The New Zealand property market had been strengthening over the first quarter of 2020, but of course the alert level 4 lockdown introduced in late March then saw the market dry up. From Tuesday, however, activity should rebound.

Over the first couple of months of 2020, the property market had been strengthening, with sales volumes rising and value growth accelerating, notably with Auckland and Christchurch turning a corner. However, from the level 4 lockdown on 25th March the world has obviously changed and the property market has largely shut down. 

Real estate activity will start to recover again as we (hopefully) move back down through the alert levels over the coming months, but the recession and rising unemployment rate both point to a much more subdued property market than otherwise would have been the case. Our working assumption is that sales volumes are 15-20% lower in 2020 (about 70,000) than they were in 2019 (about 85,000).

In terms of the economic backdrop, the outlook is tough. GDP is expected to fall by about 6-7% this year and the unemployment rate to more than double from 4% to even as much as 10%. However, the size of the government support package (more than $20bn across wage subsidies, wider fiscal package such as extra health spending and business tax changes, and business finance guarantees), the measures taken by the Reserve Bank (official cash rate of 0.25% for the next year at least, delaying of extra capital requirements for banks, and quantitative easing), and support from the retail banks (such as mortgage payment deferrals) are all reassuring factors.

For the property market, ultra-low mortgage rates are a key factor and it would also appear that, by contrast with the GFC where the banks had to toughen up on lending, credit conditions should remain relatively supportive this time around for people with income and the willingness to borrow. At the same time, listings levels were very low heading into lockdown, so the supply/demand balance could still provide some support for prices over the next few months.

Once we move into the second half of the year, however, deals that were deferred during lockdown will presumably have been finalised (or abandoned) and the ‘true’ market will become clearer. As noted above, the level of activity is likely to be pretty subdued as would-be sellers just sit tight where they are and active buyer demand also declines, partly due to higher unemployment.

In the months prior to lockdown, our Buyer Classification data had showed that mortgaged multiple property owners (MPOs) – or in other words investors – had been providing a lot of the momentum for sales volumes. Factors for this included low returns on other assets (e.g. term deposits), as well as the control that a property investment can provide (e.g. to choose tenants, when to renovate etc), and the perception that it’s a ‘safe’ choice in these uncertain times. However, as unemployment rises, rental returns may come under some pressure and it’ll be interesting to see if investors’ appetite for property can be sustained. Queenstown in particular is one area that could be vulnerable to a rise in selling by investors – some of whom would have been banking on continued profits from letting out their property on Airbnb.

Meanwhile, first home buyers (FHBs) had also been holding on to a solid market share prior to lockdown. But now with KiwiSaver balances reduced and hence property deposits also affected, they may struggle to access the market as readily as before. That said, any falls in house prices will obviously be of benefit to people who are aspiring to make a purchase. And on top of that, although the RBNZ’s proposals to scrap the loan to value ratio rules for at least a year may not necessarily be a game-changer (e.g. because banks will still be cautious about income/expense testing and serviceability), reduced deposit requirements will still at least benefit some buyers.

Overall, it’s hard to draw firm conclusions just yet about the current state of the property market, because little data is available for the level 4 lockdown period over April. The necessary data will start to be available from early May, but especially when it comes to sales/activity indicators, the volume of data will be low. In other words, it’s “wait and see” mode at present and we’ll measure the market against the pre-lockdown baseline.

It’s at least reassuring that the property market went into lockdown in a strong position and that real estate is more illiquid than the sharemarket (for example), so tends to react less to every gyration in the economy and financial markets.

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