COVID-19 impacts on the Australian economy & housing market

Discussion in 'Property Market Economics' started by Redom, 17th Mar, 2020.

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  1. Redom

    Redom Mortgage Broker Business Member

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    We are in the middle of an unprecedented economic crisis. The purpose of this post is to unpack some of the potential economic consequences to Australia and its flow through to the broader housing market.

    The social distancing & travel restrictions currently in place will hit the real economy. At this current time, the health authorities have communicated a 'dial up’ of restrictions on social mobility that will increase over time and likely put Australia into one of its biggest ever recessions.

    Business sector: Many businesses will be required to shut down temporarily OR won’t have any customers due to the strict social distancing guidance put in place. This will lead to an enormous loss of revenue for individual businesses & on aggregate. Many businesses, without large support, will not be able to absorb changes of this magnitude and will go under (without massive support). We are only at the beginning of this over coming months more and more businesses will be impacted significantly. It’s quite possible that many businesses who trade goods & services will have massive % revenue drops.

    Household sector: Unemployment may rise quickly in the short term. Households will struggle to pay their mortgages. Payments will stop from employers who are struggling with cash flow and this will in turn lead to significant levels of mortgage stress. This will require massive support to make ends meet. The longer the measures go on, the larger the support required.

    Government sector: There will be a very large role for governments to play in coming months to manage the economic fallout. In a crisis like this, it is largely up to the government to save the day and limit the short-term impacts of this crisis as much as possible. Traditional notions of ‘debt & deficit’, the ‘role of government in the market’, etc will all to go out the window. The economic mantra is ‘spend, spend, spend’ in a crisis scenario like this.

    The economic crisis cannot be solved by trying to increase aggregate demand in the short term like most other crisis responses. This will not work at the same time as asking Australian’s to stay indoors. This weakens monetary policies effectiveness in boosting demand during the health crisis. Nonetheless, measures to support aggregate demand should help boost recovery efforts when we’re on the other side of this.

    Responses will largely be about backstopping those that are hurt (almost everyone) & ensuring the starting point on the other side of Covid 19 is as robust as possible & that the speed of the recovery is strong.

    Australia is better placed to handle this than most with strong institutions & a fiscal position that allows for a strong crisis response.

    Projected cost:
    So far the government has committed about 1-1.5% of GDP outside the automatic stabilisers in built in the budget. I believe the number will be at least 3 times this to get Australia through this crisis (likely a lot more). This should come out over coming months too. Monetary stimulus will also play a role. Unfortunately, the ability to use monetary policy may be a bit more limited given the transmission mechanism is through to aggregate demand (which is highly inelastic during a health crisis) & current rate settings already.

    The housing market

    The impact on the housing market from all this change is unclear at this stage. It’s unlikely the housing market will sail through this unhurt.

    Housing will perform better than most asset classes through this crisis, but ideas that people will run to property and prices will continue to rise are unlikely to bear true. The fiscal & monetary stimulus will assist in cushioning the blow. One obvious factor is that housing activity will dramatically fall in coming months. This will likely have some impact on prices & credit demand.

    On the plus side, housing assets are not very liquid. This illiquidity will likely help absorb a lot of the shock to asset prices. I.e. supply of housing will dramatically fall as home-owners refuse to sell, or have no means of trading property. This lack of trade may mean price falls, on aggregate, are limited to a much smaller bandwidth than other asset classes.

    Given the short-term nature of this shock, the broader impacts on the housing market will be tied to the level of unemployment created, and what happens in credit markets. Both these metrics will determine whether the impact on housing is short-term and minimal, or whether there'll be a large double digit & prolonged impact on the housing market.
    • If unemployment rises substantially the housing market is likely in for some serious pain. Employment is sticky, so it takes some time to soak up and doesn't happen quickly. Sydney and Melbourne are likely overvalued if unemployment rises dramatically in these cities and doesn’t come back down quickly.
    • Likewise, if credit markets squeeze and central banks can’t provide enough liquidity to solve this, then the housing market is likely in for some pain as mortgage stress appears on the back of rising funding costs. To date, there has been some stress in RMBS markets, which suggests there may be funding costs rises for banks shortly. The RBA & central banks will likely intervene here to ensure that borrower rates do not increase at a time where they need to fall.
    We are heading into an economic tsunami like many of us have never seen before. The stress Covid19 will put on the economy, employment & the government will be enormous. There is much unknown and unclear at this stage, but it will require very large fiscal/monetary responses to help cushion the blow. How employment, credit markets & businesses look on the other side of this crisis, will largely determine the size of the impact on the housing market.
     
    Last edited: 17th Mar, 2020
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  2. Melbourne_guy

    Melbourne_guy Well-Known Member

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    The Govt were struggling to stimulate the economy and a recession was a possibility prior to the COVID-19 crisis. Unemployment will rise even if this crisis is over in 6 months. Has there been any analysis of how the global economy will look in 12 months? If it is anything like what is was in Feb 2020, there is no good news for Australia over the next 36-48 months. Maybe all a bit too early in the midst of the current crisis?
     
