Where is the property market heading amid the pandemic?

Although particularly pessimistic views are inevitable at any time, most commentators believe New Zealand house prices are unlikely to be significantly affected if the pandemic can be brought under control in June or July. OneRoof property commentator Ashley Church shares this view. He says this relatively optimistic outlook is based on a reasonable assessment of factors including current market conditions, the difficulty of buying and selling property under isolation restrictions, and the range of potential support measures the government and banks will continue to introduce over the coming weeks, rather than wishful thinking.

Although no one, from the government to medical experts, can say with certainty how the pandemic will develop in New Zealand or how long the nationwide lockdown will last, Ashley Church has nevertheless forecast property price trends for the period ahead. He sets out three scenarios to explore their likelihood and consequences for the market.

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Scenario 1

By mid-to-late April, when the provisional four-week period at Alert Level 4 ends, New Zealand has reported thousands of cases, but infections have peaked. Isolation requirements may then be gradually eased in areas that have reported no new cases for four weeks, provided residents do not travel elsewhere in New Zealand. As the outbreak has been effectively controlled, these regional restrictions would then be progressively lifted across the country. Although international travel bans would very likely remain largely in place, people would gradually be allowed to travel freely within New Zealand.

In this scenario, property markets in the first areas to have restrictions lifted would soon return to a steady, normal state, followed by the rest of the country. House prices would remain largely unchanged.

 

Scenario 2

The current compulsory isolation measures fail to stop the virus spreading, and case numbers continue to rise after four weeks of isolation, forcing the government to extend Alert Level 4.

A domino effect would hit the wider economy, with unemployment continuing to rise and many people facing the risk of defaulting on their mortgages. In this situation, more people would use the support measures banks have already introduced to make interest-only payments or defer all repayments for 6 months. The government might also act, using government guarantees to support a requirement for banks to allow a grace period for defaults, similar to some measures already operating in the rental market. If these support measures effectively reduce the need for owners to sell their properties, any impact on house prices would be very limited.

 

Scenario 3

The virus spreads rampantly through the community, the government can no longer protect us from infection, and an indefinite nationwide lockdown is imposed.

This is the worst-case scenario. Although it may be unlikely, if we were unfortunate enough to reach this point, New Zealand's property market would be in free fall alongside the entire national economy. The economic and social consequences would be more than we could bear.

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These forecasts suggest that under the most likely scenarios, 1 and 2, the overall situation would remain manageable, although the extent of damage to the market would differ greatly. Leading property company CBRE has also recently offered its professional views on the effects on individual market segments.

• Investors and owners

Properties involving close social interaction and high concentrations of people, such as hotels, retirement homes, traditional retail premises and shopping centres, and office buildings, would be more severely affected. Transactions could fall significantly, and prices would adjust. The spread between corporate borrowing costs and property yields could disappear.

• Developers

Construction projects could face delays and uncertainty due to factors including work potentially being forced to stop or face serious delays in the near term, councils suspending the issue of building consents, anticipated withdrawals of funds from financial markets, and interest rate adjustments. Future returns on development investment would also be affected.

• Operators

Over the longer term, operators with diversified activities, a relatively balanced financial position and strong customer relationships may be less affected. However, properties with fixed costs and/or direct exposure to this crisis, such as those in tourism, retail, resorts and education, as well as vulnerable institutions such as retirement homes and health services, would experience a rapid decline in net operating income.

• Retail

Whether in large shopping centres with a dominant regional position or neighbourhood retail shops, convenience stores, greengrocers and food outlets, retail tenants would probably find heavy short-term losses unavoidable. The longer-term impact would depend on whether customers' spending habits change after the isolation period.

• Warehousing

The decline of retail would increase demand for warehousing, in turn affecting prices at lease renewal. Meanwhile, employment law requires employees to be protected. If employees fear contracting the virus, labour shortages and rising costs could follow. Multi-year third-party contracts may therefore shield property owners from the impact, while operators would suffer losses from higher short-term expenses.

• Office buildings

The short-term impact on owners of traditional office properties would be relatively limited, as most leases are long term and major changes in tenant departures are rare. During lockdown, however, tenants can refuse to pay rent under clauses 27.5 and 27.6 of the ADLS lease, sixth edition, on the grounds that they cannot access the premises. Negotiations between landlords and tenants over rent reductions and deferred payments would therefore be crucial to limiting potential losses. Co-working spaces, which have grown rapidly in recent years, would suffer more serious losses, as tenants can switch to working from home relatively easily.

• Residential rentals and long-term rental apartments

In the short term, tenants may be unlikely to end leases early, as they would avoid moving during uncertain times. Working from home could, however, increase property maintenance costs for owners, while rents under new or renewed leases may need to be reduced because tenants face financial pressure.

 

The remaining length of the lockdown is therefore a direct influence on the market. Following the rules and staying at home will help us save lives and reduce economic losses.