In this special monthly video update, PIPA Chairperson, Peter Koulizos discusses residential property post COVID-19
Hi, welcome to the PIPA property report with me, Peter Koulizos, the chairperson of the Property Investment Professionals of Australia. The purpose of these reports is to not only provide people in the industry with updates with what’s happening in the property market, but also to educate property investors, property buyers, so that they can make better informed decisions when the time comes. So today what I’m looking at is property prices post COVID-19. There’s been a lot of talk about property price collapses. So we had some headlines a couple of months ago, Commonwealth Bank said in the worst case scenario, property prices will drop by more than 30%. The other major banks have come in at around 10, 11, 12% as the most probable scenario. One thing I like to do is, before you look at forecasting, have a look at what’s happened in the past, and that’ll give you not a guarantee, but that’ll give you an idea as to what is going to happen in the future.
So what you can see here, what I’ve done here is looked at the last three recessions, 1973 to 1975, 1982 to 83, 1990 to 91, and 2008 to 2009, which wasn’t a recession, but it was the global financial crisis, which did provide an economic shock to not only the Australian economy, but also worldwide. So what I looked at is what happened to property prices during and after these economic shocks. So if we look at 1970s recession, what I’ve got is the capital city, so in this case, we’ve got Sydney, property prices and then their percentage movement, and then same with Melbourne and Brisbane and Adelaide and so on. So I’m not going to go through every single capital city and every year, but what you can do is pause this particular video and have a look at the years or the city or cities that are particularly relevant to you.
So let’s take a look at the 1970s recession and we can see here … So what I’ve tried to do is, if it’s in red, if there’s a number in red, property price has gone down. So here, 1970s, no red. So what it’s telling us basically is during the 1970s recession, property prices did not decrease. They increased, and after the recession, they also increased. So in Sydney, as a matter of fact, they increased, they doubled, property prices doubled or more than doubled. So that’s not to say that a recession is good for property, but it’s to say that there are other factors that affect property prices other than the economy. Certainly the economy is a big factor in what happens to property prices, but it’s not the only effect. So in the 1970s recession, we had property prices do pretty well as you can see here, five year growth, all capital cities had property prices higher than they did at the end of that particular recession.
1980s recession. So all we’ve got here is in Perth, in one year it dropped by -1.7%, and in Canberra, it dropped by 1.2%. But again, overall, five years after that particular recession, property prices were up. Now the 1990s recession is a little bit different. So we have basically every capital city had at least one year of drop, but the big picture, the overall picture was positive. So in Sydney, it dropped by 6.2%, in Melbourne, which seemed to be affected the most by the 1990s recession, because not only was a recession in Australia, but also the banking sector in Victoria had a big hit. Pyramid Building society went broke, and that caused a lot of havoc, in particular for the property sector. So for three years, their property prices dropped in value. Brisbane, I stand to be corrected here, but Brisbane did not see any property prices drop during the 1990s recession or for the five years afterwards, Adelaide, 1.8% and then 1.3%, Perth, 1.6% and minus 0.1%, very minor there. Hobart, one year it dropped in value, Darwin, it dropped 0.7% in value. In Canberra, there were two years. But overall, five years after, property prices were higher than they were at the end of that recession.
Then we have the global financial crisis. So what we will see here is, interestingly, in the year 2011, property prices dropped in every capital city. Now there’s a reason for that. It’s not just coincidence. So if we go back to the global financial crisis which hit Australia in September 2008, the government, the Rudd government at that time, bought in a number of initiatives. There was a lot of money put into, you might remember, building and construction, not just housing, but also property or buildings other than residential. So you might remember every school had a school hall built or maybe a science laboratory. So that kept that part of the construction industry busy.
There were first homeowner grants and incentives brought in. We had the pink bats, which ended up to be a debacle, but nevertheless, there was a lot of money put in there, created some employment, but by the year 2011, all of this money had run out. So Sydney dropped 3.2%, Melbourne 5.6%, Brisbane, couple of years have dropped, but in 2011 dropped by 5.4, Adelaide as well. Perth, it was the only year that dropped in 2011. Hobart had a couple years and in 2011 dropped by 4.8, Darwin was only that year, 2.5% drop, and Canberra had two drops there, but certainly it had another one in 2011. So to me, that gives us an indication of another factor that affects the property market. It’s not just the general economy, but it’s also the availability of money and in particular, the availability of credit.
What this table doesn’t show is, in the year 2018, we had property prices drop again, and there was no economic shock then. But what we had is a number of factors that were negatively affecting our banking and finance sector. A lot of people found it harder to borrow money. Investors had to pay a higher interest rate from being a bigger deposit. Banks went through some forensic testing of people’s budgets and the availability of credit slowed up, which negatively affected property prices. So here in 2011, it shows the availability of money also has an impact on property prices. So last three recessions and the GFC, but what’s going to happen post COVID-19 and the subsequent economic shock, which we’re already experiencing and will continue?
