With everything happening around the world right now with Covid-19, we thought you might find a couple of recent articles of interest in terms of our Property Market.
Eight factors that will protect NZ from worst of recession
Only two months ago it looked like our economy was going to grow by 2 percent and perhaps a bit more this year. It looked like the upturn in Auckland’s housing market and markets in the regions from July last year would also continue. But everything has changed in a record short period of time to the point where we are probably in recession right now and will continue shrinking through to the September or December quarters.
The ban on foreign visitors is the biggest hit to our economy coming from our part in global efforts to stop the spread of Covid-19. Inward tourism accounts for about 40 percent of all tourist spending in New Zealand and contributes just over 4 percent to our GDP whilst providing employment to near 165,000 people.
Many of these people are going to lose their jobs. Many will also lose employment in the entertainment and hospitality sector as we all engage in various forms of social distancing to limit our chances of both catching and spreading the new virus.
Clearly, with these impacts running through our economy, and people concerned about developments offshore, the outlook for our housing market has shifted. Will prices now fall, rather than rising as we were expecting just two months ago?
In tourism hotspots the answer is almost certainly yes. These locations like Queenstown and Rotorua have boomed on the back of a rise in visitor numbers from 1.6 million in 1999 to 3.9 million in 2019. In other regions the combined effects of weak tourism, consumer and business pessimism, a sizeable lift in the unemployment rate from the current 4 percent, and drought, will also probably produce some declines.
Finance Minister Grant Robertson announces the $12 billion rescue plan. Photo / Getty Images
In the main centres however, things may be less bad. Turnover will slow as always happens during a recession, and there will be downward pressure on prices. After all, during the Asian Financial Crisis of 1997/98 average NZ prices fell by 6 percent as the economy shrank 1 percent and the unemployment rate rose 1.7 percent to a 7.9 percent peak. During the 2008-09 GFC average house prices fell 11 percent as the economy shrank 3 percent and the unemployment rate rose 3.4 percent to 6.7 percent.
This time around the economy looks likely to shrink at least 1 percent and the unemployment rate rise at least 2 percent from the recent 4 percent.
But there are a great number of factors which will help insulate our main centres against the worst effects of the recession.
- Property owners have not been crushed recently and placed in a position of having to sell by high interest rates which in the past have preceded house price declines. Mortgage rates have been at record lows and are now headed even lower courtesy of the Reserve Bank’s aggressive easing of monetary policy.
- Housing debt grew by 90 percent in the five years leading into the late-2008 GFC. Growth for the past five years has been just 41 percent.
- Banks are likely to tighten lending criteria. But their capital bases and funding lines are not under threat to the same degree as during the GFC so the drive to curtail lending will be less.
- There is light at the end of the tunnel, though few in the West are seeing it at the moment. China has got its outbreak under control, emergency hospitals have been closed, and people are emerging from their homes while factories gear production back up – though there is still some way to go. Daily new infection numbers are also falling in South Korea.
- The long-term fundamentals for our housing market are unchanged. There are shortages in the major cities, many young people eager to buy, and many investors increasingly disappointed with term deposit rates (and maybe now more wary of volatile sharemarkets).
- The Government’s massive 4 percent of GDP fiscal support package (with more to come in the May 14 Budget) will help mitigate though not fully offset the weakness in our economy coming from Covid-19 effects.
- Listings are in short supply and there are reports that in the United States vendors are taking their properties off the market through fear of visiting potential buyers spreading the virus.
- During recessions people tend to move from the regions to the cities looking for work.
These factors do not add up to a positive picture set alongside the extreme short-term shock we are at the start of experiencing. But they do reinforce the need to make one’s property decisions on the basis of the many positive long-term factors I have striven to highlight since 2008. These include…
- Insufficient building of houses.
- Lack of construction of enough lower-priced new dwellings.
- Structurally lower interest rates boosting affordability and encouraging investors away from bank deposits.
- Good credit availability.
- High and still rising development costs.
- A shift up in net migration inflows over the past three decades.
And perhaps there is now one new factor to put in – at least temporarily. Kiwis were set to make over 3.2 million trips overseas this year. Now they won’t. Where will the saved billions of dollars go? Some will go on domestic holidays, some into savings, some on electronics, and some might go toward financing a new house or a property investment.
For housing, as for virtually all sectors bar healthcare, a recession means weakness. But the long-term fundamentals remain the same and one way or the other within a few months this recession will end – either with the virus being successfully contained and dying out, or passing through the entire world’s population.
We all need to focus on getting through to the other side of this global pandemic, protecting cash flows and our employees where possible, perhaps remembering these final few numbers. In the five years after the Asian Crisis average NZ house prices rose by 45 percent after rising by 24% in the three years preceding the recession. In the five years after the GFC average prices rose by 24 percent nationwide with Auckland ahead 58 percent, after prices rose just 14 percent in the past three years with Auckland ahead only 2 percent. Hang on in there is ultimately the message.
