Risks and opportunities for New Zealand property in the pandemic era

On 8 June local time, New Zealand’s Ministry of Health announced that the country’s last remaining COVID-19 case had met the criteria for recovery, officially bringing the number of cases in New Zealand to zero. Although imported cases subsequently appeared, they were well controlled, and the alert level remained at level one. This meant restrictions on social distancing and gathering sizes would be lifted, social and economic life would largely return to normal, and people’s work and daily lives would gradually get back on track.

New Zealand could be said to have won this battle. But, as in other countries, the sudden ‘black swan’ of COVID-19 inevitably had a huge impact on its property sector. The risks and opportunities shaping the property market are intertwined and constantly competing. No one knows which will dominate the future of New Zealand property.

“We don’t have all the answers, but you can still see the pace of change and the transactional investment opportunities arising as different types of property face sell-offs,” said Ryan Johnson, Bayleys’ national commercial director.

 

The virus has been beaten, but recession looms: is housing market stability only superficial?

New Zealand recorded its first confirmed case on 26 February 2020. After 103 days, all cases had recovered. New Zealand’s ‘team of 5,000,000’ worked together, earning global praise for increasingly stringent prevention measures, the highest testing rate per capita and an incredibly low death rate.

Alongside its determined efforts to keep the virus at bay, over those 103 days the New Zealand Government announced a series of plans to support the struggling economy:

On 16 March, the Reserve Bank announced an emergency cut to the official cash rate, reducing it from 1% to a record low of 0.25%;

On 17 March, the Government announced a major economic stimulus package worth NZ$12,100,000,000, equivalent to 4% of gross domestic product, including NZ$5,100,000,000 for wage subsidies;

On 24 March, the Government, commercial banks and the central bank announced that mortgage borrowers and small and medium-sized businesses whose incomes had been affected by the pandemic could apply for a 6-month deferral of principal and interest repayments. The Government and banks also announced a NZ$6,250,000,000 business finance guarantee scheme;

On 28 March and 15 April, the Government announced successive rounds of new measures addressing tax issues during the pandemic;

On 1 May, Finance Minister Grant Robertson announced that the Government would introduce interest-free loans to support small businesses;

On 14 May, Grant Robertson unveiled the 2020 Budget, themed ‘Rebuilding Together’, allocating a further NZ$50,000,000,000 to rescue the pandemic-hit economy. This brought total government spending related to the coronavirus pandemic to NZ$63,000,000,000, with around NZ$20,000,000,000 still to be allocated…

Over those 103 days, the New Zealand Government could be said to have managed both the pandemic response and the economy very well. A poll by New Zealand market research firm Colmar Brunton showed that 88% of New Zealanders believed the Government’s decisions in response to the pandemic were right, a higher figure than in the company’s research conducted over the same period in other developed economies, including the United States.

However, bringing the pandemic under control and achieving unity between the Government and the public does not mean the economic problems caused by the pandemic have also passed.

Infometrics chief forecaster Gareth Kiernan pointed out that New Zealand’s successful public health response should not be equated with victory in the economic battle.

“The Government’s wage subsidy scheme was an appropriate immediate response to the pandemic. However, it is currently only delaying, rather than preventing, the heavy economic cost of widespread job losses ahead. Once the Government’s wage subsidies and ‘mortgage holidays’ end in the second half of 2020, we forecast that, by the end of next year, New Zealand’s GDP will still be 4.8% below its size before the COVID-19 pandemic, and will not exceed its 2019 level until 2023. The economic recovery will be a long and difficult process, taking longer than currently expected.”

Turning to property, the latest report from global real estate services provider Savills showed that global property investment fell 33% in the first half of this year as the pandemic hit economies and disrupted transactions. With New Zealand also entering recession, Westpac still forecast that house prices nationwide would fall 7% during the year, despite the market’s steady performance in the first half. Infometrics also expected house prices to decline 6% by the end of next year, rather than the 11% initially forecast. Auckland Council chief economist David Norman said: “House prices will fall further, possibly by between 5% and 7% this year. Some financial commentators believe the decline could reach 15%. But most banks expect a fall of between 7% and 15%.” ANZ economists, for example, said the post-lockdown rebound in spending and market hype would not halt falling house prices, forecasting a decline of 12% this year.

Although professionals have not agreed on the size of the fall, they all see a future decline in house prices as inevitable. The apparent stability of New Zealand’s property market still needs to be tested over time; it is too early to say it is out of danger.

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Projects shrink and unemployment soars: is the property bubble about to burst?

