By: Justin Wang
At the beginning of the COVID-19 outbreak, I said that Sydney’s residential properties will become the winner out of this epidemic. This confidence is based on my long-term research and unique understanding of Sydney’s real estate market, and it is based on the “PIA investment philosophy” that I have concluded over the years. I always have great confidence in Sydney’s residential property market. In 2004 and 2005, whilst many people were pessimistic about the market, I said that there was no problem with Sydney’s residential market. The problem was that we lack an understanding of Sydney’s residential properties. During the Global Financial Crisis in 2008, the value of real estate assets in the United States fell by 30% and by more than 20% in the UK. Many international institutions, including the International Monetary Fund, predicted that Sydney’s residential property would suffer the same decline, yet I held the opposite view. And I was right.
The impact of the COVID-19 on the economy is unprecedented. So, why am I still confident in the Sydney residential property under the current circumstance?
The epidemic will have an impact on all assets, however, some will resist the negative impact based on the characteristics of the assets.
One of the characteristics of Sydney residential assets is that the character is mainly based on the internal factors of supply and demand and high development costs. The residential asset is less dependent on other external factors. So when external factors negatively impact the economy, the Sydney residential assets always stand out in the crowds.
The value of Sydney’s residential properties, or their ability to withstand price drops, depends on two demands. One is housing demand and the other is investment demand.
Regardless of the development of the epidemic, people still need housing. When people cannot go to the office to work or have food at restaurants, housing becomes even more important.
Although border closure and the rising unemployment rate will have a certain impact on the demand for housing and rental affordability, 95% of the demand for housing is still there, and it is still very strong. The NSW Government has recently decided to spend 500 million dollars to buy residential properties from private developers to meet the needs of society. Although this is not enough, at least we can see from the government’s action that residential properties are still in short supply.
The second demand for housing is investment demand. I said earlier that the residential properties in Sydney are Noah’s Ark of wealth. The Bible records that when the flood came, the righteous Noah escaped the disaster using Noah’s Ark. Under the trend of economic downturn and wealth loss, we cannot expect wealth to grow. We shall learn how to preserve our wealth first.
In judging whether an asset is suitable as a carrier of our wealth and to ensure the longevity of our family wealth, we need to consider the following aspects: 1. Whether the ownership is permanent; 2. Whether the asset can maintain its value; 3. Whether the asset can appreciate. 4 Whether the asset can generate passive income.
Those assets are quite limited and examples of those assets are cash, stocks, shares, gold, collection, etc.
Cash has permanent ownership, but it cannot appreciate or maintain its value. Under normal circumstances, it will depreciate due to inflation. Normally cash deposits can generate income by gaining interest. However, when the epidemic caused an economic downturn, the interest rate kept dropping to a record low level. If the global epidemic cannot be controlled, the interest rate will remain low for a long time, we may even see a negative interest rate. If a person has a deposit of $ 2 million in the bank and the interest is 3%, then he can live with $ 60,000 per year. If the deposit interest drops to 0.5%, the interest will suddenly become $ 10000 which is not enough for him to live. If he wants to maintain his living standard, he has to make good use of the principal. From this perspective, the cash had devalued. Governments all over the world are borrowing heavily to issue more money, resulting in a huge deficit. Who will make up for this black hole? The easiest method for governments is through the depreciation of the existing cash deposits. On top of that, some people say that the world’s debt will be paid by the entire generation. This means that the interest is likely to remain low for a long time.
For stocks, it’s needless to say, not only may the stock price fall, but we may not expect to receive any dividends in the near future either. However, a lot of public companies may go bankrupt, then the value of their stocks will become zero. Not even mentioning return, stocks can’t even guarantee ownership.
Though trading stocks are shares issued by publicly listed companies, companies that are not publicly listed and their shares can face the same issue too.
We say the collection market flourishes when times are good because everyone has money. Now that everyone has no money, many companies can no longer survive anymore, and life can not be carried on in the same way. Under this circumstance, the collections naturally will not appreciate. The collections are merely embellishments of economic prosperity unless they have significant value to human heritage and history.
What about gold? I have never advised people to invest in gold. Though the ownership of gold can be guaranteed, it cannot be preserved, appreciated, and it cannot generate passive income.
