Downward pressures might push investors out

Thursday 21 May 2020

There’s a major housing market downturn coming and it’s likely to reduce the number of investors in the market, according to ANZ economists.

By The Landlord

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.”

Comments from our readers

On 22 May 2020 at 2:45 pm Winka said:
OK.....My previous comments on this forum are being proven by TIME as I suggested when I wrote them and "pictured" many many readers rolling their eyes in absolute disbelief. I wrote that most readers and non-readers would simply not be able to see life in any way different than what they had enjoyed for many years. Remember, I wrote about the "perception" people just became lulled into believing?g economy, created by the "cheating" people who drove it. You can recall how a large example of that was the huge number of buildings with new scaffold and white plastic in virtually all our towns and cities so that "remedial" works of a huge and mostly unnecessary cost were carried out under the instructions (stipulations) of local government (councils) who were instructed by central government so that buildings could have a Code of Compliance. Some of that work included placement of signs, using electricity 24/7 to remind us where the front door is! Also, concrete constructed buildings having hugely- costly fire-alarm systems fitted, with many of these re-hashed buildings actually having those alloy rectangle panels fitted which have a very low flash (flame) point, so low in fact, that they were the cause of the fire in the apartment building in London in recent years which resulted in the death of many of the occupiers. Someone said that those panels are banned in most of the northern hemisphere as a result of that fatal fire and are now only used in parts of the southern hemisphere.....I would have to assume at a rather large discount to get rid of the immense stockpile of them? When one local architect was quizzed as to "why he built-in the use of those panels here"....his answer was "well they are not banned here??" YET. So all this current reporting of the pending downturn was destined to happen, at least as far back as when I issued the statement approximately TWO years ago. I added to my written warning back then that this event was absolutely sure to happen (by 2020), and only required a catalyst to fast-track it. No....you are correct, I did not predict Covid-19 as the catalyst, as of course no-one can claim to have accurate;y predicted. What I suggested back two years ago was that it may be a form of "mushroom-cloud" war with North Korea, or possibly Iran, or here is where I got close,... "a huge Ebola outbreak round the world?" Close with that last pick huh? Just a few weeks ago, our PM is quoted as suggesting that "they are going to have to consider reducing or even removing much of the unnecessary regulation and compliance that had been thrust upon different sectors............... (eg; construction...and finance)" in order to assist the pending necessary support for at least part of the growth that is going to be required economically to grow us out of the pending doom" If you missed that important comment, you should be able to see a re-run on one of those daily broadcasts while we were in levels 4 and 3 lock-down. Additionally, Messrs Twyford and Parker made supporting statements on this forum along with others. You can recall that I also stated that the aftermath of the 'health' aspect of this Covid-19 thingy would tend to be the first hurdle, however the big one would be when the economic aftermath kicked in. I wrote that this is not liable to be a recession.....and that it would be more serious than that.....a depression. and that most people do not really understand the difference between a recession and a depression. A recession is sort of what was experienced in that GFC event just over a decade ago. A depression is explained as where there are TWO or more consecutive quarters of negative GDP growth. We are nearing the end of the second one now. Let me make it clear that I do not write my newsletters to make people angry, or negative, even though several may think so? It's just apparent that whenever some people are warned that there is a bus roaring down the road that they are crossing, and even if you point to the big bus and yell out your warning, lots of people still get wiped out..!? Now...how do I claim to be so good at this? It is with the assistance of a very small number of learn-ed and proven colleagues who I have continued to communicate with for literally decades, right through my professional investment-planner and fund manager years, and with a track record nearing 100%. In fact one of these colleagues made a brief and very informative (video) appearance on one of our NZ breakfast shows just a couple of days ago. Watch the replay I would advise, .....whether you saw it or not. As I wrote in one of my previous letters here, "we aint seen nothing yet, and time will be the proving factor." Even the ANZ is supporting the same views.....now.

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