Opportunity in Crisis

IGNORE THE PESSIMISTS AND MAKE THE MOST OF EVERY CRISIS

The year 2020 dawned without the usual sense of hope and optimism that accompanies the arrival of a new year.

A heartbroken nation was still struggling to contain devastating bushfires that had burned through millions of acres of land, destroyed thousands of homes and buildings and resulted in 34 deaths.

We barely had time to draw breath when ominous images emerged of armed patrols in the streets of Wuhan in China, trying to contain the spread of a new and deadly virus. By late January, the first case of coronavirus had been recorded on our shores.

Within weeks economists, politicians and the media combined forces in an effort to convert us into a nation of doomsday preppers.

The headlines were filled with dire predictions about COVID-19 cases exploding, with some politicians claiming this country would have millions infected and to expect between 50,000 and 250,000 deaths within 12 months.

The same ‘run-for-your-life’ experts were suggesting the economy was about to fall off a cliff, we were heading for a recession or worse, unemployment would skyrocket and property prices would plummet. Things were looking grim, if not dire, according to the majority of commentators.

Certainly, the arrival of COVID-19 in Australia was cause for significant concern but not for John Fitzgerald who labelled some of these forecasts as ‘preposterous’.

John knew it was time to act. Now was not the time to pull down the shutters, it was time to embrace opportunity and he would ensure JLF clients were the ones to benefit.

As the pandemic raged, virtual and online communication became more important than ever.

This was a tool John and the team at JLF already used extensively but during the pandemic they increased them substantially.

John began a weekly webinar series in March to counter many of the claims being made about the likely impact of COVID on the property market and urged clients to ignore the noise, look at the numbers, examine the facts and make the most of the extraordinary opportunities being presented.

Now with the benefit of hindsight, we take a look back at what the headlines said, what John said, and what actually happened.

MARCH-APRIL 2020

The forecasts about house prices were alarming. Major news outlets published articles suggesting they were about to nosedive as the nation watched COVID-19 cases climb, followed by our first taste of lockdown.

There was enormous uncertainty and nervousness, with buyers and investors understandably unsure which way to jump in the face of a one-in-100-year pandemic.

The impact on health systems overseas was catastrophic and major cities were shutting down.

The Federal Government abandoned its hopes of achieving a surplus and began rolling out tens of billions of dollars in stimulus measures but even with a cash injection of this magnitude, the market jitters persisted.

The headlines suggested the Australian property market was in for a rough ride, despite record low interest rates and banks pausing mortgage repayments for affected customers.

John’s response was out of step with much of the mainstream commentary.

He encouraged Custodian investors to not only hold their nerve but capitalise on what was, in his view, an extraordinary opportunity. He was convinced that the stimulus measures being provided by the Government would push the market skyward over the next few years, offering the following explanation via his webinar.

“For the market to be strong it needs liquidity, and all the governments in the world are putting money into the markets,” John said.

“They’re literally going to print money to buy their way out of it. Printing money means massive inflation, it means house prices doubling.

“The $500,000 house will go to $1m in the next three years.

“The stimulus the government announced on the weekend shocked me… this is incredible, the most exciting thing I’ve ever seen in my life.

“We need to study the numbers and look at the long-term opportunity.”

MAY-JUNE-JULY 2020

Over the next few months, John reiterated this advice as JobKeeper funds, business support packages, government grants and boosted JobSeeker benefits poured into the economy.

In May, he told clients to not be swayed by the naysayers and stick to the tried and true fundamentals of real estate investing.

“There is one truth that has proved itself during the last two months; every prediction we have read or heard has been wrong. And therein lays the opportunity of a lifetime,” John said.

“How did we know it was all BS? We looked at the numbers and determined what was true and not true, relevant and not relevant.”

In June, he compared economists to ‘Circus Clowns’ appearing in between the main acts to keep the audience entertained.

John had forecast the arrival of stimulus for housing, which duly arrived in the form of the Federal Government’s $25,000 HomeBuilder grant.

“They thought 27,500 would take up the offer in the next six months (but) within six days, 13,800 have registered and 188,000 visited the HomeBuilder website,” John said.

“Pretty much the day after the announcement the ‘Circus Clowns’ were saying that this stimulus would cause house prices to drop.

“Last time we had a housing stimulus house prices went up 11.4 per cent within 12 months (2010).”

