The year 2020 will be forever remembered for all the wrong reasons: death, destruction, panic, pressure, tension, turmoil … the list goes on. At an individual level, we suffered everything from mild inconvenience to complete chaos, but everybody around the world was affected in some way. COVID-19 hit public consciousness like a tsunami. It seemed every night there was a tidal wave of bad news roaring in and destroying lives in one country or another. We were glued to stories of infection and death and, inevitably, predictions of the end of the financial world as we know it.

Here's a quick recap of the sequence of events, as they unfolded. The first COVID-19 death in Australia was on 1 March 2020. By 18 March, the Australian government had banned international travel and gatherings of 100 people. By the end of March, most Australian states had imposed lockdown measures to prevent public and private gatherings, on top of limiting movement between states and within cities. Leaders and public figures were predicting up to 20 million Australians could become infected and as many as 200 000 would die in the first year. Experts said there was no possibility of a working vaccine for at least two, possibly three, years. The stock market dropped 36.5 per cent in a month, small and medium sized companies crumbled and many large organisations hit the wall or went onto some form of life support. Unemployment was tipped to hit 20 per cent and practically every bank and economist forecast that property prices would plunge by 10 to 25 per cent.

Collectively, the news was paralysing: people were rattled, emotionally, socially and financially. To be honest, I did not feel particularly bulletproof. This is where the real value of a mentor comes in — I had never seen Uncle John so excited! As much as he was alarmed by the health implications of COVID-19 (members of his family were infected and forced to isolate), from a financial perspective, the troubled times represented huge opportunity.

Here is how ‘smart money’ people thought and responded to the pandemic (including me, under John's guidance!).

Previous crises

The first thing we looked at was previous crises and what happened to some of the key economic indicators. For instance, the share market, unemployment rates and property prices. What did they do during previous crises and immediately after?

We started with the 1987 Black Monday stock-market crash — the first financial crisis John had been exposed to. Without notice, the stock market plummeted 25 per cent in one day, setting off a chain of bankruptcies and causing general mayhem. Investors quite literally jumped out of buildings rather than face their financial predicament. Forecasts were that property prices would also crash. Meanwhile, in the first five months after the crash, unemployment soared, peaking at 8.2 per cent in April 1988. Despite this, from 1988 to 1990, median house prices increased astronomically — by 45 per cent in Sydney, 53 per cent in Melbourne and 63 per cent in Brisbane. John, just 24 at the time, was on edge wondering what to do. His mentors gave him the same advice that he was now giving me.

‘Never waste a crisis; buy whatever you can,’ he said.

In late 1987, John did just that, buying his principal place of residence, as well as a significant development that would, in his words, ‘set him up for life’.

In 1990, there was Paul Keating's famous ‘recession we had to have’. This crisis saw unemployment jump to 11.25 per cent yet, in the main, house prices again rose, the trend only disturbed by short-term falls in Sydney and Perth, which experienced extraordinary growth in the four years prior.

In 2001, we witnessed the horror of the September 11 terrorist attacks. Like COVID-19, September 11 was not a financial crisis but a productivity crisis, with markets shut down and international travel grinding to a halt. For four years after, Australia's unemployment rose to 7.6 per cent, while house prices across all capital cities increased by 68 per cent.

Finally, the Global Financial Crisis of 2009 (that's the year it hit Australia — the impact elsewhere in the world was felt a year earlier). Unemployment again rose, this time from 4 per cent to 6 per cent, but in the following years (2010–12), house prices in Sydney and Melbourne increased by 19 per cent and 24 per cent, respectively. Brisbane prices increased by just 4 per cent but they had the double whammy of the 2011 floods. The Brisbane market would quickly catch up, increasing by 22 per cent between 2013 and 2016.

I’m not as knowledgeable or experienced when it comes to other asset classes, however the principle remains the same. Lean on experienced mentors, look for assets that will at least hold their value during a crisis, protect your cash flow, and try to take advantage of opportunities that will inevitably arise (where you can).

Collectively, these historical events confirmed that residential housing is incredibly resilient during a crisis. In fact, the data suggested it typically prospered amid uncertainty, with investors flocking to the relative security and safety of bricks and mortar. Additionally, because property is an illiquid asset, it is less susceptible to panic selling and subsequent dramatic drops in value. The data also suggested there is no correlation between unemployment rates and house prices.

I learned that the investment strategy laid out in this book not only holds up in times of crisis, but also that it prospers. The reason I like investing in property is simple: people must live somewhere and we have a growing population. Hence the expression ‘as safe as houses’ or, to my way of thinking, a relatively bulletproof investment.

Focusing on the facts

As the COVID-19 pandemic gathered momentum, Custodian (the investment coaching division of the JLF Corporation) started a webinar series, advising our clients that most of what they would read and hear would be inaccurate. We were able to take the emotion out of the frenzy, asking them instead to focus on the numbers in three areas that had meaning: logistics, timing and liquidity.