  3. hammer

    hammer Well-Known Member

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    I sincerely hope you've got this all wrong @Redom .

    I really, really do.
     
  4. Jess Peletier

    Jess Peletier Mortgages, Finance & Property Strategy Aust Wide Business Member

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    From that post, it seems the impact of just letting everyone go about their normal business would have far better consequences to everything than the route they're all currently taking.

    Maybe just throwing all that money at the healthcare side of things would be a better solution? Dunno - seems way less extreme.
     
  5. Melbourne_guy

    Melbourne_guy Well-Known Member

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    The numbers being discussed in terms of infected cases and deaths are huge. This is despite high medical intervention and the current measures being taken. Left unattended, would the Australian public accept higher deaths and a healthcare system swamped that treated almost no-one? I'm of the opinion that countries across the globe risk wrecking their economy because they have good reason to - the 'doing nothing' approach would have been worse in human and financial cost.
     
  6. d_walsh

    d_walsh Well-Known Member

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    @Redom if this stimulus works and virus either contained or accepted in a reasonable timeframe, do you see hyper inflation following?
     
  7. Redom

    Redom Mortgage Broker Business Member

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    I really do to.

    I take no pleasure in thinking this and appreciate the personal cost of household recessions more than most. I was a teen when my family lost our home around GFC time (both parents retrenched). Economic loss, job losses, they leave a toll on individuals, families, for years to come.

    IMO so many Australians are relying on the government now. We may not be aware of it yet, but every action taken today from here will have large societal consequences in the future. Protecting our health is obviously our first priority. Once that task is met, finding a way, whatever it takes, to protect jobs will be key. I’m sure the excellent economic advisers supporting ScoMo and Frydenberg will be advising fiscal stimulus on scales we have never ever seen before. Treasury spent an awful lot of time, resources and energy understanding and unpacking crisis response. It’ll land with spend spend spend, as that’s al that can really be done here. The measures required, already needed, will be enormous.
     
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  8. croseks

    croseks Well-Known Member

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    2 weeks ago I would have thought you were talking about Venezuela... today I totally agree with your whole analysis. It's crazy the impact that CV has already had in Aus and it has only started.

    All markets will be affected (even more so then already). There will be bad news in the media for weeks/months to come and already there are airlines looking at defaulting (Rex).

    Don't mean to be alarmist but batten down the hatches folks, once we hit peak numbers I think then will be a good time to look for opportunities but in the meantime we should look at how to help our family, friends and those struggling over the next few weeks to get through this.
     
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  9. Redom

    Redom Mortgage Broker Business Member

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    Don’t think so. Our fiscal position is way to healthy for this to occur...even with massive scale stimulus. This would be more likely in countries that take extreme fiscal responses but have no real ability to do so.
     
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  10. Gockie

    Gockie Unicycle - get exhausted but never two tired Premium Member

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    But then heaps of people may die, and where would we get all the health care workers and equipment from to look after all the sick people?

    I’d say the travel industry would have gone down the gurgler anyway, nobody is travelling anywhere and because all these other countries making parts we rely on have ceased/slowed down manufacturing, business suffers anyway.

    Not an easy issue to solve.
     
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  11. K974

    K974 Well-Known Member

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    Guys
    This is very simple
    Understand what happened in Europe in 2008
    And add steroids

    very simple
    All these “soft landing”. “solid fundamentals” “under lying demand “ “Recover” “stimulus “

    this is the same rubbish jargon as before
    If we are lucky we’ll get out of this without having to bail out a bank or 2 but that’s unlikely
     
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  12. Melbourne_guy

    Melbourne_guy Well-Known Member

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    I agree. You understand well that housing fell in parts of the UK by 40%+ during GFC. Its only recently some are near that level again but some may never. The austerity measures implemented by the UK following the GFC was the cost of saving the banks and businesses and Europe also implemented austerity.

    I'm not an economist but on the recent precedent of UK and Europe, what will happen for Australia not to have to implement their own austerity measures after the COVID-19 crisis?
     
  13. matt_j

    matt_j Well-Known Member

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    Most of what I've been reading and researching (on a basic level vs some of the posters here) is telling me to pull out of a property deal that I've signed and is currently in the cooling off period. I don't know much about economics but have been spooked by what I am seeing. Would this be sound advice even as a long-term play? Thanks to K974 & The Y Man for their opinions so far.

    With cash reserves of 400k+ I wonder if it would be a better idea to slowly load up on stocks (inc blue chips) & other investments after things have hit their worst, then look to invest into property again in 2021.
     
