In times of global economic uncertainty, all hail illiquidity.
Uncertainty is the flavour of the quarter as the media paints our newsfeeds with COVID-19 headlines. Doubt has also crept into the Australian property sector, as investors and landlords ask how COVID-19 has impacted property values?
But new data from CoreLogic suggests the shock of the pandemic on property values and the overall property market may not be so shocking just yet.
Property performs well in a financial crisis. Just look at the last few financial shockwaves and you’ll see property has been a star performer. It’s not because of super low interest rates. It’s not because of the new Code of Conduct. And it’s not because of mountain-sized stimulus measures.
It has more to do with property sales.
To explain how COVID-19 has impacted property values in Australia, here’s a quick lesson in property fundamentals.
How to calculate the value of the property market (in 30 seconds)
Beyond cash flow and market demand, there is a large factor that determines property values and the property market.
Imagine Australia’s property market as one big cake. Each slice of the cake is one property. And each slice will vary in size (property values).
But there’s one ingredient that helps with the flavour (value of the property market) of this huge property market cake. It can’t be seen on the outside, but you can bet your apron it exists.
That ingredient is transaction volume.
When a property is sold, it records a new value. And that new value contributes to the value of the property market.
What’s the key takeaway here?
Minimal property transactions equal minimal change in values.
Volumes have dropped during COVID-19 – not values
The volume of property transactions has hit the skids. But property values aren’t going far either until we see more sales.
An Early Market Indicator report by CoreLogic says the volume of Australian property transactions from mid-March to mid-April this year was about 64 per cent lower than the volume of property transactions during the same period last year.
The same report tells us that residential valuation requests have dropped roughly 30 per cent in the first week of April and commercial valuations have also decreased 42 per cent.
Fewer property owners are selling so far in 2020. Much fewer. There might be panic buyers in stores, but there are few panic sellers in our property market.
To set the scene, look at values on the ASX. The cliff drop in share values was a result of investors dumping shares amidst uncertainty.
If we’ve learnt anything from our recipe above, it’s that recorded property values won’t change unless properties are sold (or they are revalued). So CoreLogic’s data is calming news for anyone worried about the property market going bust.
This is when we thank the length of time it takes to sell a property. In times of global uncertainty, all hail illiquidity.
What about the future?
There’s a lot to be said for transaction volume being a key indicator of property market performance. But we will no doubt see new information, new statistics and new comparable data hit our inboxes as each day in our strange new world ticks over.
Either way, this is a time for property investors to celebrate their investment in an illiquid asset. Because there’s enough volatility out there in other markets.
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If you’re interested in investing in robust commercial property investment, get in touch with Properties & Pathways today.