What does the Covid-19 Pandemic mean for OpenCorp and our clients?
Let’s look at the economic situation:
- The current pandemic has had a significant impact on the stock market as institutional investors have sought safe-haven assets in the face of uncertainty
- The wild swings are occurring because institutional investors are finding it hard to determine the direction of the market, and news released on an hourly basis can significantly impact the mood of the market.
- Fortunately, Governments and central banks around the world have responded to this pandemic incredibly quickly, providing an influx of capital through lower interest rates and stimulus to the economy to boost spending capacity.
- In countries where the government has mandated a lockdown of residents, such as Italy, the government has also put a freeze on mortgage repayments in order to support residents. As this pandemic, like all those before it, is likely to be temporary we are seeing that governments are aiming to reduce the financial burden on households to ensure that they are well positioned to bounce back after the lockdown ceases.
- In China, where the country went into lockdown much earlier than others, we are now seeing production ramping back up to full capacity and residents returning to the shopping centres.
- Australian Banks, who now have very strong balance sheets thanks to additional capital controls and are therefore more resilient than ever before, have also confirmed support for borrowers and are prepared to not only continue lending but to also demonstrate leniency to any borrowers affected by short term disruption resulting from the virus.
The following chart shows that deposits held by banks in 2019 are approximately 2 x the deposits held in 2008. (source: ABS, PWC)
Figure 13 below shows that the equity held by Australia’s major banks has increased by approximately 60% over the 6 years to June 2019.
From the perspective of the virus itself:
- While there is no denying that it is a serious illness, data that is now coming to light from South Korea, which has a high-quality health care system and has tested 140,000 people since their first infection was identified, indicates that their actual mortality rate is currently around 0.6%. This is significantly lower than the 3.4% mortality rate reported elsewhere.
- What this implies is that many countries are testing only those people that are mildly or seriously ill, and are potentially missing those that have no symptoms to only minor symptoms. As a result of this, and potentially the older populations in some of these countries, the death toll appears higher in some countries.
- Nonetheless, studies from Wuhan indicate that those with pre-existing heart or lung conditions, and the elderly, are at higher risk. Young people do not appear to be affected substantially.
- Efforts at containing the virus are intended to slow the spread to give as many of these high-risk patients a longer lead time to benefit from any vaccine that is proven effective and to minimise the demand on the hospital system. Some vaccines are already at testing stage but it may take another year to become available to the general public, while during this time the more we can avoid a sharp spike in cases the better the public health system will be.
- As more data becomes available we anticipate that life will begin to return to normal.
How does this effect the residential property market?
- In times of uncertainty bricks and mortar is considered a “safe haven” for many investors.
- Prices of houses are not as volatile as the stock market, which have seen losses of 20% in as little as 2 weeks. Corporate dividends can drop during these times which is why stocks are so drastically repriced.
- Commercial real estate also has the risk of businesses being unable to pay rent. That is likely to affect the valuations and returns from commercial and industrial real estate.
- On the flip side, studies conducted after the Global Financial Crisis (GFC) found that during uncertainty people choose not to sell residential property unless they have to. This reduces established house supply instantaneously. Additionally, if construction slows down at the same time, new housing supply diminishes quickly while there is concurrently an increase in rental demand for residential properties (the opposite of what happens with other assets) and property owners often see their revenue increase as a result.
- As interest rates fall the cost of servicing debt diminishes, which means holding costs drop. The result is that investors income grows while their holding costs fall, making their cash flow even better.
- Moreover, the stimulus injected into the economy through lower borrowing costs and government expenditure results in a period of extraordinary price growth once the economy returns to normal operating conditions as borrowing capacity has increased substantially and there is pent up demand.
What does this mean for OpenCorp clients?
- Those that are building or have already signed contracts should be pleased with the fact that their interest bills will be lower for some time and their rental prospects remain strong. Nonetheless, they also benefit from our fixed price and build time guarantee and our rental guarantee. In other words: they get all the upside and none of the downside.
- Those that are looking to buy will similarly get all of these benefits and can get ahead of the market boom that is coming as a result of the Reserve Bank of Australia (RBA) interest rate cuts and quantitative easing, designed to put more money in the economy, and the government stimulus packages which will inflate asset prices for years to come.
We often see that once the market switches back on after any downturn prices quickly increase. In some suburb’s prices are already up 20% on a year ago. Clearly, seeing through short term uncertainty helps investors to capitalize on the medium to long term trends.
If you look at the last 30 years there have been many “black swan” events. At each point, some people chose to sit out of the market for fear. The following chart shows that short term news stories make a negligible impact on the long term. In fact, if you look at these times there is often a period of accelerated growth as a result of the stimulus measures introduced to address any drop in demand.
While we are not experts at dealing with viral pandemics, we spend a lot of time dissecting the news to understand how it might impact our clients. The information we have provided here is a summary of information that we have received from credible news stories. From the reports that we have read, this Covid-19 virus is not here to stay and is not likely to cause catastrophic loss of life, provided it is handled rationally. Our governments efforts are focussed heavily on minimising spread to reduce the case load on the hospital system, and we believe that this is a practical and logical approach. It may even be that State or Federal Governments ask Australian’s to go into lockdown for a short period of time to help contain the spread of the virus.
The key thing to remember is that we will come out the other side of this situation. When we do, we will benefit from record financial and monetary stimulus in the Australian economy and history shows that this type of stimulus often boosts house prices in the medium term. Notwithstanding that we are likely to see lower immigration for the short term, we expect immigration demand to return once the global spread of the virus has been contained and border movement returns to normal.
We will aim to continue sharing relevant information as it becomes available to us, but most importantly we recommend that you help to limit the spread of the virus to avoid unnecessary impacts on the more vulnerable Australians, and that you stay happy. One day we will hopefully be able to laugh about the time that we weren’t allowed to shake hands with our friends 😊
Disclaimer: The content within this article is subjective and is based on the educated opinion and information obtained by OpenCorp professionals. No claim is made to the accuracy of the content provided. Property investing decisions made are at the sole discretion of the client. Information, data and advice supplied within this article should be used as a guide only.