How will the recession affect our property markets?
Written on the 18th of March 2009 by Michael Yardney
The million dollar question...
It’s official, well sort of ‘official’ - Australia is heading for a recession.
This is both good news and bad news. I’m happy now that the news is out, because we all sort of knew it anyway, didn’t we? And now we can move on.
While I’m not trying to play down the severity of our problems, I know that the next stage of the economic cycle after a recession is recovery – yes the cycle moves on.
Just so that you are clear, a recession is when our economy stops growing and has 2 or more consecutive quarters of negative growth. Of course recessions are part of the normal economic cycle and most countries have a recession every seven to ten years. Australia was the exception and hasn’t had one for about 17 years.
Let’s take a moment and look at what happens in a recession, or with news of an impending recession.
A “recession” pattern of behavior comes over the average person and this starts with fear. People are afraid they may lose their job or that the economy is going to go down the drain, so they stop spending. They take their bats and balls and go home - they stop playing the game.
However one of the foundations of our capitalistic economic system is the recycling of money through the system.
It works a bit like this…
You earn a dollar so you go out and buy something. The shop owner gets the money and then he goes out and spends the same dollar and buys something else from someone, who again spends some money and the cycle moves on. The problem is that when the first person stops spending their money the recycling of money stops and the economy slows down.
If you multiply this effect by hundreds of thousands of people all doing the same thing, then it ends up as a self fulfilling prophecy – the economy goes into recession because no one is spending. You actually help feed that which you fear the most. That is of course why our government is trying to stimulate our spending with its handouts and fiscal stimulus.
Of course there is much more to our current problems than just lack of spending. The dramatic deterioration of global financial markets has driven much of the developed world into recession. While extraordinary monetary and fiscal policy action from governments around the world has seen interest rates drop and liquidity conditions improve, global economic growth will be weaker in 2009 than in any year since the Second World War. The International Monetary Fund has called this coordinated global recession “The Great Recession.”
So how does this affect you and me as real estate investors?
During these times people are scared of making big financial decisions. They don’t buy new cars and they don’t buy, sell or upgrade their homes. They also hold back from investing in property and this translates to fewer people buying property, which usually leads to a fall in property prices. In other parts of the world this has caused a significant drop in values with prices falling between 10 and 30 per cent in the USA and UK.
Of course this hasn’t occurred in Australia. By and large property values have held up well due to the severe shortage of properties and more recently due to lower interest rates and increased demand from first home buyers.
In its latest property outlook the ANZ Bank suggests that while the Australian economy held up remarkably well for most of last year, 2009 will clearly be far more difficult. It predicts that economic growth will continue to weaken throughout this year as collapsing equity prices and rising unemployment weigh on consumer spending and businesses pare back investment plans.
Nonetheless, the ANZ Bank remains confident that the Australian economy will come through the global downturn in far better shape than our developed world counterparts, in part due to the strength of our financial system.
The ANZ Bank also suggests house prices will remain resilient, despite rising unemployment. They feel that Australian house prices will remain relatively well supported and won’t experience anything like the spectacular falls that have occurred in the US, the UK and many other developed countries.
They explain that Australian housing market conditions are a far cry from those overseas. Conservative lending practices have protected us from the ravages of the sub-prime mortgage crisis and our mortgage delinquency rates and foreclosures have remained at historically low levels.
There are also a number of other factors that are supporting property values:
1. Unlike the US where a clear oversupply is weighing on prices, Australian housing markets continue to exhibit an increasing undersupply of dwellings.
2. Mortgage rates have fallen to levels not seen since the 1960s meaning that housing affordability has improved dramatically.
3. Then of course there is the doubling of the first homebuyers grant and the steadily increasing numbers of homebuyers seeking finance approvals and underpinning the lower end of our property markets.
All these factors give me confidence to go out and buy the right type of property – one that I can buy well below its intrinsic value, in an area with a proven record of strong capital growth and a property to which I can add value through renovations or redevelopment.
2009 is going to pan out to be an interesting year. However, our greatest opportunities come during times of change and turbulence - as does a tremendous chance to create long-term wealth and opportunity out of the mess.
But not everyone will do well over the next few years. The gap between the rich and the average Australian is going to widen. The separation between two types of property investors will also become more apparent.
There will be those who are living in the past and think all that is going on is unfair. And there will be the financially fluent real estate investor who understands how to adapt and change in the current market environment. They recognize that what we are experiencing is temporary and part of the normal property cycle (albeit at an extreme).
Michael Yardney is director of Metropole - Property Investment Strategists and a highly regarded property commentator. He is the author of the best seller - "How to Grow a Multi Million Dollar Property Portfolio - in your spare time" and co -author of "All You Need To Know About Buying & Selling Your home."