ANZ chief economist Sharon Zollner
Covid-19 has made for a reduction in property listings and less sales activity and most commentators anticipate this will impact on the market.
In ANZ’s latest Property Focus report, the bank’s economists reiterate their view that the impact will be significant, with softening demand becoming clear over time and a big drop in prices.
While they note the data will be all over the place in the period covering lockdown and the easing of restrictions, they are picking a 10-15% fall in house prices over the year, compared with a fall of 8-10% in GDP.
Further, they see downside risk to their forecast as the housing market usually responds more to downturns in GDP than they have assumed and this means there is a risk of an even greater fall, they say.
“With the virus in retreat in New Zealand, downside risks have receded slightly, particularly if the Reserve Bank provide more stimulus than previously assumed.
“We don’t think the Reserve Bank can prevent house prices from falling double-digit, but they may be able to support a faster recovery. Nonetheless, downside risks remain, particularly if financial market jitters were to lead to a tightening in funding markets and credit supply.”
They say it will take some months for a weaker trend to be evident, but a number of factors will weigh on housing demand and lead to a significant downturn in prices, with some regions more affected by this softening than others.
The regions most at risk are regions that are significantly exposed to international tourism, that tend to attract new immigrants and students from overseas, and that have seen rapid increases in prices.
Working from that premise, the most vulnerable regions look to be Queenstown-Lakes District, Mackenzie, Kaikoura, Westland, Taupo and Thames-Coromandel.
Rents will also be affected by lower demand and reduced ability to pay, the ANZ economists say.
“More supply coming on stream due to short-term rentals sitting vacant will also see the supply-demand balance shift and put rents under downward pressure.
“This will become clear as new tenancies are entered into and, in some cases, where tenants negotiate down their rents to a level they can afford. Landlords in some regions may not have much negotiating power, given the increase in rentals available.”
It is this factor which could determine the number of investors who stay in the market.
ANZ’s economists say that although the removal of LVR restrictions ostensibly gives investors more options, they will now have to deal with more problems in finding tenants, the prospect of lower rent, and a higher risk of rent arrears.
“For this reason, we may see the proportion of investors in the market reduce a little, and the share of owner-occupiers could increase as some first home buyers take the opportunity to enter the market.
“This would see the recent upward trend in the share of new lending to first home buyers continue, even if the dollar amount falls.”
However, the commercial property market is likely to see an even greater impact from the Covid-19 prompted downturn, the economists add.
Not only is it likely to be affected by lower rents, falling prices and credit constraints, but it is particularly “cyclical” (which means it is very affected by cycles in GDP and incomes), they say.
“This is because there is a link between business activity and demand for commercial buildings. Additionally, some participants in this market take on more risk.
“Riskier ventures may be more vulnerable to asset price falls, exacerbated by the fact that they are probably also more likely to come up against credit constraints.”