual safety net of gold is dropping like a stone. But one thing is holding up for now — the Australian property market.
“Business as usual this weekend,” crows an email from a real estate agent in Sydney’s inner west, which is offering virtual inspections and live-streamed auctions in a nod to social distancing.
“2020 ushers in new moderate growth cycles” is the title of this week’s letter to clients from an agency in Melbourne’s northern suburbs.
It lists low interest rates, a pick-up in demand from retirees looking for rental returns, and a weak dollar luring in offshore buyers, as reasons that real estate remains a “safe” and “capital preserving” option. In other words — safe as houses.
In past economic meltdowns Australian homes and apartments have fared well. In the last Australian recession, the one we had to have, home prices declined only around 4 per cent in 1990.
Property prices declined in only one of the five years following the financial crisis of 2008; going backward on an annual basis by 4.8 per cent in 2010, before rebounding 2.1 and 9.3 per cent in the following two years.
But past performance is no indicator of future returns.
It’s a different beast to the GFC
The crisis that we find ourselves in is very different to previous shake-outs.
Commonwealth Bank boss Matt Comyn, who sits on top of a portfolio of the largest number of loans in the country, believes the coronavirus impact will be longer and harder than the only crisis many working Australians can fully remember.
“There’s every reason to be concerned at this particular point in time,” Comyn told ABC’s The Business. “The GFC was quite different and much more around failure in the financial system and a lack of trust, particularly between financial institutions.”
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After the first initial shock, the wave of pain of the GFC was like a slow-moving tsunami. Many households and businesses were able to somewhat prepare, and to some extent economies continued to function, airlines continued to fly, hotels accepted guests, cruise liners left the docks.
But this time economic activity has been wiped out overnight across the globe.
Ratings agency Standard and Poor’s says the world is already in recession.
China, one of Australia’s biggest customers for goods, services and raw materials, has contracted so sharply it’s hard to comprehend. Factory output plunged 13.5 per cent even before the full shutdown, and retail sales fell 20 per cent
In Australia, the unemployment rate is set to shoot from 5 per cent to 7 per cent. And some believe that may be conservative given the scale of the shutdown.
It’s hard to know, as this is unlike any other economic crisis. It’s a health crisis.
The losses are immediate
Instead of brides scaling back the number of flowers for a wedding, having one photographer instead of two and choosing cheaper plonk for the table, weddings have been cancelled en masse.
During the GFC theatres struggled but remained open, offering discounted tickets. Not this time. Social media is littered with artists, singers, actors out of work.
Stephanie, a Sydney make-up artist reliant on weddings and some theatre work, now has zero income. From an average $6,000 a month to nothing, overnight.
She isn’t spending at cafes, make-up stores, bars, she cancelled an Airbnb weekend away on the NSW South Coast, and forget about new clothes. She estimates she has savings that will cover food, rent and bills for three months.
Will weddings be back on the minute coronavirus is deemed “under control”? No. Will theatres have money to pay for extras like make-up artists once they reopen? No.
Stephanie is already considering selling her car and is looking to move back in with her parents. Her landlords will have an empty flat.
Stephanie is just one element of the wedding; think of the florists, the suppliers to the florists, the flower growers, the caterers, the wait staff, the marquee suppliers — nearly all small businesses with zero bookings over the next three months at least.
The indefinite standing-down of 20,000 Qantas staff this week shows it is not just casual workers reliant on events who are being devastated by the shutdowns.
Tim, a maintenance worker in Brisbane, has two toddlers, a mortgage and only two weeks of annual leave to cover the likely couple of months he will be sitting at home. The airline has said many of its employees will have to take leave without pay.
Tim’s mortgage isn’t going to go away, so any non-essential spending, at pubs, cafés, getting the pool pump fixed, has been shelved. The holiday up Queensland’s Sunshine Coast in June is off.
A pilot, James, believes he will see a 50 per cent reduction in work, which means an almost 50 per cent reduction in money landing in his account.
The scars won’t fade quickly
The consequences of the outbreak will be long and deep, because despite promises that “things will return to normal” the scars of losing income overnight will not fade quickly from the consumers’ mind.
Household war chests, the money saved for a “rainy day”, will be depleted if not run out across the country. And it is unlikely Government stimulus hand-outs or RBA-backed business loans will prevent that.
Clearance rates at auctions have been running hot, along with prices in most capital cities over the past couple of months as buyers confident in their jobs and buoyed by ever-lower interest rates threw up the paddle.
The Reserve Bank made an emergency cut to the cash rate this week, taking it to 0.25 per cent, and banks are passing it on in different forms. While past rate cuts have lit a fire under buyers’ enthusiasm, perhaps this last cut may cause buyers to wonder — are they really going to be safe as houses this time?
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March 21, 2020 05:00:59