Property Investment during a Recession - August 2020
August 31, 2020 / Written by Rich Harvey
By Guest Blogger, Peter Koulizos, property lecturer and author
COVID-19 has spooked many people, including property investors. This is mainly because most of us have never experienced such a serious global event before. We may have lived through other medical emergencies such as the bird flu, SARS and the swine flu but nothing as serious as this. Most of us have experienced economic downturns such as the Global Financial Crisis (GFC) and recessions but COVID-19 is forecast to result in the most severe economic downturn since the Great Depression.
So, what can property investors take away from this?
Importantly, Australian property is very resilient. In research that I recently completed for the Property Investment Professionals of Australia (PIPA), it showed that house prices did not drop in value en masse during or straight after the recessions of the 1970’s, 1980’s, 1990’s and the GFC. “How can this be so?”, I hear you ask. I’m glad you asked!
Price is a function of demand and supply. Even though there are many people not interested in buying property, there are also not many people interested in selling property. As both demand and supply have dropped, prices remain fairly steady. However, this is not true for rents.
In the rental market, demand has dropped significantly as a result of COVID-19. Young people have left their rental homes and moved back home. Many people in retail, hospitality and tourism can’t afford to pay rent and some have vacated and moved in with others or went back home. International students and those on migrant working visas who do not benefit from JobKeeper or JobSeeker, also have made other living arrangements.
At the same time, the supply of rental properties has increased. As travel was restricted due to the COVID-19 outbreak, owners of short term stays such as Airbnb and holiday homes put their properties on the long term rental market. In this case, demand fell and supply increased which put pressure on rents to drop.
Property investors need to be aware that even though the value of their property may not drop during this time, their rents will be affected. Their asking rents may need to drop and it could take a little longer to find a suitable tenant.
If property investors are looking to buy property during COVID-19, the usual due diligence questions need to be asked? However at this time, a more important should be asked. “How secure is my employment?” is a critical question that must be considered. COVID-19 and the resultant economic downturn will result in increased unemployment and underemployment.
If you are certain that your employment is secure, then you can search for property with confidence. However, if you are not sure about your future employment, I’d suggest that you don’t take a risk and focus on up-skilling, retraining, etc rather than trying to buy property.
If you are looking to buy property during a recession, there are opportunities. Recessions can trigger panic in people, which often leads to them selling their property for a lot less than if they hadn’t made a rushed decision. This presents an opportunity for an astute buyer.
This recession will be a little different to others because even though we are forecast to reach record unemployment, we have JobKeeper, JobSeeker, record low interest rates and the banks have come to the party and offered mortgage repayment holidays. These initiatives will help soften the blow, especially when it comes to downward pressure on property prices.
It is very interesting to see how confidence can play a huge part in the world of property. I notice in the latest CoreLogic report that the two cities that have suffered the most in relation to dwelling values in the last quarter are Sydney and Melbourne, the two cities that have been most affected by COVID-19. In contrast, cities that seem to have COVID-19 under control such as Adelaide, Hobart, Canberra and Darwin all experienced increases in dwelling values. The increases weren’t huge but at least they weren’t falling.
In a double whammy for Sydney and Melbourne, rents either dropped (Sydney) or have stayed the same (Melbourne) in the last year. During the same time period, rents in Adelaide, Canberra and Perth increased.
The moral of the story is secure your employment, do your due diligence and buy property.
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