During this COVID-19 crisis, there are five important fundamentals to watch:
GDP
Firstly, is GDP. Pre COVID-19, it was hanging around the mid to high 2% range which gave us modest growth of our economy. We were trending upward.
However, with all the constraints, our economic growth has been hindered and we are now in a recession. During this unprecedented time, we are still trying to get some accurate readings, and of course, this means economic activity is shrinking which equates to more people making less money.
This, in turn, impacts the real estate market.
Interest rates
Second is interest rates. Pre COVID-19, we were already at record lows at .75%. the interest rate is now at .25% with really nowhere left to go.
The greatest tool we had in our arsenal to stimulate economic activity and growth has been by reducing interest rates. Whenever we were in recessions in the past, interest rates would drop, and people would be inclined to borrow money and then spend it.
This, in turn, would inspire spending to keep the economy going and keep people employed.
Unemployment
The third is unemployment. If you do not have a job, you cannot buy real estate. We were hovering either side of 5% unemployed pre-COVID-19 and now, of course, we are significantly higher, and that happened quickly.
We will not really know the level of unemployment until post Job Keeper, but the numbers are likely to be the biggest since the last recession and possibly The Great Depression.
It is just a big question mark and not known yet. From a real estate perspective, unemployment affects us because not only does it eliminate the unemployed as potential buyers, but it creates a whole pool of other people who are worried about their job security who also decide not to buy.
Another point people forget is that banks tighten their lending criteria because they also worry about people’s ability to repay a mortgage. That means a big chunk of buyers are taken out of the market.
Population
The fourth is population growth. It is a subject that most people don’t give much thought to. Our economy has been so dependent on its expansion each year by creating new and additional consumers through immigration.
Anywhere up to 300,000 people per year have come here over the past twenty years. They add to the economy from buying food, clothing, cars, and of course they create a strong demand for real estate; either to buy a property or rent a property.
With zero immigration at present, it may be that the Government won’t want to add to the unemployment queues by bringing more people in. This will also take a lot of buyers out of the real estate market.
Affordability
Fifth is housing affordability. There has been no wages growth for some time and personal debt is rising.
What has been keeping a mini-crisis at bay is the fact that interest rates have kept falling; giving people more money back in their pockets. Now, most people’s incomes will be less, many will be unemployed, others will not have access to overtime or bonuses, and dividends for retirees will be down.
There will be an affordability issue moving forward for quite some time to come.
The bottom line
There will be much conjecture along the way but pay attention to those 5 factors and you will get a much clearer picture of the road ahead for real estate.
At the moment, we are in an artificially created point in time. Some of the restrictions have been lifted and others have been imposed. We are being encouraged to get out and have a holiday somewhere within our own state. We have Job Keeper to protect hundreds of thousands of people that otherwise would have been unemployed and banks and other lenders have provided a brief respite on mortgage repayments
We won’t really be able to measure what is happening until all of those factors have ended and we all have to stand on our own two feet.
So much is dependent on the next few months and how the economy responds when the taps are turned off. This, of course, has an impact on interest rate settings, unemployment numbers, population growth, and housing affordability.
Interesting times ahead to say the least.
