Market Insight by Tony Alexander, independent economist - August 2020

24 August, 2020

New Zealand’s property market and its strong factors towards recovery

There is a fairly strict rule of thumb when it comes to activity in the real estate market, movements in house prices, and the state of the economy, which runs like this. When you have a recession, activity falls away and prices either fall briefly, or rise at a much slower pace.

We’ve had a recession in the NZ economy with economic activity confirmed as falling 1.6% during the March quarter and likely to have fallen another 8% - 14% in the June quarter – though we are still three weeks away from getting those numbers.

Housing turnover has definitely fallen. The best way to see that is not to look at one month as compared with a year earlier – especially given the unique impact of the lockdown from late-March through to early-May. Sales nationwide for instance, in April were down by 77% from a year earlier, but in July they were up 25%.

Instead, if we compare the four months to July with the same four months a year ago, we see that turnover is down by 22%. That is an outcome which seems unusually mild considering the recent weakness in our economy and widespread expectations of the current 4% unemployment rate soon doubling.

The same goes for house price inflation. In the four months to July, on average dwelling prices all around New Zealand were 8% ahead of a year earlier. But compared with the four months to March they were up only 0.2%. Surely house prices should have fallen quite a bit by now given the Covid-19 shock, and hasn’t it been commonly predicted that prices will fall by around 10% as they did during the Global Financial Crisis of 2008-09?

Back in March that was a common prediction – though thankfully my forecast was for falls averaging as little as 5%. I might still be right, but the way things are going even my optimistic view looks like being too pessimistic.

What’s been happening is that our housing market has been held up by some fairly strong factors. A big one is that this recession is mainly (but not entirely) leading to job losses for people on low and variable incomes in the hospitality, tourism, accommodation, and retail sectors. These generally younger people don’t usually own houses. Hence very few forced sellers are currently in the marketplace.

Second, we went into this crisis with record low mortgage rates, and they fell even further when the Reserve Bank cut their cash rate 0.75% to 0.25% in March. Now, the Reserve Bank are openly talking about the possibility of a negative cash rate next year which could see 1-2-year fixed mortgage rates fall below 2%.

Interest rates have fallen, may fall further, and are expected to stay low for many, many years. This is a clear factor behind the rush of investors into the housing market as soon as the original lockdown ended. First home buyers have also been encouraged by low rates, but also by the removal of Loan to Value Ratio rules (LVRs) and hopes that banks will soon accept much smaller deposits.

Third, courtesy of a huge turnaround in the net flow of Kiwis out of New Zealand which started in the middle of 2019 (at least six months before we had heard of Covid-19), the net immigration gain for NZ in the year to June was a record of almost 80,000 people compared with 52,000 a year before. Net migration each month may be near zero now, but we already have in NZ the migration gain we expected by the middle of 2021.

And finally, one more large factor. There is a shortage of houses in New Zealand which will get worse now that banks have pulled back from funding many new property developments and growth in housing supply will soon slowdown quite a bit.

There are still the negatives in play of weak offshore growth, the risk vaccines don’t work, ending of wage subsidies, and ending of the mortgage deferral scheme. But underlying fundamentals say that if house prices fall from these levels, the declines will likely be quite minor. And come 2021, a generalised upward move in prices currently looks like the most probable scenario as our economy recovers.