The case for residential real estate during a recession

Coronavirus has tested investments and investors across the world.  Stock markets, for one, have behaved erratically and dividends across the board have been slashed. Some fortitudinous investors are weathering the volatility, enjoying the 40 per cent gains since March, while others are trying to pick the market and profit from undervalued stocks. Either way, it’s proving to be a rollercoaster.

Meanwhile, another asset class, Australian residential real estate, was forecast to all but collapse. Yet, in sought-after markets this asset class has behaved contrary to the many well-publicised predictions, particularly here in Sydney’s eastern suburbs.

It is broadly accepted that property investments are often less sensitive to volatility at times when stock markets are unstable or sluggish. We would suggest that the verifiable dependability of residential real estate values in coveted locations has been the catalyst for the consistent price performance in suburbs such as Vaucluse, Double Bay, Dover Heights and Rose Bay over the past three months.

[Note: We’re strictly talking residential property. Other Australian real estate sectors have taken a beating during the shut down; industrial, retail and office space may prove riskier in a recession because the cash flow of those properties is dependent upon how well the underlying tenants can navigate a slower economy.]

Sydney’s Eastern Suburbs, Defying a National Trend

The Eastern Suburbs, an Exception to the Trend

You see, while residential property prices have been falling 1 to 1.5 per cent in some of Sydney’s most competitive regions like the Sutherland Shire and Hills district, the Eastern Suburbs – Australia’s priciest housing market – was an exception to the trend, with values rising 0.5 per cent over May, according to CoreLogic.

Certainly, the low supply of properties has gone some way towards insulating prices also. While some sellers are still holding off, buyer appetite for A-grade property has been as strong as ever. As Australia experiences its first recession in 29 years, property investments are perceived by many savvy investors as a safe haven of sorts in one’s portfolio while other asset classes swing wildly from poor to profit-making and back again.

But everyday pundits can be forgiven for making the assumption – influenced by bold headlines and catastrophizing commentators – that real estate prices are destined to suffer in recessionary environments. It doesn’t help that the last global recession – which Australia bypassed – is synonymously linked to real estate and home loans. That awareness is deterring some investors from pursuing a property investment, particularly at a time when rents are being negotiated downwards. It’s important to consider, however, that this recession is unique. It was not triggered by complex loan structures or a credit crunch; it was caused by a pandemic. It is also important to understand that recessions do not automatically result in depressed real estate prices. If you’re skeptical of that last comment, consider that in the US, real estate values increased during three of the last five recessions.

Real estate’s relative low correlation to stock market movements can make it a more reliable choice during a recession. It can be a good hedge against volatility because even in times of recession, we all need a place to live. Australia specifically repeatedly shines when global economies are lackluster. And it doesn’t go unnoticed by neighbours to the north.

Sydney property is being seen as a relative ‘safe’ asset by overseas investors

High net worth Chinese investors are turning to property during this pandemic with reports of local luxury developments selling rapidly. The rush to add more real estate to personal portfolios has seen a jump in upmarket housing prices in China. Homes priced at about AUD$4m in the country’s biggest cities emerged in April as among the most popular, aided by an easing of credit to help revive the economy.

Their international appetite has not been abated either, with the low Australian dollar making our real estate even more appealing. There’s been an increase in online buyer interest in their most sought-after international markets: think Singapore, Seoul and Sydney. Chinese real estate portal Juwai.com reported twice the volume of enquiries on Australian real estate during April.  Interestingly, they note Singapore has become an alternative to Hong Kong, where pro-democracy protests have caused mainland Chinese investors to look elsewhere. We too are seeing an influx of Australian expats planning their return home from Hong Kong, and to a lesser extent the same is occurring with expats in the United States and Europe. Compared to the 20 per cent taxes in Singapore, our eight per cent stamp duty looks like a bargain.

Both China and Australia had made it more difficult for Chinese investors to participate in our property market in recent years, but that is changing. During the last few years, Beijing had begun slowing the movement of local money to external economies and Australian banks had ceased financing Chinese buyers in recent years. A number of additional changes in 2020 are buoying Chinese buyer interest in Australia, not least of which is the emergence of Australian non-bank lenders who are willing to service that Chinese demand for Australian property.

Australia is appealing as a safe country with sound economic management and regulatory frameworks. Plus, our handling (though not quite the shining light of New Zealand) of business, society and health during a pandemic has been noted.

Our experience on the ground in Sydney’s two most affluent markets is that the Chinese buyer demographic looks to Australia’s eastern suburbs and lower north shore when adding safe haven real estate assets to their portfolio. Particularly as China’s economy slows, local inflation rises and pent-up demand of early 2020 is released.

Yes, in the short term, while international travel, migration and overseas student populations are restrained, our property market won’t have it’s normal volume of foreign buyers. Nonetheless, wealthy buyers are seeking high end property here, in many cases to guard their wealth against inflation and a weakening yuan.

During the shutdown, a Hong Kong buyer spent $6million sight unseen in Sydney’s north shore based on a video and an inspection via Facetime. Nearby in Killara, an Australian expat family currently based in Taiwan paid $6.3 million for a home they are yet to visit. Another expat family in Singapore have purchased a Mosman home with expectations of $12m. We have seen numerous instances in recent weeks where internationally-based buyers, particular families returning from Hong Kong, have acquired homes in Darling Point, Vaucluse, Rose Bay and Double Bay, despite being unable to attend a physical inspection.

Whilst these examples are prestige properties, and although international investors are typically high networth, they’re not all looking for prestige estates and waterfront mansions. At least three-quarters of Chinese buyers are looking for property valued less than $1 million, and the median enquiry price comes in “quite low”, at around $610,000, according to Juwai.
The last Foreign Investment Review Board report showed that Hong Kong Chinese investment into Australian real estate more than tripled to $9.3billion last year, while Singaporean investment increased by $2billion and Japanese by $1.5billion.

Note: The 2020 rules remain the same for foreign buyers. Overseas based residents are free to purchase any Australian real estate, while non-residents are only allowed to purchase new properties and must get approval.

The confidence of high net worth international buyers, and savvy local investors is worth noting. A-grade Australian residential real estate in sought-after locations is the asset class that we think will continue to deliver during the recession.