A broader perspective brings greater understanding, how Australians explain the pandemic’s vastly different effects on the two property markets

During the COVID-19 pandemic, New Zealand’s economy and property market appear to be following a different course from those of its close neighbour, Australia. Australia’s latest economic outlook suggests house prices there could fall by as much as 15%. Why, then, do New Zealand’s banks and Treasury forecast that house prices will continue to rise?

Is New Zealand luckier than its neighbour?

What is puzzling is that economic uncertainty, insecure employment, rising unemployment and slow population growth—all conditions that could damage the housing market—are equally serious in Australia and New Zealand. Yet Westpac’s latest analysis of the New Zealand market says: ‘We have revised our house price forecast upwards again and now expect an increase of 3.5% between March 2020 and December 2020.’

Since the Great Depression of the 1930s, New Zealand’s property market has never escaped unscathed from a serious recession. Nevertheless, Westpac maintains: ‘Our forecast for annual house price growth in 2021 remains 8%.’

Yet in the same week, the same bank’s chief executive told Australian federal MPs that Westpac forecast a 10% decline in Australian house prices from April. National Australia Bank forecast an even larger fall of up to 15%. 

By comparison, New Zealand really does seem very fortunate.

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Does Australia’s decline make more sense?

Without doubt, falling Australian house prices seem more logical. They reflect a normal decline in demand from owner-occupiers and investors, which was also the basis for New Zealand economists’ earlier projections of the local property market.

• Prospective owner-occupiers, concerned about job stability and security, are reluctant to rush into the property market and risk taking on substantial debt. If they lose their jobs and incomes, even the lowest interest rates will be of little help.
• Prospective landlords are also reluctant to invest in housing because rents are under downward pressure. As overseas visitor numbers dry up, large numbers of properties previously offered as short-term holiday accommodation through Airbnb or similar websites are moving into the ordinary rental market. While rental supply has surged, demand has fallen sharply. There are many reasons for this sudden decline, including a steep drop in immigration, fewer international students and many young people choosing to move back in with their parents because of financial difficulties.

New Zealand has no economic advantage

After comparing current economic conditions in Australia and New Zealand, Ross Stitt challenged several explanations circulating for the unusual strength of New Zealand’s property market:

Argument one: Bank interest rates are at historic lows.

Ross Stitt: The fact is that bank interest rates in Australia are even lower than in New Zealand. 

Argument two: New Zealand’s recession is milder than Australia’s.

Ross Stitt: In the second quarter of this year, Australia’s GDP fell by 7%, while New Zealand’s fell by as much as 12.2%. In the preceding first quarter, Australia’s decline was only 0.3%, compared with 1.6% in New Zealand. So far, the economic damage caused by COVID-19 has been much greater in New Zealand than across the Tasman, although Victoria’s lockdown since the third quarter began could have a relatively serious adverse effect on Australia’s economy. He also cited retail sales figures to try to understand prospective homebuyers’ sentiment. In the second quarter, New Zealand’s retail sales fell by 15%, compared with just 3.4% in Australia. 

Argument three: The New Zealand Government has provided effective fiscal support.

Ross Stitt: Such programmes can indeed cushion a recession and support property prices, but the New Zealand Government has allocated less fiscal assistance than the Australian Government has through comparable programmes. For example, Australia’s ‘JobSeeker’ programme, intended to help employers retain employees, has now been extended until March 2021, while New Zealand’s comparable wage subsidy programme has already ended.

An observer’s deductions

Why, then, is New Zealand’s housing market holding up better than Australia’s during similarly difficult times? As an overseas observer, Ross Stitt offered these deductions:

Answer one: It may be New Zealand’s tax system.

Unlike many other developed countries, including Australia, New Zealand has neither a comprehensive capital gains tax nor a transaction tax for property investors.

Answer two: It may be New Zealand’s lack of alternative investment options.

The entire New Zealand sharemarket has a market capitalisation of only about A$100,000,000,000. Each of three companies listed on the Australian Securities Exchange (ASX)—BHP, Commonwealth Bank of Australia (CBA) and biopharmaceutical company CSL—has a market capitalisation exceeding New Zealand’s total. The Australian sharemarket’s total market capitalisation is nearly A$20,000. If investors are concerned about the risks of foreign-currency investments, their options within New Zealand are relatively limited.  

Answer three: New Zealanders may simply be fixated on residential property.

After all, New Zealand’s property market has consistently performed very well. However, he rather ‘unkindly’ leaves New Zealanders with a question at the end of his article. As New Zealanders always say, ‘She’ll be right’—there will be no second major wave of Covid-19… a vaccine will arrive soon… international students will return before long… international travel will resume… international sharemarkets will prop up the economy… the US election will not trigger a crisis… and interest rates will not rise… But what if something does go wrong? 

An insider’s interpretation

As a local economist with a closer understanding of New Zealand’s market, Tony Alexander has consistently sought logical explanations for its property market’s ‘illogical’ behaviour. In his latest account, he has expanded his list of reasons for the current property boom to 25:

1. Low interest rates;
2. Expectations that interest rates will remain low;
3. Immigration reached 90,000 people last year;
4. More New Zealanders will return home when borders reopen;
5. It is easier for visa holders to remain in New Zealand;
6. Loan-to-value ratio restrictions have been removed;
7. Lockdown reduced everyone’s spending;
8. People cannot spend money on overseas travel;
9. Less new housing construction is expected;
10. Those losing their jobs and homeowners are different groups;
11. More time at home has made us pay greater attention to the quality of our living environments;
12. Property listings were scarce when lockdown began;
13. Prospective buyers who had been waiting on the sidelines have returned to the market;
14. Prospective sellers are reluctant to sell their existing homes for fear they cannot afford a replacement;
15. Fear of missing out on investment opportunities;
16. Household wealth has increased. The country’s residential housing assets are valued at 900,000,000,000, with total debt of 300,000,000,000;
17. Giving up travel dreams means the savings can be invested;
18. Large-scale money printing has raised concerns about inflation;
19. Mortgage deferrals have reduced forced sales;
20. New Zealanders’ household debt levels are now half what they were before the 2008 financial crisis;
21. Banks have been busy providing loans rather than selling mortgaged assets;
22. Share prices have soared since the end of March;
23. Many of the jobs lost were held by work visa holders;
24. The Government has stayed out of the house price debate because falling house prices would deepen the economic downturn;
25. Wage subsidies are still having an effect.