Given the seismic changes of the past few weeks and days, it’s important to take stock and in this blog we’ve pulled everything together in terms of the property market implications of COVID-19, as well as the policy response from the Government and Reserve Bank. Here’s our take on recent events, both positive and negative, in ten points:
1. The NZ property market has historically been resilient to most ‘shocks’
- There’s only been three material falls in property values in the past 30-35 years, which occurred in the early 1990s (5% fall), late 1990s (3% fall), and late 2000s (10% fall). From the troughs in the first two episodes, it took around one year for the previous falls to be fully reversed, but the rebound from the GFC-related downturn took more than three years.
- The market shrugged off the SARS epidemic, for example, without any falls in prices.
2. Interest rates have been slashed again from an already low level
- The official cash rate of 0.25% is a record low and isn’t set to change for at least 12 months; fixed and floating mortgage rates are also at all-time lows.
3. The Reserve Bank has postponed the extra capital requirements for banks and they also stand ready to kick off a quantitative easing (QE) programme
- QE basically involves buying ‘low risk’ assets such as government bonds to push down their yields, and encourage money to flow into other sectors/asset classes – e.g. shares, property.
4. The Government has stepped up with a $12bn fiscal injection to the economy, with the wage subsidy element in particular a key, direct support for households
- The economy will also benefit from extra health spending and business tax cuts.
- In relation to the property market, these support measures may be most relevant for the construction industry, which until recently has been running red hot. However, it remains to be seen if that pace can be maintained if/when staff are required to self-isolate and/or imported materials become harder to get.
5. However, there’s no denying that this recession is still likely to be serious
- So far, this episode doesn’t have the credit-crunch features of the GFC, but a lack of tourism and people movement is particularly negative for NZ.
6. It’s reassuring that the unemployment rate is starting low (4%), but it’s set to rise and that will create some mortgage repayment problems
- These issues could be more pronounced in areas like Queenstown and Rotorua.
7. Repayment problems could be pretty quick to bite given that mortgage debt levels are higher than ever before
- More credit availability and larger mortgages have gone alongside reduced housing affordability – our measures show a price to income ratio for NZ as a whole of 6.2, above the cyclical peak in 2007 (6.0) and also above the long-term average (5.6). The share of gross household income required to service a typical mortgage looks less stretched (33% versus long-term average of 36%), but that’s only because of ultra-low mortgage interest rates.
8. As a working assumption, sales volumes look set to bear the brunt of this recession, with property value growth slowing but potentially not turning negative
- Buyers will be cautious and some (due to social distancing) won’t be able to attend auctions or open-homes anyway; and at the same time, many would-be sellers will probably bide their time and list at a later stage.
- For property values to avoid falls, much will depend on that balance of active demand/supply, as well as any rise in unemployment being moderate.
- Note that firms will be keen to hold labour if they can, rather than face the costs of redundancies and then re-hiring.
9. A key support for property will also be the perception of many NZ’ers that it’s a relatively safe asset class
- Certainly, the recent collapse in share prices will have done nothing to improve the generally suspicious kiwi attitude to this asset class.
- Indeed, mortgaged investors have already been increasing their presence in the market in recent months, given that residential yields are often now better than term deposits and property gives them the control that they want (as opposed to say shares or a syndicated property fund).
- Of course, we’ve heard anecdotally that Airbnb demand has dried up and many short-term rentals are shifting back into the traditional long-term rental segment. That rise in supply will tend to dampen rents, and landlords will also need to be careful about the risks of rental defaults if tenants lose their jobs.
10. All of this is premised on a ‘fast’ resolution to COVID-19, say by June/July. But a longer recession would almost certainly see property values fall
Any readers looking for further detail on any of this may also want to look up some of our other recent coverage of the economy, COVID-19, and the property market:
- Key issues: Buyer Classification and COVID-19 effects
- Episode Five of the NZ Property Market Podcast
Finally, let’s hope that people already with the virus get well quickly and that everybody else escapes it entirely.