Despite the additional measures and signs the drastic predictions may have been overstated, the negative headlines persisted.

AUGUST-SEPTEMBER 2020

In August, John’s newsletter to clients highlighted three key points made by the Reserve Bank Governor about the economy that supported his belief in the strength of the housing market.

Philip Lowe had said ‘we have already seen the worse of the decline’ and it was ‘not as large as initially feared’; interest rates will stay at record lows for likely three years or more; and the financial system is flush with liquidity and asset prices are rising.

“Despite the above, our press wants you to believe we are still going off a cliff sometime in the future, i.e. end of JobKeeper; Christmas (not sure what the logic is here) or just because..... ,” John said.

“Agents from all over tell me their biggest challenge is getting people to sell. Vendors are sitting put and listings are down 6.18 per cent in NSW, 9.62 percent in Victoria, 15.04 per cent in Qld, 14.17 per cent in SA and 15.27 per cent in WA.

“On the flip side, auction clearance rates (if you include vendor withdrawn) are easily at or above last year’s figure for the same time.

“In fact, Melbourne is higher and Brisbane and Adelaide are nearly 30 per cent higher.

“Don’t get caught by the noise. Follow the numbers and make the most of this amazing opportunity.”

The doom and gloom headlines continued but John doubled down on his predictions of a property price boom hurtling towards the market.

John told his clients that prices would ‘explode’, and they would be surprised by how quickly and by how much, pointing to recent records set in Sydney, regional Queensland and on the Gold Coast.

“We now know, exactly what we said would happen, has happened: when Australia opened up briefly at the end of July, property prices officially went up in Sydney, Brisbane, Adelaide, Canberra and Perth.

“Even the banks and economists are back peddling:

“What has genuinely surprised us is the resilience of house prices in some of the other capital cities, considering the negative shock to the labour markets around the country,” a CBA economist said….”

OCTOBER-DECEMBER 2020

John was staggered by the level of stimulus that had poured into the economy over the past six months and the level of liquidity sloshing around world markets as a result of efforts to head off the worst of the pandemic’s impact on the global economy. He noted that long term bonds in some countries were selling at zero per cent or even negative return, and that countries were continuing to print money.

John told his clients to brace themselves for massive inflation of particular assets, including Australian house prices, and pointed out that the responsible lending limits ushered in after the banking royal commission had evaporated.

“Banks are now doing 90 per cent loans with no lender’s mortgage insurance for certain professions and the expenses and borrowing capacity calculators have been dialed up big time,” he said.

“Today the Australian median house price is around $660,000. I expect this to quickly go to $1m and returns on residential property to drop from 4 per cent to 2 per cent.

“I can point you to record sale prices in just about every street in every suburb but hopefully you can see this for yourself in your own suburb.”

Things moved quickly in 2020 and seemed to be accelerating as the year began drawing to a close.

“A lot can happen in a week. Over the course of just seven days, we’ve witnessed: The US election, Reserve Bank of Australia (RBA) quantitative easing, UK lockdown, Melbourne free, Queensland election, home loans 1.89% fixed, house prices surge and a vaccine in production!! Yes, it all happened in one week,” John wrote in November.

On Melbourne Cup Day, the Reserve Bank dropped the cash rate to 0.1 per cent while the eyes of the nation were on the race track and a result, banks were offering four-year fixed rates at 1.89 per cent.

More importantly the RBA signalled that they are now pumping money into the economy on longer terms than their normal three-year horizon.

“Their new bonds will be five to ten years and that’s the golden ticket for us and property, as I expect investors will gain access to longer terms and lower rates,” John told his clients.

“House prices are officially going up now – not that they ever tanked, despite what some commentators predicted,” he added.

By December, the trend of rising house prices was clear and most commentators had changed their tune.

Those with the nerve, knowledge and the means had recognised the opportunity during the year and many others were ruing their decision to follow the pack.

“Essentially in the year 2020 – the year of COVID-19 – everything you read or heard was ‘get out while you can’ and ‘doomsday is coming’,” John said. “Our message, however, was ‘make the most of this crisis’.

“Hundreds of Custodians did exactly that by riding interest rates down and buying again.

“This year was a defining year for us as Custodians, as it truly shows the resolve needed to push ahead, amidst all the noise.”