John McGrath - Property A Safe Haven
During today’s unprecedented volatility resulting from the Coronavirus, I’m predicting a flight to quality amongst investors following dramatic scenes on the trading floors of stock markets around the world.
What a rollercoaster ride these last five weeks have been for stock investors. The S & P ASX All Ordinaries Index has plummeted from 7,289 points at the market high on February 20 to below 5,000 points last week for the first time since 2016.
Coronavirus has put an end to the US market’s 11-year bull run with this correction reportedly the fastest ever recorded in the history of the market. Investors are clearly panicking around the world and making erratic decisions to reduce their risk.
Meantime, property values have remained stable. That’s because property is not as easily traded and therefore does not have the same dramatic reaction when ‘black swan’ events like the GFC or COVID-19 come along to disrupt our lives.
We might see some sort of impact on property eventually, particularly if Coronavirus leads to large scale job losses, but nothing has happened yet and hopefully it will be over before then. There has been no panic in the market, that’s the big difference.
Over my 35 years in real estate, many investors have told me that it’s the ‘sleep at night’ factor that makes property so appealing. Property is a stable, long term investment that requires time, above all other considerations, to grow in value. It’s the tortoise in the race.
Owners do not tend to panic about the value of their homes or property investments when calamity strikes. Despite coronavirus, we all still need a home or rental property to live in.
With interest rates at such historical lows, investing in cash is pretty unappealing right now. There’s virtually no return and if your cash isn’t invested, you’ll actually end up with less buying power compounded year after year due to the effects of inflation.
That leaves stocks and property.
One of the great benefits of stock investing is the ability to make quick money and withdraw it easily when times are good. But when times are bad, you can pay a big price, especially if you panic sell and lock in your paper losses!
There are many thousands of Australian cash investors with term deposits maturing now. In these times of ultra low interest rates, they will need to make a choice.
I think more will go for property. It simply offers a much greater chance of capital preservation in the short term; and steady, reliable capital gains in the long term.
Any professional investor will tell you it’s good to have your money invested in a diverse range of assets and over the long term, both shares and property return similar results. But property is just easier, particularly for ordinary Australian investors.
We all need to invest for financial security. Unless you’re on a very high income, it’s not really possible to retire on savings alone. You need assets.
As coronavirus unfortunately creates more and more panic from stock markets to supermarkets that is heightened by social media, I think more investors will see bricks and mortar as a safe haven.
See you next week. JM
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This article originally appeared in The Real Estate Conversation (March 23, 2020)