Approximately half of Australia’s population is currently in a lockdown, and this may continue for another few months until vaccine target levels are reached. I wanted to discuss what impact this may have on the property market and the broader economy.
Of course, there are wide ranging impacts
The impact of Covid lockdowns can be wide-ranging. Dealing with the challenges of home schooling, not seeing family, not enjoying your normal pastimes, business failures, job losses, mental health challenges and so on. Of course, we all have a tremendous amount of empathy for the various ways that lockdowns are negatively impacting people’s lives. That said, the aim of this blog is to focus purely on economic impacts only.
What we learnt from previous lockdowns
The lockdowns in Australia during 2020 and around the world taught us some valuable lessons, as there were some common themes, namely:
- Low-income earners tend to be impacted to a much greater extent. In fact, it is not uncommon for higher income earners to avoid any negative financial impacts from being in lockdown, because as they can work from home, they retain their employment and income.
- Because people cannot undertake their normal (non-lockdown) activities, we observe two economic trends. Firstly, people save more money (i.e. the savings rate spikes), which improves their financial position. Secondly, people tend to spend more on durable goods – although this trend will probably diminish at some point – how many new appliances do we really need!
- Whilst an increase in business failures hasn’t yet been reflected in insolvency statistics, it stands to reason that each successive lockdown (Melbourne’s onto its 6th) puts an increasing amount of pressure on some businesses, as their financial resources deplete. Anecdotally, unfortunately I have observed a greater number of business closures in the Melbourne CBD over the past couple of months.
- Overall economic demand does tend to bounce back strongly and quickly. At a macro level, demand for spending by higher income earners tends to more than compensate for lower levels of demand by income earners.
But we don’t have JobKeeper anymore?
The federal government’s Covid-19 Disaster Payment provides an income of $750 per week to those that have lost 20 hours or more of work during a lockdown. The highest JobKeeper payment during 2020 was $1,500 per fortnight, so this is on par.
However, according to Deloitte Access Economics, only about 2 million Australian’s were accessing this Disaster Payment in August 2021, compared to 6 million that accessed JobKeeper in March 2020. That means less money from government assistance is being pumped into the Australian economy. That said, the JobKeeper program was widely criticised for its untargeted nature e.g. some large businesses claimed JobKeeper and subsequently declared record profits and dividends (e.g. Harvey Norman). As such, perhaps this Disaster Payment package is more efficient and still just as effective. Regardless, the Australian federal government will rack up more than $1 trillion of debt from supporting the economy through Covid, so it isn’t going to stop now. I expect the federal government will provide more support should it be needed.
Apartment rental incomes will be under pressure
Renting an apartment tends to be more affordable than renting a house. As such, apartments are tenanted by a higher proportion of lower income earners. Whilst the federal government’s Disaster Payment package will hopefully avoid or minimise financial hardship, it is possible that some residential tenants will seek rent relief (in the form of a waiver of deferral) from landlords.
Because Covid has adversely impacted lower income earners to a much greater extent, it is likely that apartment rental income growth will be relatively stagnant over the next one to two years.
Vendors are likely to remain cautious about selling
According to the REA Group, property listings dropped by over 10% nationally in July, with Melbourne and Sydney experiencing much larger falls. One-on-one property inspections can still be conducted in Sydney, but not in Melbourne. Live auctions have been banned in both cities. As such, almost half of the auctions that were scheduled to occur over the past week in Melbourne were withdrawn.
The fact is that vendor confidence is weak. Of course, most people are reluctant to begin a sales campaign in the middle of a lockdown, as sales activities are severly restricted. However, even when we emerge out of these lockdowns, most vendors worry about their sales campaign being interrupted by yet another lockdown.
As such, I don’t expect the property market (particularly supply of property listings) to normalise until the risk of lockdowns evaporates, which might not be until next year.
Central banks and commodity prices
One of the challenges with controlling the federal budget deficit will be the impact of the falling price of iron ore. Between the start of December 2020 and mid-May 2021, the price of iron ore rose by 80% from $US125 to $US215 per tonne. This boosted government revenue through mining royalties and company income tax receipts. However, iron ore prices have been falling since the start of August. It is now trading at $US160 per tonne. If this trend persists, it is not good news for the government budget.
At the start of this month, the RBA announced that it would reduce its bond buying program from $5 billion per week to $4 billion in September, as it tappers off its quantitative easing (EQ). However, given the huge cost of lockdowns to states and the federal government, most commentators expect it will delay any tapering. Similarly, commentators expect the US Federal Reserve to postpone any planned tapering of its QE program due to rising delta cases in the US. It seems more central bank support might be needed.
Interstate migration away from Melbourne and Sydney will almost certainly rise
I shared this interstate migration chart a few weeks ago. It is noteworthy that interstate migration has been negative in NSW for quite some time. And Victorian interstate migration is trending downwards to the point that it is now negative (a net loss of 4,900 people in the March 2021 quarter compared to a net gain of 490 people in the March 2020 quarter).
I think this trend will continue in that an increasing amount of people will migrate away from Melbourne and Sydney and move to Queensland. Perhaps Melbourne will fare the worst because its lockdowns have been more draconian and therefore likely to have had a more severe social and economic impact.
It is important to note that negative interstate migration may reduce demand for property in Melbourne and Sydney at a macro level. However, it is unlikely to have a material impact in investment-grade locations. The reason why is that these locations tend to benefit from multifaceted demand. Therefore, even if one demand factor temporality subsides, it is very likely that overall demand will still exceed supply, thereby resulting in price appreciation.
My conclusion about the impact of lockdowns
I predict that the investment-grade property market will be largely unaffected by the prolonged lockdowns in Melbourne and Sydney. Of course, the practicalities of selling means that transaction numbers will continue to be below trend, whilst restrictions are in place. But once restrictions are lifted and the risk of further lockdowns disappears, I believe demand for property will quickly return to normal. Supply (i.e. properties for sale) is not likely to recover until 2022.
However, non-investment-grade locations that are predominantly occupied by lower income earners may not fair as well.
Regarding the economic recovery, at a macroeconomic level, I think the economy will bounce back relatively quickly, like it did in 2020. However, unfortunately, some sectors will now take a lot longer to recover (i.e. years, not months) such as hospitality, retail (particularly in the CBD) and tourism.