– Tony Alexander is an economics commentator and former chief economist for BNZ.
Should you buy a house during a pandemic? Answer may surprise
5:00 AM, 20 Mar 2020
By Catherine Smith
Those willing to enter the housing market now can benefit from low rates — and the wisdom of those who bought during the economic last crisis.
Real estate agents, property investors and mortgage brokers are sure that buyers will keep buying and sellers will keep selling in the weeks ahead, as the economic impact of the coronavirus works its way through.
This despite economists being divided on whether the slashed Official Cash Rate to the new record low of 0.25 per cent will mean banks keep lending and borrowers keep borrowing,
“There are really low interest rates, people are not under pressure to sell, we won’t see a sudden big drop in house prices,” says Squirrel Mortgages’ head, John Bolton.
“Property investors now have cash flow positive properties, so there’s no pressure on cash flow. Most households have dual incomes, so if one person loses their job, low interest rates mean it’ll be easier servicing the loan.”
Bolton points out that many people in the at-risk sectors such as tourism, hospitality or retail were not high home owners, so a spike in unemployment rates probably won’t affect rates of home ownership.
While he doesn’t expect people with term deposits in banks to switch to investing in property, nor does he see property investors quitting the market while their yields are so good.
“There’s no urgency, so that will keep house prices up,” he says, adding that while the spread of the Covid-19 virus might be short term, economic effects will linger.
REINZ expects bounce back
The chief executive of the Real Estate Institute of New Zealand, Bindi Norwell, says that while it is too early to understand the full extent of the impact of Covid-19, she does expect people to take a wait and see approach to the housing market.
“As a general rule, house prices tend to either hold or have a slight dip and volumes tend to fall,” she says, adding that during the Global Financial Crisis, while prices at first fell nearly 6 per cent, they were rising some months before the end of the recession.
A year later, by January 2010, median prices were up 9.4 per cent, $10,000 above January 2008 when prices started falling.
“[This] highlights that the market did recover reasonably quickly,” she says.
“The reality is that people always need to buy and sell houses – people might be moving for a new job or upsizing for family reasons, so we don’t expect the market to come to a complete stop.
“This time the use of technology may have a significant part to play in how the housing market can try and continue in a ‘normal’ fashion.”
Most commentators acknowledged the rapidly changing situation, expecting that revelations from the Reserve Bank later this week on regulatory measures that can be deferred, like the bank capital requirements, will ensure credit continues to flow.
‘Housing not driven by fearmongering’
UP’s head Barry Thom is upbeat, pointing to successful auctions – 17 of the last 19 auction properties sold under the hammer, including one on Tuesday – and crowds of anything from 10 to 80 people at open homes.
“The reality is that there are plenty of people who want to buy houses because interest rates are so low. It’s better than renting, affordability has never been better,” he says.
“People have to decide whether to be intimidated by the headlines, people are attracted to the fear and rage of experts with predictions. It’s not doom and gloom, if we stand back and look at the big picture, the long term. And the big picture is that interest rates are at a record low.”
Thom remembers the “talking heads” predicting after the 2008 GFC that house prices would fall, when in fact they firmed, as indeed, he says for earlier crises, from the 1987 share market crash, the earlier SARS and bird flu scares and so on.
“Houses are on a continual climb, so take a high level view, and not be driven by fear mongering.”
Thom says that most home buyers are in for the long term, five or 10 years or longer, so owners will hold on “through good times and bad.”
Investors will pick up their buying
Sharon Cullwick, a long-time property investor and now executive officer of the New Zealand Property Investors Federation, is equally optimistic.
“Any time is a good time” to buy, she says, but if banks improve the serviceability of loans or drop loan-to-value ratios, then buyers, herself included, will be out looking.
“I can go shopping. For me, it’s about serviceability. If the LVR levels change, then people are getting into investment. Young investors, or people able to buy their second homes, they’ll be growing to a few houses and to being a professional landlord.”
Thom too predicts sales in the under-$1 million price will fire, making a great opportunity for investors to get into rentals.
Cullwick does expect that some landlords will have to be sympathetic to tenants who may have jobs under threat. She’s observed that landlords won’t be quitting properties, as those who didn’t want to work with new residential tenancy regulations such as insulation, or ring fencing, have already gotten out of the market.
She is anxious that landlords are seen as businesses too, and will qualify for the government relief subsidies. The Government package announced Wednesday means that any employer, sole trader, or anyone self-employed, who can point to at least a 30 per cent decline in revenue, will be eligible for a major wage subsidy programme, of around $585 a week, for 12 weeks.
Expat Kiwis eyeing home again
Bayleys agent David Rainbow, who says he’s seen a lot of these cycles through the 36 years he’s been in real estate, says that in Sydney the market is just carrying on, and he expects the same here.
