No Comments

Can Property Investment Withstand the Coronavirus Outbreak?

The recent Covid-19 pandemic has sent stock markets across the world reeling. US futures and Asian stocks tanked as policymakers worldwide took dramatic steps to cushion the economic blow caused by the outbreak.

The US Federal Reserve and Bank of England slashed interest rates to a historic low of near-zero, with the former launching a massive $700 billion quantitative easing program to shelter the economy from the effects of the virus.

Investors are having concerns over the volatility of the property markets, as many countries go into full or partial lockdown to deal with the spread of the coronavirus.

But how much of an impact could current health fears actually have on house prices? The stock markets have fallen dramatically, but compared to property, stocks are largely driven by sentiment.

Stock markets remain down despite drastic economic measures (Image: The Edge)
Stock markets remain down despite drastic economic measures (Image: The Edge)

Demand for property is tied to population growth, and, as with past global outbreaks like the 2003 SARS epidemic, Covid-19 is not likely to have a significant impact on growth. As the population continues to grow, people will need a place to live, and demand for housing will continue to go up.

The Effect of Global Crises on Property

Property & Epidemics
Case study: SARS, Hong Kong

During significant economic shocks, historical evidence shows that property markets remain resilient. The SARS virus affected 29 different countries and territories in 2003, infecting 8,000 people and causing 774 deaths worldwide. Economic activity fell sharply during this time but snapped back quickly once it was over. 

In Hong Kong, which was adversely affected by SARS, house prices did not fall significantly, although transaction volumes fell by 33%. Transactions jumped back to normal volumes after the epidemic was over. The country has one of the most dense populations in the world, and faces an ever-increasing demand for housing — the epidemic merely delayed rather than decreased buyers’ appetite for property.

Post-SARS in Hong Kong, house prices had a sudden jump by about 28% in the following year (2004). A decade later, prices skyrocketed to an increase of almost 300%, despite a slew of cooling measures implemented by the government since 2009. Those measures include stamp duty levies and reduced borrowing capacity in the form of lower loan-to-value ratios and stress tests of debt-servicing ratios. 

News reports indicate that since the Covid-19 outbreak, transactions in China have nearly ceased, but house prices have not fallen. This pattern is similar to what happened during the SARS outbreak — where customers, unable  to view property or close transactions in person, would rather wait till the outbreak is over.

 

READ  Most Liveable City 2017 Goes to Melbourne

Property & Recession
Case Study: Australia 

Recession patterns differ slightly from epidemics — economic activity falls for 6-18 months and then recovers more slowly, as opposed to the quick “bounce-back” after an outbreak has ceased.

Australia’s housing market has been resilient, through its last national recession in 1990 and the global financial crises in 2008 and 2011. 

During the recession in 1990, which lasted for 12 months, national GDP fell by 1.7% and Australia’s unemployment rate jumped from 7.4% to 10.1%. Although there were mild price declines in Sydney (-0.7%), Melbourne (-2.3%), and Perth (-1.0%), the capital cities of Brisbane (6.8%) and Hobart (4.3%) produced some solid growth in house prices. 

When the global financial crisis hit in 2008, the Australian market shrugged it off, with house prices increasing in almost every Australian capital city. Only prices in the capital city of Perth fell slightly (-1.6%).

During one of the world’s worst financial crises in 2011, house prices went down by 2.6%, but jumped back up by 5% within 2 years!

Australia has one of the highest population growth rates among OECD countries, largely due to international migration; and its housing demand is strong, supporting house price growth.


Covid-19: Property Prices are Still Holding

Australia

Despite the worsening global outbreak, we saw home prices rise across Australia in February 2020. Almost every Australian capital city recorded price increases, with the exception of Darwin. 

Nationally, prices went up by 1.1% month-on-month, increasing from a gain of 0.9% in January. Prices went up by 6.1% compared to a year ago, which was the highest annual gain in three years. Last February, prices across Australia declined annually by 6.3%.

Sydney and Melbourne now lead the way with a 10.9% and 10.7% annual increase in prices. Five capital cities now have record-high property values, namely Melbourne, Brisbane, Canberra, Hobart and Adelaide.

Australia house prices rise 6.1% compared to a year ago (Image: CoreLogic)
Australia house prices rise 6.1% compared to a year ago (Image: CoreLogic)

With the significant drop in the exchange rate, Malaysian investors can benefit from cheaper Australian property prices. The Australian dollar has fallen to RM2.56, trading at its lowest levels against the ringgit since 2009.

The Australian dollar has fallen to a 11-year low against the Ringgit (Image: Yahoo)
The Australian dollar has fallen to a 11-year low against the Ringgit (Image: Yahoo)

The United Kingdom

In the same month, house prices in the UK hit a new record high. Figures from Rightmove show average asking prices of almost £313,000, topping the previous peak in June 2018, and marking a 3.5% rise from a year earlier. 

UK House Prices hit a new record high in February (Image: Rightmove)
UK House Prices hit a new record high in February (Image: Rightmove)

Number of sales also jumped to its highest level in four years, with Rightmove saying there was no sign of any drop in buyer activity so far. The surge in buyer interest is widely seen to reflect pent-up demand constrained by high levels of Brexit uncertainty in recent years. 

Mortgage applications in the UK had increased to almost 71,000 in January – also the highest figure in four years. It is very likely that those with loans already approved will go ahead with purchasing plans. Cheaper mortgages as a result of the rate cut will provide added incentive for UK home buyers.

It is also worth noting that the recent UK Stamp Duty Surcharge for non-residents will come into play next year in April. This will significantly increase payable stamp duty for foreign investors, by as much as 50% for a £250,000 property. UK property investors thus have a limited window of opportunity to buy now and save on taxes.

Conclusion

When stock markets are thrown into chaos in a time of crisis, we can see from evidence that property remains a solid investment. Due to uncertainty, the markets will experience a temporary halt in buying and selling. House prices may not increase during this time, but people will eventually need to purchase property. 

Supply is going to be affected by the crisis, and once it is over, the increased demand will support price rises. At this point in time where interest rates worldwide drop to all time lows, investors can benefit from the reduced rates on mortgages by buying now.

Contact us by registering in the form below to learn more about property investment in the current climate, or join our upcoming webinar ‘Investing During Crisis’.

READ  New Guidance to UK Landlord Licensing Scheme

 

Register your Interest


By Ian Choong, Edits by VP

Sources

Comments (0)