What about real estate? Commercial real estate, retail real estate, and tourism real estate are already facing problems. And the problem will not get too much better after the epidemic. Because the epidemic has changed the way we work and consume. The longer the epidemic drags on, the bigger and stronger this change will be, and the world will not be the same again. E-commerce and the home office has already become a trend. This epidemic has made these changes come faster and more thorough. So in the foreseeable future, the world no longer needs that many offices and retail stores. For the shops and offices that lost their tenants during the epidemic, it will be difficult for them to find the same rental demand as before. It will take a long time to find new ways to use those office buildings and shops.
No matter what happens in the world, people must have a home. When the border was closed, some people could not enter the country. But for people who remain in the country, they must have a home.
Residential property as a form of real estate will never lose its advantage. As its ownership is permanent, and its living function will never disappear. Because of the epidemic, people may choose to order food online, shop online, or work online, but those activities need to be done at home, so the value lost in commercial properties is being transferred to the residential properties. From this perspective, the residential property has gained a new utility value because of this epidemic.
When disaster strikes, no one can escape its impact, so does Sydney’s residential property market. Many people worry about whether this epidemic will affect their rental income. The impact will definitely be there, but even if it does, it will not affect Sydney’s housing market being the winner in the wealth race.
Interest on long-term deposits is less than 0.5% p.a only.
The yearly return on government bonds is only 0.75%.
Stock dividends can not be counted on at all,
Business operations are very difficult.
Only Sydney’s rental market has a return of 2.5-3% after deducting 1% of outgoings. Even if the vacancy rate rises to 6%, which is double the historical average vacancy rate, the rental return rate can still reach 2.35-2.5%. This is still considered a good return compared to other investments.
If we see Sydney’s residential property as an asset, not only we need a stable rental income, we also want capital growth. There are five Don’ts in PIA’s business philosophy. One of them is not to make subjective judgments on the market. Here I will not say when the house price will grow back and how much it will grow. But here we can give you a few tips and, you can think for yourself.
1. Under immense financial pressure, the residential housing prices in Sydney have not fallen so far.
2. Two of Australia’s major construction and real estate industry associations have joined forces to lobby the government to provide tens of billions of dollars to support property development. The reason is not just to stimulate the economy, but responding to real demands.
3. The government has started to discuss canceling stamp duty to stimulate residential property sales. Although the sales of off-the-plan properties are not good at the moment, we are not seeing a significant drop in land prices. On the contrary, because of the epidemic, and the stricter building standards set out by the government, the construction cost has begun to rise. If the land price does not fall, and the construction cost increases, there is no room for property prices to fall.
4. Although it is estimated that net immigration will decrease in the future due to the epidemic, the facts may be on the contrary. Some people currently living overseas with an Australian permanent residency visa will return to Australia because of Australia’s ability to keep the epidemic under control. In addition, as Austliaa built upon immigration, increasing immigration is the best way to solve the crisis and revitalize the economy. This happened in the past, so it will happen this time. The only difference is that this time only the high net worth immigrants who create job and investment opportunities will be welcomed. Those who are only there to get welfare payments or do low-end jobs will be kept out.
5. News from today says the Government is considering priority entry of international students into Australia.
Because international students will not only affect Australia’s education export industry they will also boost the real estate market again.
When the government announced the mandatory closure of multiple industries, it was specifically mentioned that the construction industry will be business as usual. When easing the restrictions, the open home inspection is among the first batch of restrictions that have been lifted…..
I personally feel that the prosperity of Sydney’s residential property market will come sooner than most people think, and the real estate industry will recover faster than many other industries.
Some people say that living through this COVID -19 is like being through a world war. Then you may wish to take a look at the historical data on and how property prices in Australia have risen right after the First World War and the Second World War.
The above is just my personal opinion for your reference only.
Disclaimer: the above article contains information about PIA and the investment philosophies of its founder and MD, Justin Wang. The information and material are purely for information and general marketing. In reviewing this document you acknowledge and accept that no representation or warranty in any way whatsoever and howsoever is meant or intended in or from any information or material appearing at any time and you do not rely on such. Persons reading this document should always rely on their own independent advice and judgment, and further in making any inquiry with PIA or its employees the enquirer may not rely on any statement whether in writing or verbally made by any members of PIA unless PIA confirms in writing.