This is a testing time for all of us, something none of us can say we have seen – the most challenging time economically since the great depression and since wartime. This crisis is having a major impact on our economy and our retirement as well as our health creating fear and anxiety from an “invisible” enemy.
Let’s be clear, we will bounce back, however the message from our Government is that it will take at least six months to get the other side. It’s going to be a long dark winter fighting and defeating the invisible enemy (with no footy!). During this time, hundreds of thousands of Australians will lose their jobs – forecasts of over one million, this is a tragedy.
This will impact all of us who own property and have a mortgage as well as those who are looking to invest in property and those that are financially stressed and will be required to sell property. As the COVID-19 outbreak has progressed over the last fortnight, we have seen auction clearance rates remain stable around the 60-70% mark in Melbourne, however given the government ban on gatherings of more than 10 people and likely to be tightened this will certainly eliminate auctions in the near future and change the way “private” inspections are undertaken, moving property sales exclusively online.
First lets address loans/ mortgages. Many or most Australians will experience significant financial stress in the coming months as a result of lost income for small businesses or loss of employment for hundreds of thousands of Australians.
There are options and the Government is leading from the front here. If you are experiencing financial stress, first chat to your broker or bank to explain the situation and explore a “loan holiday”. A leading bank has provided a delay of six months for residential borrowers which is a positive that banks will come to the party (for once!), little comment was made on the fact that the banks did not pass on the full interest rate cut of 0.25% on 19 March 2020.
A loan holiday will mean that you loan repayments will be deferred for a period of time which will relieve some stress, however there are so many that still have fixed expenses whether it is the small business or sole trader or individual that needs to still cover rent on a weekly basis – I am sure there will be more announcements in this regard.
The positive is that residential home and investment interest rates are at an all time low, with most lenders providing a variable comparison rate under 3%.
Further, if you are lucky to be in a strong financial position, it may be the perfect time to refinance your home or investment loan – the banks are desperate for your business, speak to Redwood to discuss your options.
The spread of coronavirus has seen increased expectations of an Australian recession – the first in 30 years, with nearly 38% wiped of the ASX at the date of writing. As of last weekend, there was no major impact on the Australian property market.
The best advice is to turn off the television as we are continuing bombarded with bad news. Painful scenes of hundreds of our fellow Aussies lining up at centrelink and businesses closing down, shattered share prices and our hard-earned superannuation decreasing daily (if you are in shares!). There will be a rollercoaster of emotions, however we need to try to stay calm in the crisis.
Lets compare the current crisis with the global financial crisis (“GFC”), refer below for a graph that details the key capital cities of Melbourne and Sydney and capital cities combined. During the GFC, we experienced an approximate 5% decrease in property prices – there was a lag effect at that time as share losses were experienced and liquidity issues, houses were up for sale and the market was flooded with sales which led to the decrease in property values. The same lag may occur in Sydney and Melbourne over the next few months. For example, on 21 March 2020, Melbourne’s clearance rate was 66%, 927 auctions were held as compared to 1023 on 14 March 2020 and 666 at the same time in 2019 – when we saw a 10% decrease in property prices across Sydney and Melbourne.
What does the graph tell you? Obviously with share markets tumbling and massive job losses, there will be pressure on loan repayments. There are two differences from the GFC:
- Loan repayment holidays – due to Government pressure, the banks will be lenient with loan repayments and defer loan payments, as a result, they will not “foreclose” houses which will delay the pain, therefore, unlike the GFC this will reduce the likelihood of a flood of supply in the sales market as a result of job losses and share market losses.
- No auctions and limited inspections – the way real estate agents work will change. This crisis has meant that most if all not all businesses are implementing business continuity processes such as working from home (excluding retail and construction). The same applies to real estate sales, this will move online. However with the person to person interaction limited we would expect less supply to the market and auctions moving online with limited “private” inspections.
We are hope we can beat this invisible monster sooner rather than later, however, the Prime Minister has set our expectation at six months. At least in the next three months, we do not expect a share market type crash for residential property, however we will monitor supply and clearance rates and median prices across the major capital cities and provide an update accordingly.
SMSF and Property
Many SMSF’s are perfectly positioned to capitalize on this crisis with heavy weighting in cash. We would expect to see increase inquiries around using superannuation to purchase residential and commercial property over the next six months.
As always, we encourage you to contact us to discuss any of the above issues and how these measures may be utilised to support you personally, your SMSF or your business. We will get through this together!
Ivan Filipovic is a leading SMSF Specialist Advisor with Redwood. Ivan is a Self Managed Superannuation Specialist with over 22 years provides a range of services across all sectors of Self Managed Superannuation, Property and Finance with an emphasis on long term wealth strategies. Ivan is a Chartered Accountant, Financial Planner, ASIC registered auditor, Mortgage Broker, Tax Agent and Licensed Property Professional.
Disclaimer – The content has been prepared by Redwood Wealth Pty Ltd & Redwood Advisory Pty Ltd without taking account of the objectives, financial situation or needs of a particular individual and does not constitute financial product advice. This article should not be considered personal financial advice as it is intended to provide factual information only.
Ivan Filipovic is an authorised representative of First Mutual (AFSL 423710). Redwood Wealth is a Corporate Authorised Representative of First Mutual (1244359)