It’s obviously been an unprecedented year for the economy and property market so far in 2020, and unfortunately we’re not out of the woods yet. Even so, we’ve been wary of some of the doom and gloom out there, because there are factors that could see a brighter property market outlook than some expect – e.g. look at the large inflows of kiwis returning home to live, potentially with equity to put to work in the housing market (but even if they go renting, that’s still extra housing demand). Similarly, housing affordability looks more favourable than it did when we entered the GFC, thanks to higher household incomes and very low mortgage rates this time around.
That said, there’s no denying that the economic outlook remains weak. GDP is set to fall by 6-7% this year and unemployment is expected to peak at close to 10% - a level not seen since the early 1990s. Meanwhile, the extra government debt that’s been incurred in recent months could prove to be a long term restraint on the economy, as we potentially face higher taxes to keep the debt servicing in check.
But as noted, it’s not all doom and gloom. For example, the NZ Activity Index recently developed by the Reserve Bank, Treasury, and Statistics NZ showed that economic activity in June weighted across a range of measures was only 1% below a year ago (despite no international tourism). That return to ‘normality’ has also been seen in the housing market, with agent appraisals, banks’ valuations ordering activity, new listings (both for rent and sale), mortgage lending, and property sales all improving and holding at seasonally normal levels recently.
What’s more, given that we entered lockdown with a low number of total listings available on the market, the return of buyers as we subsequently moved down the alert levels has seen the supply/demand balance remain relatively tight, in turn supporting property prices. That said, there were nevertheless emerging signs of weakness in our preliminary quarterly house price index for Q2, and given the downside risks to the economy, it wouldn’t be a surprise to see clearer evidence of house price falls later in 2020.
Indeed, the wage subsidy is now scheduled to end on 1st September and that seems likely to drive a ‘second round’ of job losses, which in turn will tend to undermine the property market. At the same time, the normal seasonal rise in listings will be upon us at that time too, which will be a test for the strength of demand. And in addition, mortgage payment deferrals could potentially have more or less ended by then as well. September’s General Election is another potential driver of property market uncertainty.
In terms of the recent buyer mix, first home buyers have remained a solid presence in the market, but the more significant shifts in market share have come from investors, both mortgaged and cash. To be fair, some of that rise in percentage market share (especially for cash investors) has been because of sharper falls in the number of purchases by other groups, who have had to meet higher standards to secure a mortgage (which isn’t an issue for cash buyers). However, there is also likely to have been some genuine ‘bargain hunting’ by investors, which has helped their market share to hold up. One factor that will have reassured some investors in traditional long-term rental properties is that the feared flood of short-term Airbnb-type holiday lets onto the market (as tourism flows collapsed) hasn’t happened to any great degree so far.
Overall, property sales volumes could only be about 70,000 this year, roughly 20% below 2019’s level. However, in terms of prices, we suspect that any falls will be smaller than in the Global Financial Crisis (GFC), when the national average fell by 10%. After all, we entered this episode with mortgage rates much lower and affordability looking better than in 2007-08, banks in a stronger position to continue lending, and generally speaking more households with more equity in their homes (due to the previous loan to value ratio speed limits). This means that the risks of negative equity are reduced. Our projection is that average values might fall by 5-7% in this downturn, which is obviously not welcome for property owners, but a benefit to would-be buyers.