COVID-19 Housing Market Crisis
COVID-19 Impact on the housing market and the opportunities that await the SMART Investors
In the last week, both Australia and New Zealand have adopted extensive measures to curb the spread of covid-19. Irrespective of the public health measures that are on top of everyone’s mind, in this article, I am going to discuss the fiscal measures that have been adopted and the potential impact on the housing market in general.
Official Cash Rate slashed to 0.25%
Both AU and NZ have reduced the official cash rate to a record low rate of 0.25%. It is important to understand what this means before you start considering its impact on mortgage rates. In fact, this particular move is least important for mortgages and there’s a much bigger economic indicator at play.
Given the social distancing measures adopted by both governments, the impact on social interactions is obvious. This has an obvious impact on social activities that lead to large scale consumer spending.
Activities such as shopping, public gatherings, events, travel and tourism are heavily impacted due to the spread of the virus. The drastic move from 1% down to 0.25% in one hit is a sure shot indicator that both central bankers have priced in further decline in the economy.
When central bankers “price something in” in response to an economic crisis such as the one blamed on Covid-19, it is done so with a forward view of at least 2-3 quarters in a fiscal year.
In other words, bankers are expecting the impact, whatever it might be, to carry a dampening effect for at least 2-3 quarters.
However, in this case, it appears that the “pricing in” has been done for an entire 12 month period. So here are some of the things that are priced into this rate cut?
Housing market slump – despite borrowing being more attractive than ever, the central bank is acutely aware that transactions will decline and the housing market will experience a downturn.
This, however, if you remember the very first lesson in the Real Estate Investment BASICs course, is due to a soft indicator known as the consumer confidence index. Its no surprise that consumer as well as business confidence is at an all time low.
It was low even before the virus began dominating the daily news.
The virus just conveniently seems to have shown up at a time when an economic slump was imminent anyway.
As a result, the cause of the slump is now considered to be the virus while the intellectual masses seem to have forgotten that the recessionary symptoms were there long before the virus showed up and I had been talking about the imminence of a major downturn for a good part of 2019.
Reduced consumer spending – Mr. Morrison’s cabinet is handing out $750 via Centrelink to everyone in AU (excluding international students and migrant workers of course) in an effort to get some spending going. Not sure how much stimulus you can provide to a fledgling economy with $750 Mr. Morrison… but something is better than nothing… so its not that bad of a move anyway.
In New Zealand, however, we have seen no such move and frankly the cash accounts at the Treasury aren’t big enough to support such a massive spend for the administration. This is all the more true after the government announced $12 billion in infrastructure spending just a few weeks ago.
However, for an economy like New Zealand, that relies heavily on tourism (6% of GDP) and exports, a greater stimulus package for businesses is something the Finance Ministry ought to be considering at this stage.
Reduced growth figures – Needless to say, if people aren’t transacting, naturally GDP will not be growing, especially when the velocity of money is about to dwindle down even more than it already did in the last quarter of 2019.
Something else is rather intriguing (or should I say disturbing) though. This particular rate cut aims to provide approximately $47 billion in additional capital buffer as a result of delaying the capital benchmark requirements by at least a year if not 2 years.
The current bank cash reserves are only 3-4% above regulatory minimums but according to RBNZ, within that 3-4% there’s additional buffer by way of dividend restrictions that the RBNZ can impose on retail banks.
Simply put, I don’t read this as something good in terms of the cash reserves the banks are carrying currently. I can only imagine how much worse would it be in Australia, where banks have been proven to be blatantly disingenuous about their regulatory compliance.
RBNZ accepts that there will be job cuts on the immediate horizon. This is indicated by the hit taken by the hospitality sector in NZ which employs around 150,000 people.
Similar numbers and impact is expected in Australia. RBNZ stated in no uncertain terms that more liquidity will be made available to retail banks if they ask for it. This brought back memories of Bank of England governor Carney’s statements when the whole Brexit thing went down.
Increase in household debt: This is an imminent side-effect of attractive borrowing. Having said that, this is perhaps not the time to extrapolate the adverse effect of carrying high household income vs. debt numbers.
Both AU and NZ have had high HHI to Debt numbers for several years so if it goes from 203% (Australia) to 215% in the next 6 months, it’s not going to lead to mass bankruptcies.
The system is capable (already) of sustaining such high levels of household debt. So no need to focus on this for now.
Forward guidance program (bond buyback): This, from my experience, is something that will start emerging in the next 6 months.
When central bankers start buying back government debt (e.g. sovereign bonds etc) its like a publicly listed company buying its own shares to keep the volume and liquidity in its stock and interest in its company at the exchange.
Not good. But it is what it is.
Negative yields: Both central banks are prepared for it. In fact in Q2 of 2019, RBNZ governor already indicated that they have an appetite for going all the way down to -0.35% if “push came to shove”. So if you’ve been a saver, now’s a time to revisit your wealth creation strategy.
Key Opportunity: RBNZ and RBA have both taken a huge step in terms of fiscal/monetary policy. As a property investor, the level of opportunities that are about to emerge in the market are likely to be greater than the opportunities that emerged just on the other side of the GFC back in 2008.
Property prices will be falling. They already are and no matter what you hear in the media abut auction clearance rates being high, wait till the government announces guidelines for public gatherings and auction turnouts are going to be toast.
Housing market is slowing down (has been for several quarters). Borrowing remains cheap and will be that way for the good part of 12 months.
However, think smart. The market is moving in ways that is ideal for transactions based on the property options strategy or the distressed property strategy we teach across several of our courses. This is not the time to go out there and buy.
This is the time to learn how to navigate your way through this current climate of uncertainty.
Remember this: markets have an uncanny way of self-correcting its course regardless of whether its a case of market free fall or markets shooting up.
Self correction has its foundations in fundamentals not price action. If you know the fundamentals and understand how to invest in the property market, then you have far greater chances of success, especially if you have support and guidance from a well rounded education program such as this.
Key dangers: The biggest risk to investors right now is not knowing how to price in these economic anomalies into their market research to understand the real value of an investment property today as well as its potential value once the markets come out of the current shit show.
I strongly urge all of you to take the time to invest in learning how to take advantage of this current economic mess. Remember, one man’s crisis is another man’s opportunity; but you’ve got to know how to read the market to begin with.
In response to an unprecedented time in our nations’ histories, Property Magnets is announcing the development of a special program aimed at providing deep and meaningful insights into crisis investing. This is a new program that will be available only for a limited time and will be available by invitation only. In this program we will be teaching you all about how to navigate through the noise in the market in times of crises and how to use that knowledge to position yourself to emerge as a victor not a victim.
Please register your interest including a brief note about your current situation as an investor (active investor, looking to invest, looking to learn etc.) and we will let you know once the program I ready.
My take on this: Covid-19 appears to have become a very convenient catalyst for implementing drastic fiscal policy on a global scale.
Throughout 2019, US, Canada, UK, AU and NZ have all demonstrated severe cracks in the financial system, especially around monetary policy. The cash printing program that all western central banks are in love with continues to show itself off without placing any real cash value in the hands of the mums and dads out there. My comments about the lack of velocity of money in circulation is symptomatic of central bank policy that is designed to create the illusion of policy for the benefit of the masses, when in actual fact, its for the benefit of the very…very few.
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