April 3, 2020

Why a lack of supply could be Australia’s housing market saviour


The first rule of economics is that markets work on the law of supply and demand. When demand outstrips supply prices rise, when supply outstrips demand they fall.

So what happens when both supply and demand take a plunge?

This seems to be what’s taking place in Australia’s property market right now, making the Covid-19 affected property market different from the property market in earlier downturns. Supply has been falling for several years due to regulatory intervention reducing offshore buyers and tightening bank credit. In hindsight regulators should be applauded for containing the overbuild.  The number of people needing homes has not changed and the growing population remains intact, however the only question will be if this population on average has the financial where with all to buy and service the stock.

It also makes the property market a different proposition to the share market.

Because shares can be bought and sold at the push of a button – or in the days of automated trading even based on an algorithm – we’ve seen them take a wild ride over the past month. The ASX200 has fallen from a high of 6,435.70 down to 4,546, a loss of almost 30%. Then it rose to 5,258.60, a gain of over 15%.  ASX trading volumes have also risen from 1,745,731 on 21 February to 2,752,761 on 31 March.

Conversely, over March, Sydney and Melbourne property prices actually rose by 1.1% and 0.4% respectively, according to CoreLogic. But the same research revealed buyer and seller enquiries with agents are down around 50%.

This lack of activity should help prevent property prices from falling too far. While people don’t have the confidence to buy, they’re not yet forced to sell their homes for whatever price they can get. This is thanks in part to lenders placing a freeze on mortgage repayments for people impacted by the virus, as well as the Commonwealth government’s wage subsidies.

This wasn’t the case in the Global Financial Crisis (GFC) or early 1990s, especially in the United States of America, where the median sale price fell 29%.

For our purposes, this may mean developers may find it difficult in the short-term to commence new residential projects, but it should also continue to constrain the supply balance when the economy comes back to life… and one day it will.

The Merricks Capital Partners Fund continues to perform well. Our investment strategy remains unchanged albeit we are currently focussed on more completed / existing assets and are also targeting new loans from traditional bank customers that need more flexibility or the bank is going to take too long to deploy capital.  At its most basic element our strategy is to lend at a level that is secured against real property at values well below their replacement cost.  With no leverage in our fund our key defence is the ability to hold real estate at a discount, when others offering finance are forced to exit due to their own borrowings.

Enquiry rates from borrowers have almost doubled since the outbreak of Covid-19 reflecting a tighter credit market but also the need for borrowers to continue accessing credit. Significantly higher lending rates are also being maintained.

For construction loans in the portfolio, we continue to monitor these closely and have not yet seen any delays induced by Covid-19. The construction industry remains ‘open’ and projects continue to operate as normal albeit with restrictions in place around social distancing.  Federal and State Governments, the CFMEU and associated unions remain very committed to keeping the construction industry going during Covid-19 given the reliance on the economy for construction to continue.

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