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COVID-19 – A Property Market in Quarantine

20 Mar 2020

As we navigate these unprecedented times, QV Senior Valuer Paul McCorry advises calm as a collapse in property values is highly unlikely.

As 2020 started and news that COVID-19 was discovered far from our shores in Eastern China, the New Zealand market was pushing new boundaries. Only two weeks ago our QV House Price Index reported national values increasing 5.3% year on year. Auckland, Wellington and Christchurch were all showing positive growth in the last three months. Real Estate Agents were reporting open homes flooded with purchasers and a return to multiple offer scenarios, COVID-19 was only a footnote. What a difference a fourteen days makes. As our returning kiwis and visitors settle in for another fourteen in isolation – our market is set for its own quarantine period.

As cases spread around the globe and governments grapple with economic fallout, we take a look at the potential impacts for the New Zealand residential property market.

Depending on the severity of the outbreak, as well as the length and depth of the predicted recession; we are faced with uncertain times ahead.

To try and unwrap the implications, we discuss some of the key drivers and how they might play out in the coming weeks and months. There will be a punch, but where will it come from?

Banks and Monetary Policy

It is in neither a bank nor a borrower interest to see widespread mortgage defaults. Banks will be actively working on solutions to mitigate against this.

Our banks are well insulated from several years of effective LVR restrictions so it’s unlikely we’ll see knee jerk reactions, even if house prices were to take a short term hit.  

The Reserve Bank has used monetary policy very effectively over recent years, from stimulating the market out of the Global Financial Crisis just over a decade ago, to moderating the freight train of growth in the last 5 years.

After Monday’s announcement to slash the Official Cash Rate to an all-time low of 0.25%, banks have indicated rate reductions will be passed onto borrowers. While the reduced rates are set to stay for at least 12 months, with most existing home owners on fixed term mortgages the flow-on effects of the rate cut will take time to be realised.

In addition, as part of Monday’s announcements they confirmed that the requirement for banks to hold more capital on their balance sheets will now be delayed by 12 months, in turn freeing up additional bank funds available to lend. This is a positive move as kiwis with savings may look to take funds out of low earning savings accounts and push it towards housing.

Employment

Job security will hit New Zealanders hard, particularly in the forestry, tourism and hospitality industries. There is no avoiding this. The stimulus and wage subsidy package announced by the government on Tuesday afternoon will work towards alleviating some of the fear around a probable rise in unemployment and sick leave – but there is a long way to go. Everything depends on the gravity of the situation that faces us in the coming weeks and months. This uncertainty has the potential to erode confidence in committing to purchasing property.

This crisis of confidence could be offset by the interest rate reductions, but in reality whilst these may help with existing mortgages, it’s less unlikely to encourage first time players to enter the market.

Whilst some sectors could bounce back relatively quickly, the tourism industry and the network of supporting businesses face more long term challenges. Not least with the proposed job cuts at our national carrier Air New Zealand. It can be very difficult to turn the tourism tap back on once it has been turned off.

The flow-on effects will be felt on not only the hotel and motel sector, but also on the many residential properties in the Airbnb pool which will be fielding cancellations from their international visitors.

On the flip side Airbnb properties coming on line as regular rentals may alleviate this some of the upward pressure we have seen in the residential rental market in recent years, particularly in Auckland, Wellington and Queenstown.

Immigration and a Construction Boom

Strong net migration numbers have been a key factor in the current property cycle driving demand for housing.  However with the global travel lockdowns and the announced requirements for international arrivals to self-isolate, net migration will likely be significantly reduced over the next 12 months.

Immigration has also supported the current construction boom which has seen record numbers of new houses being developed, particularly in Auckland and some of the other main centres.  

With the ongoing influx of migrants new construction was barely keeping pace with fresh demand, rather than getting ahead of the curve. Assuming the free flow of imported materials which remains a question mark, this trend of high volumes of new builds is likely to continue unabated throughout this crisis. As a consequence it is feasible that we will get to an equilibrium between supply and demand sooner than expected. 

Depending on the depth and length of the downturn, this could eventually lead to an oversupply of housing in some locations, triggering a reduction of value levels.

The Stock Market

In recent times the ability to extract some of a Kiwisaver balance to put towards a deposit has been a great leg up for first home buyers. With superannuation fund balances taking a hit, savers will be more reluctant to extract this money now and suffer a loss.

That said, the share markets compete with banks and housing for investment funds.  With both stocks and banking likely to perform poorly over the coming 12 months, investors may seek to invest in the perceived ‘safe haven’ of housing in order to maintain financial returns.  This could actually help stimulate housing demand.

 

Affordability

Debt serviceability has not been a major issue in the New Zealand housing market for quite some time, even in our major centres. The main limiting factor has been affordability, getting your hands on a deposit.

Affordability has continued to hold back further significant gains in the Auckland market after such sustained growth earlier in the cycle and the lowering of interest rates will do little to change this given the already historical low rates on offer.

Should the uncertainty around employment in key sectors such as tourism, education and exports sustain, could demonstrating job security and serviceability to your lender become an issue? Absolutely.

What does it all mean?

Don’t panic. Over the last 5 years, our lending institutions have been prudent. Those seemingly unrealistic deposit levels prepared for exactly this type of scenario. There is a buffer and unless property owners are forced to sell, for example due to job losses – mortgages should be serviced. Options such as interest-only periods could also be explored for those close to the cliff-edge.

It is inevitable that sales volumes will decline as we head towards winter and as the wider economic slowdown sets in. Even on a practical level should self-isolation and social distancing measures become more widespread, attendance at open homes will diminish as people are simply unable or unwilling to attend.

The most likely scenario in the short term is that given the uncertainty, buyers and sellers will defer their decisions where they can, meaning less stock and less demand. As a consequence we are likely to see a flattening of existing house prices growth along with a sharp drop in the number of sales occurring. 

In the longer term it would not be alarmist to suggest house price declines are on the horizon if the slump continues towards the end of the year, this will be felt most specifically in locations dependant on international visitors or our export industry.  

A lot will depend on the severity of the outbreak and the measures introduced to curb the spread. New Zealand is not alone in tackling this issue, governments globally are struggling to keep their economies afloat. What we can say is that with a debt to GDP ratio of around 20%, the New Zealand government are in a much better place than many to guide us through the challenges ahead.

Author: Paul McCorry

For all media queries, please email our National Spokesperson Kirsten Magnusson, kirsten.magnusson@qv.co.nz or call 09 361 7216.

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