Rain delays we have all heard of, but a pandemic delay? COVID-19 (known colloquially as coronavirus*) is the word on the tip of everyone’s tongue. It’s affecting the stock market, causing toilet paper histeria and shutting down whole countries . As it spreads more quickly throughout the world, it is no surprise that people are becoming concerned about the impacts of the virus. If you have just bought an off the plan property or are just about to, you might reasonably be asking yourself how will this effect me?
The respiratory disease is spreading throughout the world, however the original epicenter is in China — specifically, Wuhan, a part of the country that is intimately linked to building and construction supply chains throughout Australia. China is a major supplier to Australia builders, providing products as diverse as complete kitchens, to white goods, building cladding and through to simple nails and bolts. In the coming months, many people are already predicting that project timelines will lengthen for projects as there are shortages of supplies. In fact, some supply chains are already feeling the pinch as the flow of goods slows down: several Chinese manufacturers are declaring force majeure, invoking a clause in contracts over unavoidable delays outside of their control. As more countries place travel bans on China, these issues will be further compounded by the fact that even if the goods were available to come through, they would not be allowed in until thoroughly decontaminated, if at all.
To attempt to figure out the potential long-term impact of COVID-19, economists are looking at the 2011 Japan earthquake and tsunami and its effect on the supply chain. While this seems like an odd place to draw their predictions from, the unexpected events in Japan in 2011 are proving helpful in 2020.
“It seems a bit random, a bit left-field…but [Japan’s earthquake] was an exogenous shock to an economy that shuts down production completely for about a month or so, which is more or less what COVID-19 has done in China—so it’s not as crazy as it sounds as a benchmark,” said the head of macroeconomics at BIS Oxford Economics, Sarah Hunter.
Speaking at The Urban Developer’s market outlook event on Friday, Ms. Hunter said that the virus outbreak has forced economists to revise what might have otherwise been a “pretty optimistic” picture of 2020. With construction supply chains in Australia already feeling the pinch due to factory closures in China, Hunter said an analysis of the severe impact of the Japan event on the “phenomenally complex” sector of car production supply chains was instructive in gauging the current state of play.
The data is showing that we’re in for an “ugly few months” — but the outlook isn’t as bleak as it seems, she continued. While car production supply chains are extremely reliant on specific parts in a specific order to property construct an operational vehicle, there is more room to look elsewhere in the property industry. There are several companies within the country who have the capability to produce the parts and goods needed for construction (albeit at a slightly higher cost than that of Chinese companies), meaning some developers may only see a slow down of a few months while the Australian suppliers ramp up their production to meet demand. Boral chief executive Mike Kane said a planned shutdown of plants in China over the Chinese New Year was now extending, in comments given to the Australian Financial Review late last month. He also said that it was too early to predict whether there might be shortages of building products. “We don’t have those numbers,” Mr Kane continued. However, some other Australian building contractors are starting to warn clients of potential project delays where China is the source of materials being used in local projects.
To gain a true understanding of the state of supply from China in particular, we contacted a freight forwarder responsible for arranging the import of building products for a large number of developers, and whilst they were not prepared to go on the record, they were prepared to say that that the current shipments arriving into Australia have already dropped significantly. In one example a major Australia building retailer has gone from receiving 24 containers per week from China to only receiving a handful last week. Given that most construction companies operate on a ‘just in time’ inventory management model, this level of drop in supply will be felt through the industry quite quickly. Furthermore, the situation is being exacerbated by the 14-day self-quarantine period all freight ships entering Australian ports must adhere to.
A recent report discussing and modelling the potential global macroeconomic impacts of COVID-19 highlights some other issues as well: primarily, how will we deal if man-power has to be cut back? The shock to labour supply — which could be caused by workers taking time off due to being sick or caring for sick family members, workers dying from the virus, or workers being dismissed from work to prevent the further spread of infection — will be particularly prevalent on construction sites, which rely primarily on workers. Without them, projects will be unable to progress, even if the required materials are on hand. According to data modeled on the SARS outbreak of 2003/2004, Australia could have a shock in the labour supply of 0.48-1.58 — and that’s if workers only take the required 14 days off. Any more time could severely increase the scale of the shock and push project timelines out even further.
