Over the last few days, we’ve seen some encouraging news in the battle to control coronavirus, with the number of people getting diagnosed with the disease continuing to increase, but a slower pace than previously.
Whilst this is a good sign, it’s far too early to think the worst is behind us, especially as Australia is still to head into winter, whilst in some countries like the USA and Spain, it appears to be exploding.
Domestically, the impact the coronavirus is having on the economy has been growing by the day and is evident in the 25% decrease we’ve seen in the Australian equity market since late February, as well as a plunging Australian dollar, which is again trading at just USD $0.60.
Both of those factors should serve as important reminders as to why investors should look at pink diamonds, as they have a very solid track record of maintaining value in periods of equity market stress, and they of course benefit from any fall in the value of the Australian dollar.
How about housing?
One other market that hasn’t been getting as much attention in recent weeks, but which we think poses just as much threat to the wealth of many Australians going forward is the Australian housing market.
After decades of almost permanent capital growth on the East Coast, many Australians still see property as a one-way bet, and an investment that will provide an easy way to retire wealthy.
We think this notion will be sorely tested in years to come, with Australian property facing a range of challenges in the year ahead, including:
- Record high household debt to income ratios of close to 200% in Australia, making Australian households one of the most indebted in the world.
- Record low interest rates of just 0.25%. This makes it easier to service loans (for now), but at almost zero, there is little to no more monetary stimulus that can be deployed to support housing, and a substantial risk that rates head higher in the years to come.
- Little to no real income growth for seven years for most Australian households, with a low savings rate.
Note that all of the above challenges pre-date the emergence of coronavirus, which in time will put further pressure on house prices.
The first and most obvious challenge is that auctions have effectively been banned in Australia, a move that has already seen household clearance rates plunge to some of their lowest levels on record, seen in the chart below.
Weekly Clearance Rate
Combined Capital Cities
Auction clearance rates do a reasonable job of predicting house price gains/falls (note the sharp fall in 2018 and early 2019, which occurred alongside a roughly 10% fall in the value of houses on the East Coast), so this is an obvious worry.
Added to this is the explosion in the number of Australians losing their jobs, or now needing to access Federal government support to pay their bills. Early estimates are that the real unemployment rate may top 15% as a result of coronavirus (the published number may be lower given the way the government has structured incentive payments).
These people will not be in a position to consider investing in property for years, whilst those that have lost their jobs (and who are renting), won’t be in a position to pay their rent for the foreseeable future.
This obviously poses a huge challenge to the more than 2 million Australians who own an investment property. Those investments are about to go from low yielding to zero yielding.
Add to this the fact that the government is openly telling short-term visa holders and many other foreign nationals that they are probably best leaving Australia and returning home for the foreseeable future. This demographic wouldn’t be big investors in Australian property, but they all need (or needed) a pillow to rest their head on.
Their absence means less demand for rental properties, whilst the annual flood of migrants that we’ve grown accustomed in Australia will slow to a trickle in the months and years ahead.
Given the economic uncertainty, and the fact that Australian banks are providing mortgage holidays to customers, one can’t help but feel for the next few years they (the banks) will be very cautious in terms of who they lend too.
Indeed, the banks themselves seem to be acknowledging this, with ANZ CEO Shayne Elliot warning that the crisis will impact the national psyche for a generation. Whilst he didn’t make a prediction for how far house prices will fall, Elliot noted the fall could be ‘material’ and that ‘it’s not going to be 2 or 3 percent’.
Eliot also noted that almost 20% of their small business customers were requesting repayment deferrals, and that 5% of their mortgage customers have sought a repayment holiday.
Finally, and this is more of a longer-term issue, Federal government debt is going to blow out by upwards of $200 billion in the years ahead as a result of coronavirus, which is more than $20,000 per head for every full-time taxpayer.
This money is going to have to come from somewhere.
One option would be removing tax incentives like negative gearing, or the exemption of the family home from the pension assets test, both of which have helped make housing attractive in the past.
The other option is the RBA prints the money to fund the government.
Neither is a particularly attractive option, and for these reasons, we think the road ahead is going to be very difficult for Australian residential real estate, for savers in cash and term deposits, and for those who don’t have money in assets which benefit from a falling Australian dollar.
Given this backdrop, the rationale for investing in pink diamonds is crystal clear, with these unique, discrete, tangible assets offering a far greater ability to protect and grow wealth in the years ahead.
What about your Super?
In next week’s ‘In the Loupe’, we will touch on developments in the Australian superannuation market, and why pink diamonds remain an attractive investment to consider as part of one’s overall retirement portfolio.
As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and look forward to any questions or comments you may have.