COVID’s impact on housing ‘benign’, says lender CIO

In an economic outlook update to investors, the chief investment officer of non-bank lender La Trobe Financial, Chris Andrews, suggested that the economic impact of the coronavirus will be felt over several years, but that housing is expected to be relatively protected from any major shock.

Mr Andrews told investors that providing an outlook for the economy and the housing market was difficult given the uncertainty over whether there would be any future lockdowns and outbreaks of coronavirus in the community. However, he noted that investors would face greater challenges than the housing market as a whole.

The La Trobe Financial CIO said: “The length of this transitional period depends purely on the success of our government in addressing, firstly, the Victorian outbreak and, secondly, any other outbreaks that occur from time to time. 

“Different geographies within Australia will experience the transition at different times, and some places are perhaps already moving towards the third phase being the restructure phase. This transition continues to see increasing economic activity in the 74 per cent of the Australian economy that is not Victoria. High-frequency data, like card and spending data, continues to suggest that the initial, dramatic rebound is tailing off in those places which are rebounding, and of course that’s to be expected. 

“We’re moving to a more measured and sustainable trajectory as we move those geographies towards the restructure phase. We expect economic growth will recover, as the year progresses. But as we’ve said many times before, we don’t expect it to get back to pre-coronavirus heights, for some time.”

Indeed, Mr Andrews suggested that the theme for the economic environment would be “lower for longer”, with lower aggregate demand, lower employment and lower interest rates through this next phase of economic history. 

“There is a growing realisation that the recovery and restructure phases will take some time to work through. We’re likely to see our economy below capacity for some time to come. Watch for the ‘molasses economy’, as we’re calling it, over the next 12 months or so at least.”

He continued: “Investors will experience these as a continued challenge in generating consistent, real income.”

However, Mr Andrews noted that many economists had been revising their outlooks for the economy, outlining that some lenders – such as Westpac and CBA – have reduced their expectation of the peak-to-trough decline in the property market as the economy transitions from a “hibernation” phase to a “rebound” phase.

Mr Andrews said: “Even more bearish economists now have materially improved their predictions since the dark days of early April. Over the last month, Westpac, for example, has improved its outlook both for 2020 GDP and for unemployment. 

“Our own house views remain unchanged; we’re at the bearish end of the spectrum here, and we are comfortable to be there. In our view, it is a prudent place for a conservative investment manager to be; we do want to always prepare our portfolios for the potential downside risks ahead,” he said.

“Our view is that an 8-12 per cent house price correction is the most likely outcome. That will be followed by short-term bounce as economies reopen, and they will see longer-term solid (but unspectacular) growth, on average, across aggregate house prices.”

The CIO concluded: “The property market continues to be exceptionally resilient… House prices still declined in August, true, but the rate of decline slowed to 0.4 per cent, down from 0.6 per cent in July.

“Notably, of our major markets, Sydney is still up 12.9 per cent year-on-year for total returns, even Melbourne is up 9.5 per cent year-on-year. 

“So, and I can’t emphasise this enough, there are still no signs of disorderly house price reductions. This is a very benign outcome so far for one of Australia’s most critical markets.”

[Related: Westpac projects 15% rebound in property prices]