Shares or property? Amid the downturn caused by COVID-19, investors could be forgiven for putting it all in the too hard basket and going 100 per cent cash.

Yet if Warren Buffett’s famous maxim is to be believed, it may well be time to be greedy when others are fearful and there are still opportunities for investors, according to Morningstar analysts.

Residential property outperformed Australian shares in the year to February, with total returns on national dwellings rising by 10.1 per cent compared to an 8.2 per cent gain in the S&P/ASX All Ordinaries Accumulation Index, according to CommSec.

Yet from record highs in February, markets quickly reversed course as the coronavirus crisis worsened.

The equity market was first to feel the pain, falling into bear market territory amid concerns over disruptions to supply chains and a global recession. Yet property also is now feeling the effects, with rising unemployment and tightening lending conditions prompting predictions of falling house prices.

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Fastest bear market

“We’ve had the fastest bear market in US history—down 26 per cent in 18 days. It took 30 days in the Great Depression for the market to decline by 28 per cent,” BetaShares chief economist David Bassanese said in a 26 March webinar.

He added: “Australia and the US will have a deep recession in the second quarter. Whether that is short or extended depends on whether this virus turns out to be worse than expected.

“There are some horrible numbers being bandied about, such as a 10 per cent unemployment rate in Australia by June, 20 to 30 per cent potentially in the United States, but if we get on top of this and the restrictions don’t need to be reimposed, those unemployment rates could drop quickly by the third or fourth quarter”.

As at close of trade on 27 March, the Dow Jones Industrial Average was at 21,636, well down on its all-time high of 29,568 reached just a month earlier and showing a one-year return of negative 14.5 per cent.

bears v bulls

'We’ve had the fastest bear market in US history—down 26pc in 18 days. It took 30 days in the Great Depression for the market to decline by 28pc': BetaShares chief economist David Bassanese

In Australia, the S&P/ASX200 index closed on 27 March at 4842, showing a one-year return of negative 17.35 per cent. Similar to US markets, the Australian bourse had reached a record high just a month prior of 7197, following a relatively positive reporting season and upward momentum from Wall Street.

BetaShares’ Bassanese warns that the average bear market decline in the US is 28 per cent, but during a recession it is closer to 40 per cent. In the last two bear markets of 2002 and 2007, the market slumped by nearly half.

“Given rising infection rates in the US and the weakness of economic data, it may decline more and a 50 per cent decline is more likely … but it really depends on how the virus plays out over the next few weeks,” he said.

However, Bassanese expects sharemarkets will stabilise “well before the economic data even bottoms” and before the easing of policy restrictions.

To that end, the S&P/ASX200 benchmark index finished Monday up 399 points—a record 7.0 per cent—after the government announced new stimulus to help businesses through the coronavirus pandemic.

Property pain

Before the coronavirus made its full impact, the latest housing data showed a sector in good health, with values across five of Australia’s eight capital cities reaching a record high in February.

As at 29 February, Sydney was showing an annual gain of 10.9 per cent, narrowly ahead of Melbourne’s 10.7 per cent rise, followed by Hobart (up 5 per cent) and Canberra (up 4.1 per cent), according to property data provider CoreLogic.

Yet the residential property market is not immune to COVID-19, as investors have quickly discovered in the wake of the government’s ban on auctions and open for inspections.

More than 1000 residential auctions planned for Sydney and Melbourne on 28 March were reportedly cancelled at the last minute due to concerns buyers would stay away, according to the Australian Financial Review.

AMP Capital’s Shane Oliver has warned that a relatively short recession that sees the jobless rate rise to around 7.5 per cent “would likely only set prices back around 5 per cent or so, after which prices would bounce back.

“But a deeper recession with say 10 per cent unemployment risks tripping up the underlying vulnerability of the housing market around high prices and high debt levels. This could see a 20 per cent fall in prices”.

Capital Economics expects rising unemployment and tightening bank lending conditions will result in weak housing demand and falling prices, with both the supply and demand for mortgage lending expected to fall.

With household debt already “exceptionally high” at 200 per cent of disposable income, the London-based consultancy expects house prices to peak in the second quarter and then fall by 5 to 10 per cent.

However, CoreLogic argues that housing will be less affected than equities, due to its relative illiquidity and the fact it is used as a consumption good and is less likely to be speculated upon.

In Australia’s last recession of the early 1990s, property values declined by 4.4 per cent from June 1989 to October 1990. The GFC saw a fall of 7.5 per cent from February 2008 to January 2009, but this was followed by a fairly swift recovery.      

Shares vs property

Given the likelihood of lower returns, which asset class should investors pick?

In the short term, Morningstar’s head of equities research, Peter Warnes suggests the S&P/ASX200 index could find support at around 4700 to 4800, with an overshoot closer to 4400. An extreme case though could see the bourse drop to 3600.

“But below 5000, I believe we should be gradually putting our cash reserves, built up over the past six months or so, to work. I am never going to pick the bottom and so prudent averaging is the best strategy,” he said.

Warnes also remains bullish towards residential property due to Australia’s rising population.

“Longer term, the property market could still do quite well … our population is going to reach 50 million by 2050 and that demand will underpin long-term prices,” Warnes said.

Morningstar’s global equities research team predicts COVID-19 will cut about 2 percentage points from global GDP growth in 2020. However, a quick recovery is expected next year, with a vaccine expected to be deployed by mid-to-late 2021.

“Economic moats are as important as ever. While most businesses are likely to be affected, those with a competitive advantage could extend their lead,” the analysts predict.