“New Zealand could be among the first to feel the impact of a bursting property bubble as the economic effects of the COVID-19 crisis unfold.” Global economist and author Harry Dent Jr’s statement may sound alarmist. Yet it must be acknowledged that his predictions in the last century, including a 10-year slowdown in Japan’s economy and the Dow Jones Industrial Average reaching 10000 points, were ultimately proven correct despite fierce opposition and widespread scepticism—

Risk factor one: New Zealand may have a property bubble

Over the past few decades, New Zealand house prices have risen far faster than average incomes. A property or housing bubble typically develops as rapidly rising property prices reach unsustainable levels. During an economic downturn, properties lose value. In these circumstances, homeowners may owe more on their mortgages than their properties are worth, leaving them in negative equity. If they sell, they will receive far less than they originally paid.

“Among developed countries, Australia and New Zealand have high-end housing and property markets favoured by Asian migrants. But New Zealand does have a property bubble, just like California, Hong Kong and London. This is a huge danger: your house may ‘collapse’ more easily than you think,” Dent said.

He also said New Zealand’s property bubble was moving dangerously close to bursting following the pandemic’s outbreak. “In the United States, we have only 28% of our net worth invested in property. In Australia and New Zealand, that figure is 65% to 67%. That is dangerous.”

He said the world was on the brink of economic collapse, and financial asset bubbles could ‘return to reality’. Whether Dent’s latest prediction will prove correct, as his earlier ones did, is something only time can tell.

Risk factor two: a sharp contraction in project volumes

In an interview, Frank Xu, president of the New Zealand Chinese Building Industry Association (NZCBIA), said that before the pandemic, publicly funded projects accounted for 30% of New Zealand’s construction projects and privately funded projects for 70%. Following the outbreak, the value of privately funded projects fell 60% while publicly funded projects were expected to grow by more than 40%. Overall, the industry’s project volume was therefore expected to shrink 30% in the short term, leaving it at roughly seven-tenths of its former size, comprising 28% in privately funded projects and 42% in publicly funded projects.

Growth in publicly funded projects is largely based on government infrastructure spending. The NZ$50,000,000,000 Budget allocated NZ$3,000,000,000 to infrastructure, on top of the NZ$12,000,000,000 in infrastructure funding announced before the COVID-19 pandemic. In the long term, substantial government investment in infrastructure naturally benefits the country and its people, while major projects require large workforces and help create more jobs. In the short term, however, these government-led projects face practical obstacles to delivering rapid results: complex preparation and operational processes, long construction periods, substantial capital requirements and technical challenges. They cannot quickly ease the pandemic-driven contraction in projects.

The direct consequence of a sharp contraction in project volumes is more redundancies and unemployment. Senior economist Satish Ranchhod estimated that as many as 20,000 of the 250,000 construction-related jobs could be at risk.

After speaking with construction industry leaders, Newsroom journalist Dileepa Fonseka was more concerned that, as building projects were cancelled, postponed or delayed, many construction workers would turn their attention to Australia unless more was done to retain them. This concern is not unfounded. New Zealand has long faced a severe shortage of construction workers. Losing workers means losing construction capacity, making it harder for the industry’s skilled workforce to meet demand when economic conditions return to normal.

Risk factor three: high unemployment weakens home-buying power

Since the 2007–08 global financial crisis, New Zealand’s lowest unemployment rate has been 4.0%, recorded in the December quarter of 2019.

Stats NZ senior manager for labour market and household statistics Sean Broughton said: “Our survey shows that New Zealand’s labour market was strong before the country entered lockdown. Following a downward trend from late 2012, unemployment has remained steady at around 4% since late 2018.” He predicted: “The effects of the COVID-19 pandemic on the labour market, including unemployment, actual hours worked and underemployment, should be more apparent in the quarter ending in June.”

ANZ economists referred to labour market data released by the Reserve Bank, which showed that unemployment rose to 4.6% in the first quarter of this year, before the nationwide lockdown had begun. ANZ said businesses could use wage subsidies, cash reserves and loans to delay redundancies, but this was unsustainable for some. Infometrics economists expected New Zealand’s unemployment rate to climb above 8% before the end of this year as support schemes ended, peaking at 9.7% in 2021.

Auckland Council chief economist David Norman said: “After the bad news [the pandemic] arrived, Auckland’s unemployment rate rose sharply to 6%, and could reach between 8.5% and 9% by year-end. That represents tens of thousands of people out of work.”

Economic recovery will be harder in cities that rely excessively on aviation, tourism, services and retail, with little industry diversity. House prices in the heavily tourism-dependent Queenstown Lakes district, for example, have already fallen 6%. The disappearance of international tourism has hit both Queenstown’s economy and housing market, and unemployment can be expected to keep climbing.

High unemployment means a substantial drop in incomes, weakening people’s ability to buy homes. It will also leave 30% of mortgaged homeowners unable to keep repaying their loans. With people unable to afford homes as their finances tighten, and more homeowners forced to sell because they cannot meet repayments, the housing market could stagnate and enter a vicious cycle. Of course, this is the worst-case scenario, and risks and opportunities always come together—

Supportive policies and low interest rates: will underlying demand sustain the housing market?