The recently volatile financial markets may be throwing a further spanner in the works. Pick just about any market — stocks, bonds, even oil — and you might be noting significant drops over the last few days. J.P. Morgan sent around a note to clients late last week saying markets were indicating a 90% chance of a recession, a term that generally means six straight months of economic contraction. The picture looks worse now, especially in the bond market. Last week, Wall Street panicked when the yield on a marquee government bond — the U.S. 10-year Treasury — fell below 1%. This has never happened before. Now that yield is below 0.5%, a jaw-dropping situation that didn’t even occur during the Great Recession. This is essentially the blowback from a double impact on the market: the serious health crisis that is COVID-19 is morphing into an economic crisis as people stay at home, cancel trips and spend less (on everything other than toilet paper, apparently), while Saudi Arabia essentially launched an oil price war against Russia on Sunday. It remains to be seen how these issues will develop, so we will update this article as the story progresses.
Looking back at Japan post-2011, industrial manufacturing took a hit in the wake of the earthquake and tsunami — not as badly as car production, but still down 15% — but there is a positive takeaway. The market will rebound, slowly at first, but then with increasing speed.
With the global spread of the virus, Ms. Hunter anticipates that in Australia, that recovery and normalisation won’t occur the second half of this year. In fact, she went as far to predict that some of the supply chains won’t normalise until we reach June (potentially even July/August). However, Ms. Hunter insists the anticipated negative growth for the quarter is “nothing to panic about”, with some normalisation of supply chains and travel movements anticipated, which will help lift growth going into the second quarter.
In order to speed up recovery the Reserve Bank of Australia (RBA) has responded to the COVID-19 outbreak by lowering interest rates further to 0.5% on Tuesday this week. The Board took this decision to support the economy as it responds to the global coronavirus outbreak. According to the statement made by RBA Governor, Philip Lowe, “it is too early to tell how persistent the effects of the coronavirus will be and at what point the global economy will return to an improving path…[but] policy measures…will help support growth”. In the views of the RBA, once the virus in contained the Australian economy is expected to rebound quite well, due to low level interest rates, high levels of spending on infrastructure, lower exchange rates, a positive outlook for the resources sector and expected recoveries in residential construction and household consumption.
Despite all of the bad news, the property industry in Australia is performing strongly. As we’ve reported, more homes are selling for a profit and there has been strong price growth around the country. The RBA reports that mortgage loan commitments have also picked up, although demand for credit by investors remains subdued. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.
Well, no major developers in Australia have made announcements that they’re expecting construction to be delayed in any way. However, we may see some revised timelines throughout the coming months as the current supply of building materials are used up and developers turn to different suppliers if they can. At the worst, buyers could potentially see a delay of one to six months on their project if the developer does not have enough materials to proceed to the next stage of construction or they are priced out of the market by the increased prices on scarce goods. For investors, these delays are unlikely to be a major issue, however owner-occupiers may find it more vexing.
Some developers are expecting the shortages in construction goods will push up apartment prices. Iwan Sunito, the Chief Executive of hotel and apartment developer, Crown Group, says the supply shortages could increase apartment prices in popular areas. While this is less likely, apartment prices may drop quite quickly if the market continues to decline.
The major issue buyers will have to keep an eye on is their sunset clause. This is the last date by which the unit must be constructed and registered with the titles office. They will vary from 6 months to 5 and a half years with the average being three and a half years. If construction is delayed in any significant way, or the project is already close to the sunset clause date, we recommend getting into contact with the developer of your project.
*The author studies biomedical science, and would like to remind readers that ‘coronavirus‘ is actually the name for a large family of viruses that cause everything from the common cold to SARS. COVID-19 is a novel (a science word for ‘new’) coronavirus, and is the virus everyone is discussing in the news.
As per recommendations by WHO, please take precautionary action to prevent the spread of COVID-19. Our very young and elderly populations are at risk (along with those who are immunocompromised), so we must do our best to prevent the spread of the virus until a vaccine is created. Standard recommendations to prevent infection spread include regular hand washing, covering mouth and nose when coughing and sneezing, thoroughly cooking meat and eggs. Avoid close contact with anyone showing symptoms of respiratory illness such as coughing and sneezing.
If you think you are showing the signs of infection (including respiratory symptoms, fever, cough, shortness of breath and breathing difficulties), please contact your doctor as soon as possible and self isolate.
This article was adapted from one published by The Urban Developer. Read the original article here.
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