The insight

Property prices were predicted to drop from 10 to 25 per cent but, to the contrary, we believed the market would accelerate beyond COVID-19, due to economic stimulus. Officially, house prices around the country dropped between May and August — by a paltry 1.6 per cent on very low sale volumes — but by September they were up in six of the eight states. Come December, property prices were rising by a percentage point each month, back above their pre-COVID-19 highs, and finished the 2020 calender year up 2.6 per cent.

In contrast, the share market in Australia dropped by 36.5 per cent between 20 February and 23 March as investors panicked. The market recovered across the back half of the year but, as 2020 drew to a close, it was still some 8 per cent below pre-COVID-19 levels (and finished the 2020 calendar year 3.2 per cent down). Highly leveraged stock-market investors were caught out, having to stump up cash of their own when the total value of their portfolio dropped below a particular percentage of their borrowed funds. This was especially troublesome for some share investors who used leverage. The typical investor with $100 000 in shares and a 50 per cent loan was forced to come up with as much as $10 000 of their own cash to meet what is called a ‘margin call’. It gives me anxiety just writing about it!

Notably, the same financial blowtorch was not applied to property investors. Bank loans on property are traditionally repaid over 20 to 30 years. While repayments are made, it does not matter how much the paper value of the asset fluctuates. Irrespective of the merit of plunging money into the stock market, property repeatedly proves to be the most reliable, resilient and bulletproof form of investment.

Population growth and supply

Population growth and supply are the fundamental drivers of growth in house prices. In 2019, Australia's total population grew by 375 000 people. Some 38 per cent of that figure stemmed from a higher number of births than deaths, a trend likely to be accentuated in post-COVID-19 times. If anything, a health crisis contributes to a baby boom!

Overseas migrants and student numbers would be impacted in the short term but this would be partially offset by the return of expats. Pre-COVID-19, there were more than one million Australians living overseas; by the end of 2020, 400 000 expats had returned to Australia because of the pandemic, sending the housing market into a frenzy in the last quarter of the year. This ripple effect was not factored in by any of the doomsayers. Any notional drop in population numbers would be offset by a shortage of supply. Property listings (for sale) were down 20 per cent by September 2020 and construction of new housing was at a 50-year low, partly as a result of the 2018 Royal Banking Commission inquiry.

Affordability

Property prices can also increase if the overall cost of owning that property falls. Put another way, people will buy housing if they can afford it — an obvious driver of demand. In this respect, the federal government intervened to underpin confidence in housing. On 3 March 2020, the Reserve Bank cut its interest rate target to 0.5 per cent, then lowered it again to 0.25 per cent later in the month. Both were record lows, but in November we witnessed further reductions in official rates, this time to 0.1 per cent. As a result, by December 2020, a typical Australian mortgage holder was paying as little as 1.9 per cent interest on their home loan. To put that in perspective, in December 2020 a $1 million mortgage would cost an investor around $380 per week in interest, compared with $675 per week in January 2020 and $1250 in 2009 (during the GFC). In October 2020, Moody's Investors Service reported households with two income earners were shelling out 23 per cent of their monthly earnings on mortgage repayments, down from 25.1 per cent a year earlier. The last time housing in Australia was this affordable was in March 2009, in the aftermath of the GFC.

What's the lesson?

In a crisis, you need to carefully look at the numbers and find the opportunity. At first, it took my mentor to point me in the right direction, towards the relevant statistics and important trends. Investors want stability in troubled and uncertain times. As a naturally conservative and cautious investor, that was particularly important to me — you want your investment to be bulletproof. Most importantly, you need cash flow.

To some extent, you need to be able to hold your ground in a crisis until the pressure subsides and the opportunity presents. A crisis is when you can be most exposed to running out of cash — the oxygen of investing — so remember that people will always need a place to live, a reality rammed home during the height of the pandemic, when we witnessed extended periods of lockdown. While income from shares (dividends) was incredibly volatile and the big four banks slashed their dividends substantially (CBA by 31 per cent and Westpac by an alarming 82 per cent), rents remained stable. In Brisbane and Adelaide, they went up by 1.2 per cent and 1.4 per cent respectively during COVID-19. In Sydney and Melbourne, house rents dropped by 0.4 per cent and 1.0 per cent, compared with a 6.6 per cent and 7.6 per cent drop in rents on units during the same period, respectively.

On a personal front, my investment income remained relatively unaffected during COVID-19. I collected 100 per cent of rent on all properties and enjoyed the drop in interest rates, which allowed me to add a further two properties to my portfolio. My then partner, now wife, Hannah also bought an investment property — her first investment of any kind — using the savings we had allocated for our wedding, which was delayed during COVID-19. There's always a silver lining!

Incredibly, during 2020, I was able to realise one of my biggest goals — one of my ‘whys’. I worked closely with Mum to help her buy an investment property in the midst of the crisis. It is an amazing achievement, in light of everything she has been through, and knowing that she does not lie awake at night worrying about money brings me enormous relief and satisfaction.

None of what I have been fortunate to achieve could have been done without three things:

• the guidance of a mentor
• a stable and reliable cash flow
• the mindset to look for opportunity in a crisis.