According to the CoreLogic QV April 2020 House Price Index results out today, momentum in the property market continued right up to the level four COVID-19 enforced lockdown. What’s less clear is how property values have performed through April. With sales activity stalling through the month, we won’t get a reliable measure on home prices until activity resumes under the more market friendly level 3 restrictions.
Technically, property values across NZ grew by 7.1% in the year to the end of April 2020 demonstrating strong market fundamentals prior to the COVID-19 disruption. For Auckland the annual growth rate was 4.5%, while Dunedin remained the main centre with the greatest momentum of 20.7% annual growth.
With the real estate market once again open for business, the focus now turns to the reaction from owners and would-be owners of property. Will there be a significant lift in listings as owners look to reduce their exposure in a weakening economy? And how will each of the regions perform, given the varied impact to different industries from shutting the economy down for almost 5 weeks?
Early signs of pre-listing activity for the property market are encouraging, with appraisals generated by agents more than doubling in the last week (albeit from a low base), but there will still be a small number of properties available for sale in the very short term. A lack of available supply had previously been a strong contributor to increasing property values around much of the country in the first quarter of 2020, and with very few new listings coming to market, choice will remain limited for those buyers still wanting to purchase.
While property listings are likely to be in short supply, demand for property will also be reduced due to a hangover in higher unemployment, lower household incomes, continued conservative bank policy and a significant dent to confidence. A large portion of prospective buyers are likely to hold off, or reconsider such a significant financial commitment in uncertain times.
A lack of both buyers and sellers could lead to a price stand-off as prospective buyers sense a re-balance of power in their favour, and consider the likelihood of price falls in the short term. Vendors will then be faced with the option of selling at a reduced price or holding on and hoping things improve.
CoreLogic Head of Research, Nick Goodall said “The tipping point for vendors selling at a reduced price will be sped up by the uncertainty surrounding the market, their own financial situation and of course a lack of buyers”.
Demand for property will vary around the country, and areas which had very strong growth leading into the COVID-19 health crisis, may have some pent up demand from those who couldn’t buy previously. Dunedin (20.7% annual growth), Whanganui (32.8%), Gisborne (23.6%) and Invercargill (20.6%) are notable examples of this, however the key for this to remain relevant will be how the local economies fare through restrictive trading practices through to a longer term recovery.
From that perspective we know Queenstown is more vulnerable than anywhere, with its heavy reliance on the tourism industry. Indeed, according to Infometrics, over 17% of Queenstown’s GDP is supported by the accommodation and food industry, with a further 5.9% from arts and recreation – two sectors likely to feel lasting effects from the current crisis. Alongside an already weakening property market (1.9% annual growth) and a restrictively high average property price of more than $1.2m, the Queenstown market looks particularly vulnerable.
“The likes of Napier/Hastings and Invercargill, with a broader base of economic activity as well as a reduced exposure to the sectors most impacted by the economic shock, may mean the property market holds up better.”
Longer term, the impact of migration has also been a key factor contributing to property values increasing, adding demand to both the rental and owner occupied markets.
It mustn’t be forgotten that a significant proportion of that migration is New Zealanders – both not leaving the country and those returning home. Indeed, for the first time in 20 years the net flow was actually positive at the start of 2020. This is a considerable difference to the long term trend of roughly 20,000 net out-flow that may help to cushion the impact of migration pausing for the foreseeable future.
While the number of foreign migrants to NZ will reduce, we may see an even larger number of Kiwis return home over the coming year combined with fewer leaving.
“There are reports of up to 1 million New Zealanders living overseas and with early signs of success of the lockdown here (no new cases of COVID-19 reported on Monday) the appeal of NZ as a place to live will further strengthen. This will include for foreigners as well as returning Kiwis, once the border restrictions are loosened.”
It must be noted that Government stimulus policies continue to evolve, with recent announcements including confirmation of the temporary removal of the loan-to-value ratio restrictions, interest-free loans being available for small businesses and an extension to the Business Finance Guarantee scheme. Finance Minister Grant Robertson will make his pre-budget speech this Thursday (7 May), before the final budget is released a week later. A strong focus on budget initiatives aimed at reviving economic activity is expected.
In terms of the support already provided by the Government, Reserve Bank and the banks themselves, it is however important to recognize that most is only temporary, and there will be another fork in the road in about 5 months’ time.
“In the first 4 weeks of lockdown ANZ had already transitioned a total of 7% of their customers to more favourable terms for their mortgage. When these terms need to be reviewed many people may have to re-evaluate their financial situation and that could mean needing to sell property. Stressed sales aren’t really good for anyone though, so the hope will remain that our economy is getting back on track by then and certainty and confidence have lifted.”
Finishing on a positive, Mr Goodall added “Aside from uncertainty for those that are relatively unaffected personally, they will need somewhere to invest their money, and will eventually be thinking about future retirement again. From that perspective, the physical nature of property will still appeal, especially in comparison with other investment options which could arguably have more uncertainty surrounding them and/or offer very low returns.”