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How have Australian real estate and shares performed in a financial crisis?

28 April, 2020
Categories: Commercial, COVID-19, Investments

Recessions, depressions, bursts and busts. Financial crises hit investments hard. But when we think of performance, which investment delivers best during economic downturn? Real estate or shares?

There’s a real benefit to real estate being an illiquid asset during a financial crisis. You can’t sell a property in a day.

You can, however, sell an entire share portfolio with just a few clicks.

So, want to see how liquidity begets volatility? Take a look at the last few financial crises and you’ll see that shares have dropped during every economic downturn, while property has increased every single time.

How Australian property has performed against shares in financial crises

1982 Recession

The deepest post-war recession only lasted two years. But in that time the share market dropped 13.90 per cent while national property prices rose 7.80 per cent.

1989 Recession

The “recession we had to have” hit during an era of relentless interest rates, sky high unemployment and considerable government debt. 1990 saw the stock market droop by 17.50 per cent, while the property market rose 4.10 per cent.

2001 Dot Com Bubble (and September 11)

Extreme speculation in internet-related companies in the late 1990s led to the infamous Dot Com Bubble and its subsequent burst in the early 2000s. Only 48 per cent of US dot com companies founded since 1996 survived through 2004 – all had lower valuations. The September 11 attacks only sped up the stock-market crash.

In Australia, the share market dropped by 8.10 per cent in 2002. The property market rose 13.90 per cent.

2008 Global Financial Crisis

2008 global financial crisis

Australia avoided recession during the GFC shock because of our large resource exports to China. But the cost to the country was still great. Government debt was $58 billion at the start of the crisis. It hit $190 billion just four years later.

The whack to the stock market was also great, dropping 40.40 per cent in 2008. Meanwhile, the property market rose 7.50 per cent.

Property owners still sweat during economic downturns. Uncertainty remains the Achilles Heal for many investors. But as tough as it was for property owners during the last financial crisis in 2008, the latest financial crisis, caused by COVID-19, will be a far different experience for owners of property.

Here’s why.

How the COVID-19 financial crisis differs from the 2008 Global Financial Crisis for property owners

Interest deferral

Property owners can defer mortgage repayments for up to six months. No landlord had that option in 2007.

The banks’ very own Get Out Of Jail Free card gives property owners the opportunity to ride through this period while tenants do the same.

Code of Conduct

There are now rules in place for how tenants and landlords should behave. The COVID-19 impact on commercial property leases has brought about formal guidelines for how tenants and landlords should behave during the pandemic period, in the form of the COVID-19 Commercial Leasing Code of Conduct.

There was no sign of such a Code during the GFC.

Government stimulus

There was also no financial aid provided to employers and employees during the global financial crisis.

Fast forward to present day lockdown and the government’s huge financial stimulus package will see many businesses, which otherwise would have gone under, survive the COVID-19 period.

The same may be said for the hopeful explosion in consumer spending post-COVID-19.

It is too early to call this a likelihood, but there is at least a possibility of an economic boom thanks to reignited discretionary spending once we’re all let back into stores, offices and home opens.

Businesses are still fundamentally sound

This is a pandemic-caused crisis.

It has nothing to do with market bubbles bursting or shockwaves running through our property or finance market.

It has nothing to do with major companies operating poorly or being run by poor management.

Businesses will sadly suffer throughout this lockdown period, but the many we see survive it can return to operation knowing their business plan, strategy and operation are sound.

So, is real estate the better investment?

Real estate remains Australia’s largest investment asset class by market value, and will for some time. People will continue throwing money at property while land remains a finite resource and rental payments give a stable investment income.

Likewise, people will continue to throw money at the ASX while it is easy to afford and simple to access (or divest).

But when the day is done, and the pain of the financial crisis is balmed, it’s diversification that stands strongest in a smart investor’s investment portfolio. Diversification reduces investor risk of being burnt during a market crash or left with only dirt after a property bubble. It keeps volatility at bay and helps an investor regroup while the markets do the same after a financial crisis.

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