Thanks to an effective response, New Zealand emerged from the pandemic earlier than anticipated, and the virus’s economic impact was weaker than expected. Compared with European countries and the United States, which remained mired in COVID-19, swiftly controlling the outbreak reduced the impact of lockdown and bought more time for economic recovery. This could be described as the greatest opportunity for New Zealand’s property sector, its wider economy and the country as a whole.

Government rescue measures, exceptionally low lending rates and the expected influx of returning New Zealanders will also provide significant support for the property sector.

Positive factor one: unprecedented government relief

Alongside increased infrastructure construction—a textbook government response to an economic crisis—the NZ$50,000,000,000 Budget planned to allocate NZ$5,000,000,000 to add 6000 public homes and 2000 transitional homes for emergency accommodation for homeless people over the next four to five years. Insulation upgrades for 9000 older homes would also receive NZ$56,000,000 in government funding.

The Government had previously committed to building 6400 homes and 1000 transitional homes. Following the NZ$50,000,000,000 Budget announcement, the total number of public and transitional homes funded by the current Government would approach 17000. Housing Minister Megan Woods described it as “the largest public housing construction programme in decades”.

Woods also said the $5,000,000,000 in public housing spending was significant for the construction industry and sent businesses a ‘strong signal’ to retain staff. REINZ commented: “This will not only create more local jobs, but also help ease some of the housing supply shortage.”

The NZ$56,000,000 for insulation would be delivered through the existing Warmer Kiwi Homes programme, with the subsidy for retrofitting insulation rising from 67% to 90%, providing further benefits for low-income households. Woods said the insulation programme would generate work for 90 businesses employing 1300 contractors, and 90% of the insulation they used was New Zealand-made.

Infometrics economist Brad Olsen also said: “The Government’s wage subsidies have provided relief for nearly 60% of New Zealand’s workforce and 71% of businesses. The range of cushioning policies has achieved the intended effect of softening the pandemic’s severe impact, also averting upheaval in the property market and keeping it stable.”

Finance Minister Grant Robertson said more support for housing would follow. “Further support for housing development and construction, including the private residential market, will be a key part of our recovery from COVID-19. My intention is that this will be a focus for further investment in the next stage of the fund.”

Positive factor two: historically low mortgage rates will stimulate the housing market

Although the COVID-19 pandemic has dealt a heavy blow to New Zealand’s entire property market and created considerable uncertainty, exceptionally low mortgage rates have fortunately provided a shot in the arm, keeping the market active. Very low interest rates also help lift asset prices, as demonstrated by the recent rise in New Zealand’s share market.

Westpac chief economist Dominick Stephens stood by his forecast that house prices would fall 7% between April and December this year, but said bank interest rates were so low that they could rescue the property market.

“Last year, we successfully predicted growth in the housing market. Most people thought house prices were already high and could not rise further. But we believed that was not the case: falling interest rates would push prices up. The fact that interest rates are now even lower is why I expect house prices to rebound quickly once we enter the post-recession environment, whenever that may be.”

Leslie Harris of the First Home Buyers Club also believed exceptionally low interest rates and the removal of loan-to-value ratio (LVR) lending restrictions were very attractive to first-home buyers. “We are seeing some first-home buyers seemingly getting interested again. If they have kept their jobs, a weaker housing market could make this a very good time for them.”

Positive factor three: returning New Zealanders and migrants will drive the housing market

With severe outbreaks in some overseas countries, compounded by pandemic-related job losses, many New Zealanders have chosen to return home.

David Nagel, general manager of New Zealand property valuation firm Quotable Value, said that although the housing market had cooled somewhat, open homes and auctions remained packed. Market stability depended partly on returning New Zealanders, who could fill gaps among buyers and tenants. “Many people need to find somewhere to live… This can offset the sharp drop in migrant numbers… They are certainly filling that gap at present.”

Auckland Council chief economist David Norman also believed the influx of returning New Zealanders could support Auckland house prices. He assumed that, of 20,000 people completing border quarantine, a third would settle in Auckland, providing a temporary boost to the city’s property sector.

Many people who previously wanted to migrate to other countries, or had no intention of migrating at all, have also begun looking at New Zealand following its success in controlling the pandemic. Visa processing in New Zealand remains on hold, with more than 100,000 applications awaiting processing. Despite the continued border closure, foreign nationals are still submitting visa applications.

According to Immigration New Zealand data, the number of Americans visiting its website in April this year rose 37% compared with the same period last year, while May saw an increase of 65%. In May, a total of 80,000 Americans showed interest in moving to New Zealand. Interest among British citizens also increased: in May, it was up 18.5% year on year, representing more than 30,000 people. Australian, South African and Indian citizens were also among the website’s more frequent visitors.

New Zealand real estate agents told TVNZ that they had also noticed a surge in foreign interest in buying New Zealand property, with more than a quarter of purchase enquiries coming from overseas. Underlying demand for housing will persist in the long term; the pandemic has only temporarily suppressed it.