“It’s a bit like a bump on the head – the bump might last a day or so, but then we just carry on. There will be people buying homes to hold for the long term.”
Rainbow says that the sorts of high end properties he deals in is a particular kind of stock that rarely comes to the market, so buyers are waiting to buy a particular property and will move when it comes onto the market.
He’s been fielding enquiries the past couple of weeks from Kiwi expats in Australia, London and New York who are all, for different reasons, not just Covid-19, planning to come home. He thinks that compared to the GFC of 2008 this is more cautionary, with Monday’s border changes, but says that listings are still coming in and open home attendances are keeping up.
“Good real estate will still be in demand. People are just getting on with it.”
Ray White agent Nick Lyus agrees, saying that educated sellers will spot the opportunities, particularly as they will be competing with fewer homes on the market in the traditionally quieter winter months.
He even expects that once the travel restrictions are lifted, Auckland will have “a flock of Kiwis” who are currently working overseas coming back home with people fast-forwarding their plans and coming back to the “slice of paradise” sooner.
“Previously London and Hong Kong would have been more desirable places to live where money has been everything. Manhattan is so much fun but it’s not safe in a pandemic – just too many people.”
He says expats will revaluate their priorities, accept a salary cut and come back to a safer environment.
New Zealand Sotheby’s International Realty agent Pene Milne is also noticing a high level of enquiries from expats.
“The vibe I’m getting is people would rather invest their money to New Zealand.”
She says the last few months have been awakening for Kiwis living overseas who are planning to bring money back home. The pandemic is positive for real estate so far with sellers and buyers being confident about selling, Milne says.
“Anecdotally, due to Covid-19, if people are based in Europe or the US, they’d rather be home right now.”
Epsom’s Ray White agent Ross Hawkins says its business as usual despite the pandemic, again with high interest from overseas buyers who are residents in New Zealand.
“In a short term we have a virus, in a few months it will be gone and people around the world will be thinking ‘Next time it happens, where is the best place to be? An island in the Pacific with no neighbours.’ And we are it.”
He also thinks that people forced to spend a more in their house while self-isolating, or not travelling now, might be prompted to look at bigger living environments.
He also urges against a mindset of “sit and wait”, as once the virus slows down buyers will be competing against many other waiting .
“Those who are sitting on the fence and waiting to buy will be in a catch-up mode and we will get a buying frenzy, I imagine,” Hawkins adds.
South Auckland confident too
And it is not just agents in up-scale parts of the country who are still seeing market optimism. Ray White’s Tom Rawson, who has agencies from Manurewa to Manukau, says that people are still wanting to sell, and still wanting to buy.
“It’s still pretty good for investors, yields really work out now, and you’re not getting any money if you put it in the bank. And the rent vs purchase price all still makes sense.”
He points out that at whatever stage a market is in, there’s always a buyer – whether it’s investors who come back into the market after sitting it out, and he’s seeing five or more bidders at auctions for properties from $700,000 to $1.1 million.
A Harcourts agent based in Queenstown, Kirsty Sinclair, says the resort town is going through “interesting times” with one covid-19 case confirmed, two weeks after it hit Auckland.
But despite that, the owner-occupied property market is active.
“We have had some really strong sales last week from owner occupiers. I think what we will see is that investors will just sit back for the next few weeks and adopt the ‘wait and see approach’.”
However, it’s too early to tell how Queenstown market will be affected and Sinclair is hoping for a clearer picture in a few weeks.
New Zealand Sotheby’s International Realty agent Pene Milne says New Zealand property has always done well during previous global economic crisis.
“It’s been the pattern in the past and I suspect people are looking into how they might hold or invest their money, rather than the stock market. If they don’t have stability in a stock market, they’ll put money into property.”
She says 1987 and 2008 recessions were a different scenarios, but did indicate how well New Zealand deals with tough times, compared to other places.
“The number of enquiries I am receiving is significant for people who are looking to invest,” she says.
Lessons from the GFC
Auckland Ray White agent Ross Hawkins says in the last recession, sale volumes went down and picked up at faster rate afterwards.
“There were people who were waiting, and they missed out on opportunities. It’s a good time to make a change and think about how this might change the way you think about your living.
However, everyone is affected differently and might not be in a position to buy now.
“If you have tourism business your hands are tied but there are people who have sold all their shares over the last few weeks and now they are all cashed up and property is the safest place to put your money,” Hawkins says.
“Property is tangible, you own it, you can feel it and touch it – it’s yours,” he adds.
UP’s Barry Thom says: “Life goes on. This too will pass, and in the meantime, we’ve got to get on with it.”
“The reality is, we will come through this – we just need to give time, time,” says Norwell, adding that, like everyone else, REINZ will be reviewing the emerging ‘new normal’ constantly.
– additional reporting, Daria Kuprienko