Sharemarket recovery will decide property’s fate

Sydney and Melbourne are potentially undersupplied with apartments. Picture: Supplied.

Lower interest rates, whether in Australia or the US, will not stimulate the economy.

What they achieve is to boost or stabilise asset prices and they may delay the spread of the market jitters into the domestic real estate market.

In coming weeks, the link between the sharemarket and dwelling prices will be the subject of intense speculation. Accordingly, with dwelling prices still strong, it’s worth calling on the past to try to plot what is ahead. Such forecasting is made more difficult by the unique circumstances we face, but there are clear guidelines.

In terms of the sharemarket, lower interest rate speculation has triggered a much-needed breather from the seemingly endless falls in share prices.

For that reversal to gain momentum will require good news on the rate of coronavirus infections. For example, China is trying to restart its factories to repair supply chains. If that can be done without triggering a rise in the infection rate it will limit the global economic impact and may even enable a very scared Australian tertiary education industry to be saved.

The first rule in the links between the share and property markets is the so called “15 per cent” rule. It’s not until share markets encounter a sustained fall of 15 to 20 per cent that they start to trigger property impact. In the past that impact normally kicks in six to 12 month later but I have seen the impact gap extend to 18 months.

We have just seen a global fall of about 10 per cent so, on its own, this is routine market event that will not hit residential real estate.

Correction overdue

Indeed, after such a long run up the sharemarket was well overdue for a correction and so interest rate reduction speculation and action was well timed.

Around the world market historians point to the fact that after previous medical emergencies, once the problem was contained, markets roared back. No one wants to be off the bus when that happens.

In many areas of the property market shortages are on the horizon. In the Melbourne apartment market, while an array of inner-city towers is at in an advanced state of construction, very few new ones can start. To get a project off the ground in 2020 requires presages of around 50 or 60 per cent and that is not possible in this market. Apartment developments are confined to smaller suburban developments. In Sydney, the planning chaos and credit squeeze sent a series of large Chinese developers back to China with heavy losses. Planning rules have improved but outside Harry Triguboff’s Meriton there are few big developers. That means in both our large cities if demand continues rents will rise because we are set for shortages of dwellings.

In outer suburban areas, Sydney always struggles with availability and Melbourne developers were put off track by the credit squeeze. Accordingly in both cities supply constraints will mitigate against share market infection.

And so, the bullish scenario is that when the share market fall is over we can get back to our share and property booms, now further boosted by lower rates.

Let’s hope that scenario plays out. If China gets back on its feet quickly, helped by a big stimulus, there is a good chance we can contain the sharemarket fall. However, the speed with which the virus has hit the Middle East and Italy is fearful. If it spreads rapidly through Africa and South East Asia, we are looking at a calamity of much greater proportions than a 10 per cent market correction foreshadows.

Dead cat bounce?

If the current rise turns into what is called a “dead cat bounce” and the fall resumes, then it will not be long before the market decline hits the 15 to 20 per cent trigger point.

What happens around these levels and at even lower points is that the forces that caused the share market fall have the same impact on property, albeit at a slower rate.

However, I suspect the normal six to 12 months delay will be shortened if the virus triggers further big share market falls. Further share declines will mean that global supply chain has not been quickly repaired; all over Australia parts will not be available to complete tasks so new ones will not start; the tourism, airline and dining sectors that employ so many people will be in severe recession; education will be hit; there may widespread shortages in super markets and so on. If all this happening then banks will tighten and buyers become cautious. Existing mortgage repayments are further accelerated.

Profits fall and that hits the sharemarket but if overall income starts to fall that affects the property market.

But the market bulls are right. It will recover but the post virus world will be different. Unrestrained globalism will be curbed. That is not necessarily good for Australia but, as I discussed yesterday, as an island nation we need to be much more self-reliant starting with defence. That view began in the US well before the virus, but it will spread with the virus.