Why the future is not bleak for the housing market
Friday 3 July 2020
Economist Tony Alexander
Uncertainty continues to cast its shadow over the housing market but economist Tony Alexander has put together a list of reasons which offset the negatives and mean the market remains well-supported.
Record low interest rates
Investors are actively looking for returns better than what they can get on bank term deposits, of which they have too many having saved up extra money during lockdown.
Money saved not travelling overseas
These lump sums can go a long way toward building a deposit for a property whether to live in oneself or as an investment.
Money printing
Overseas experience post-GFC and as admitted by the Reserve Bank, quantitative easing places upward pressure on asset prices.
Migration not collapsing
Not only was there a net inward migration boom of Kiwis just ahead of lockdown, our compatriots continue to flood back in.
This raises the question, with 33,000 extra people beyond estimates in the country in April, and the net 2020 flow likely to be well above zero, could Covid-19 actually boost net flows for calendar 2020 above what they would otherwise have been?
Falling construction
Building businesses are currently busy finishing jobs. But with banks pulling back from funding property development the rate of growth in housing supply will slow over the next couple of years.
Low debt growth
We went into this crisis with low growth in risky bank mortgage lending. LVRs were in place from 2013, and banks have been applying high test interest rates for calculating debt servicing ability.
Job losses of renters
The majority (not all) of people losing employment during this crisis work in the generally low-paying sectors of hospitality, tourism, entertainment, and retailing.
Most will not own property. In addition, whereas in the GFC 4% of jobs in NZ were held by migrants on temporary work visas, the proportion this crisis is 8%. They are not property owners and many will find they have to leave New Zealand.
Investment demand
The Covid-19 crisis has not slashed willingness to take risks and invest. The opposite is happening with young people in particular flocking into the sharemarket. This investing attitude will likely naturally roll over into property investment also.
Working from home
This boosts housing demand because it is easier to remodel one’s own house to accommodating working remotely than to expect a landlord to do it.
Temporary downturn – a “new” factor
The health-induced recession of 2020 involves a temporary cessation of some economic activity, not decimation of our economic base.
Standard and Poors estimate that whereas three years after the GFC our economy was 10% smaller than it would otherwise have been, this time they think the decline will be just 3%. Three years after the GFC NZ average house prices were exactly the same (on average as in 2008).
With far less economic destruction this time the implication for where New Zealand house prices will be in three years from now is fairly clear.
Listings shortage
We went into this crisis with only 19,000 properties listed for sale compared with 46,000 heading into the GFC. There is a long queue of frustrated buyers hoping that the Covid-19 downturn will bring forth sellers so they can finally secure a property.
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