The spread of the coronavirus has certainly taken its toll on the world economy. And if you listen to the health experts in Australia, it could have a big impact on people.
One of these experts thinks our best-case scenario is to have 5 million infected with 50,000 dead.
In the worst-case scenario, we’re looking at a death toll of 150,000 people.
We’re no health experts but we don’t think it will get that far. The country has made an amazing response to this crisis, and we think we’ll land closer to the best-case scenario.
But there’s no denying that we have a health crisis.
And the result of this crisis is a triple shock that spreads across the entire economy.
Think about all of the people who are out of work right now. While some can work from home and essential workers can still generate an income, there are many who can’t. People like waitresses, tilers, event coordinators, and casual workers don’t have jobs anymore.
The list goes on.
And these job losses, though they’re short-term, creates a massive demand shock.
We can tie this triple shock into the current health crisis. When all of the measures get lifted, this demand shock will dissipate with it. But while we’re in the middle of it, we see the demand for all sorts of products fall.
People focus their income on the essentials, such as food and bills. They’re not going out and buying the things that they’d normally buy.
This demand shock leads us into a supply shock.
The fear that surrounds the markets right now leads to projects getting delayed. Some projects simply can’t go ahead because they’re not deemed essential. For example, we’re seeing a big drop in construction work, which means there’s less housing supply.
This extends across the entire economy.
And what we see is a country that isn’t able to create the supply needed for regular growth in the economy.
What this also means is that lenders feel hesitant. We haven’t any flow in the economy that allows for the creation of the supply we need.
And that brings us to the third shock…
A combination of both the supply and demand shocks leads us into a credit shock.
There’s low consumer confidence in the Australian economy right now.
And we saw something similar in the wake of the GFC, which we’ll touch on more in a moment. The credit shock results in an alarming surge of people who struggle to pay credit cards, mortgages, and bills.
This shock hasn’t really hit yet.
Those who’ve lost their jobs did so recently, at the time of writing.
This shock will hit us in a few months, assuming this goes on for that long. As we mentioned earlier, all three of these shocks will occur because of the current health crisis.
But the reality is that a whole generation of businesspeople hasn’t seen a situation like this. And that means they’re also unprepared for it. On the consumer level, we’ve seen a massive surge from a credit perspective.
And in the professional sense, we’re seeing the stock market struggle. We’re seeing how difficult it is for companies to raise capital.
Worst of all, this isn’t limited to one country. These three shocks will take place in almost every country in the world.
This is all scary stuff, right? Maybe it has you quaking in your boots as a property investor.
But we’re not here to scare you. We just want to make sure that you take this situation seriously. And that’s because with every crisis comes massive opportunity.
If you recall, we mentioned the GFC earlier. This was one of the most serious financial events of recent times. But if you look at the percentage change in property prices after the GFC, you see something amazing…
After the shock of 2008, we saw a massive price increase. It levelled off for a little bit before increasing again.
And as many investors know, those increases kept happening for years afterwards.
Bring it forward to the present day and we’ve had a downturn that occurred before this crisis. Prices fell by 10% in a single year, which is more than they fell during the GFC!
But we’d already started seeing signs of recovery before all of this happened.
It all comes down to interest rates.
The RBA slashed interest rates in the wake of the GFC. This lowered the cost of borrowing and restored confidence in the housing market. People could get bigger mortgages, so positive sentiment returned and the housing market soared.
Barring a few wobbles along the way, that’s the pattern that these lower interest rates established.
Think about where the cash rate is right now.
It’s lower than it’s been at any point in Australian history.
And while that may not mean much right now with the current health crisis, it will mean something in the future. When we come out of this, the supply and demand shocks will both disappear. And in their place will be lower interest rates, which leads to easier borrowing.
We believe that this will lead to another spike in house prices.
The triple shock will hit a lot of people hard.
But during this time, property is the safest investment that you can make. That’s because the triple shock will come to an end as soon as this health crisis ends.
And when it does, we’ll have a lot of people who find it easier to borrow, thanks to lower interest rates.
That means you’ll have plenty of demand for your investment property.
Furthermore, it will take a while for housing supply to start catching up with that demand. As a result, that investment property you’re holding right now will likely see its price increase remarkably.