  14. K974

    K974 Well-Known Member

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    Yes I think there may be austerity in one form or another here , possibly indirectly say proposed tax cuts won’t happen things like that

    I genuinely think a bank will have to be propped up . I’m surprised a run on physical cash to some small extent hasn’t happened . I’d advise everyone to have sub $250k in any account and some physical cash in a safe at home . 99% chance it’s unnecessary but if you need it ......

    this is going to really hurt people financially , understand that now, we have a generation that have never seen hard times .

    I’m not being alarmist I don’t want to be , but to be fair I have as I said a few times lived , borrowed , developed and invested and expierenced a major economic depression and by the skin of my teeth got out un scathed a little by luck a little by things I did

    so many people are saying all the same mantras as before soft landings recovery soldi fundamentals, etc , ignore this , this is just bluster and spruiking


    just think about this , we have just witnessed the behaviour of humans panic buying , we are bigger sheep than sheep.
    what do you think will happens when people start to head for the exit , it’ll be a stampede , just like shopping , just like when things are booming everyone can’t get in fast enough

    my advice to everyone is cut every last unnecessary cost you have , and I mean everything , batten down your hatches , do not make any purchase of any significance , postpone any large expense you have (you’ll prob get whatever it is cheaper later anyway)

    Do not under any circumstances trust any commitment the bank make to you to assist you , for those in business this is important restructure what you can now , and I don’t care if you have been banking with the same bank for 30yrs , expect your credit facilities to be pulled . Anything you are doing now and requires credit so what you can to get out of it


    Fundamentallly this issue is that so many people have never seen this before , I’m not saying I’m any sort of expert but the one lesson I learnt was neither are the experts / commentators fincancial advisors they have even less of a clue , do not listen to them , remember few if any have expierenced a recession they might have a degree in it , but humans in times like do strange things


    On the bright side if you have cash you’ll clean up
    And asset that drops does and will always (maybe not some of the mass subdivision rubbish) come back , you just have to hold onto
    It .
    Again I don’t meant to be a doomsdayer but even on here I’m just reading the exact same rubbish that was said before from people
    Who may not even have been born the last time this happened here
     
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  15. K974

    K974 Well-Known Member

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    You said previously it would cost you $5/6k to pull out?

    If so I would . No one knows (including me for that matter) the impact of this will be , but you have good income big savings , $5/6k is no big deal and it’s money well spent to sit in your hands for a little bit and see how this plays out


    Only my opinion
     
  16. strongy1986

    strongy1986 Well-Known Member

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    the gov should of made an early call and requested all the oldies (over 75?) to self isolate at home or in the nursing home

    introduced testing for carers and possibly live in arrangement funding - good dollars - think fifo mining style but for nursing home staff to stay on site for a week or two,

    this way they could let the vast majority of the economy function as normal , we could of all.gone about our business infecting one and other and hopefully avoided the current economic **** show

    OR
    they could of just started quarantining international.visitors ages.ago - but this is very hard to pick the correct timing and targets, easy to be judgey in hindsight
     
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  17. Jess Peletier

    Jess Peletier Mortgages, Finance & Property Strategy Aust Wide Business Member

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    I know.

    I was just thinking of what it looked like in war times, when deaths and casualties were huge - people trained to become nurses very quickly, and make-shift hospitals popped up everywhere. If the world was still producing normally, the healthcare stuff could be produced quickly.

    Again, it's easy to throw (possibly flawed) ideas around but the current plans seem to hinge more on hiding from the problem with massive, far-reaching implications, rather than meeting it head on.
     
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  18. Jess Peletier

    Jess Peletier Mortgages, Finance & Property Strategy Aust Wide Business Member

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    You're probably right. But doing nothing isn't what I'm suggesting. More mass training of nurses and carers - mass production of the medical necessities and pop-up hospitals to cope with the influx. Think war-time tactics. Dunno... in the end, we'll never know if I was right or not ;)
     
  19. Melbourne_guy

    Melbourne_guy Well-Known Member

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    When the many were dying in Wuhan, they might have stopped flying all passengers in in the first place and (if legal), notified passengers flying out of the potential of them not being allowed to, for a temporary period, return. Would definitely have slowed down the speed of transmission. Most of the early cases have been from people who are visitors, have returned to Oz from overseas or have a close relationship with those two other categories. I still can't believe they allowed thousands of visitors in from Europe and other parts of the world only a few days before the cancelled Grand Prix.

    Overall, consequently once this crisis is over, I believe the Govt needs to account for their action/inaction so we can all learn from any positives and negatives for future pandemics.
     
  20. matt_j

    matt_j Well-Known Member

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    Yeh just the cost of the 0.25% and conveyancing etc

    My gut is telling me to pull the pin but my partner is happy to see it through given it's a long-term play - I just think there is more $$ to be made by going the route I've mentioned above (with some assistance and plenty of learning to do as I'm really only beginning to learn about investing).