So firstly, it is predicted to be the worst economic shock since the Great Depression. So even though I’ve looked at the last three recessions here, the COVID-19 is supposedly going to cause an even greater economic shock than these three recessions. So that’s a bit of an unknown, because we’ve never had that. The other thing, and let me share some other information with you. The other interesting factor is what happens to unemployment. So tradingeconomics.com is one of my go to websites, a very good website if you’re looking for information, whether it’s on Australia or anywhere in the country. So unemployment. So we’ve gone over 25 years here. So pre 1980s, it was dropping. So remember we had the 1970s recession, so unemployment was up here, came down. 1980s recession, went up and slightly came down. 1990s recession, went up, slowly came down. Long time, Australia actually holds the world record for the longest time without a recession. 2008, we’re down to 4% unemployment. GFC, unemployment went up.
Then it went down, but up and down and here we are, this last little spike, this is COVID-19. Now the prediction is unemployment will be worse than the last three recessions. Another negative factor for us is underemployment. So unemployment is talked about a lot, but not underemployed. So underemployment in simple terms, is people who are working three or four days a week and want to work five days a week. So what we had going back from the 70s when under [inaudible 00:09:24], so we’ve got men in the gray line, women in the yellowish line. If we just look at this gray line here, underemployment was only 2% back in the 70s, fairly steady through the 80s, 1990s recession it spiked up to 5%, fairly steady until the GFC, spiked up a little bit, and now increasing again. So what we’re going to have this time around is the greatest shock to the economy since the Great Depression, the highest unemployment that we’ve had in a long time, and the highest underemployment. That’s on the negative side.
On the positive side, we have the lowest interest rates we’ve ever had, so check out another graph here on Trading Economics. So some of you watching this might remember interest rates back in the 90s, here we are, 17.5%, came down, moving along and certainly in the last, well, this graph shows us in about the last 30 years it’s the lowest it has been, but it’s really the lowest it has been for a very long time, about 60 years. So interest rates are very low, so that puts less pressure on people panicking and selling. But the big one is mortgage holidays. Never before, certainly in my lifetime, have banks offered mortgage holidays. It doesn’t mean you don’t get to pay the mortgage at all for that particular period of time. Just means that you can start paying it again after a certain period of time, and job keeper, which we’ve never had in the previous three recessions or the global financial crisis and job seeker.
So if we look more at job keeper, really low interest rates, and mortgage holidays, on the positive side, that’s like an economic airbag and going to soften the blow. Now, in my opinion, there is no doubt that property prices will drop as a result of COVID-19 and the economic shock that it’s going to cause. My opinion, it’s going to drop five to 10%, closer to 10% for, say, Melbourne, which at the moment, and this is being recorded August, 2020, which is currently in its second lockdown. Providing other capital cities don’t go into another lockdown, subsequent lockdowns, they should remain around 5%. So a five to 10% drop, which, if we look historically, we have had in the past. Sydney in one year dropped 6%, but then recovered. Melbourne in one year, 5.6%. But in the medium term, it recovered.
So it’s not like a five to 10% drop we have never had before. We have had generally single digit drops throughout in a one year period. Generally the property market doesn’t have a crash like the share market does where it can change virtually overnight. Property market is quite different, behaves quite differently. So the takeaways from this are, firstly, residential property prices will drop as a result of COVID-19, but there is no need to panic. Low interest rates, mortgage holiday, job keeper will help soften the blow. Yes, we need to be aware of underemployed and unemployment. Often property professionals are asked, “Is this a good time to buy a property?” I think you need to take a step back and ask yourself how secure is your job. If your job is secure, then by all means, go and seek out the assistance of a member of the Property Investment Professionals of Australia, whether it’s a qualified property investment advisor, a QPIA, or somebody else in the property industry.
But if your job is not secure, there’s probably no point in going to the bank or the mortgage broker, because especially at the moment, if you’re in retail, hospitality, travel, or tourism, you are not looked favourably upon because those sectors in particular, are a particular concern to banks and lending institutions. Whereas other sectors, like maybe aged care, health care, seems to be going pretty well. So ask yourself, is your job secure? So if your job is not secure, then I would strongly advise you to look at ways of either securing your current job or making a plan B, whether that’s going back or going to uni, to TAFE, doing some sort of course. So if you can see that, due to COVID-19 or other reasons, the particular career path that you’re on now or your job now is not that secure, have a look at other opportunities.
Because once you secure your employment, then you can be confident and more importantly, the lending institution can be confident that you have the capability of paying off that mortgage. It almost doesn’t matter how much of a deposit you have or how much equity you have in other properties. That’s only one part of the equation when it comes to borrowing money. The other part is, can you pay it off? So again, the takeaways are, property prices will drop. Don’t panic, probably only be five to 10% during that economic shock period, which has already started and may continue for another year or two or possibly three, and also secure your job. So that’s it for now. Thank you for taking the time to listen to and watch the PIPA property report, and look forward to next time we meet. Thank you.