What does level four mean for the property market?

As a nation, we've experienced seismic changes over the past few days and weeks. It is essential to take stock.

As a nation, we've experienced seismic changes over the past few days and weeks. It is essential to take stock.

In this blog, we have tried to list the potential property market implications of Covid-19 as well as the Government and Reserve Bank policy response.

As expected, there's both negative and positive.

Historically, the NZ market has been resilient to most 'blows'. There have only been three material drops in property values over the past 30-35 years. These occurred early in the 1990s (the result was a 5% fall), again, late in the 1990s (the result was a 3% fall), and, lastly in the late 2000s (the result was a 10% fall). Data from the troughs in the first two episodes show that it took roughly one year for the previous falls to fully recover. The Global Financial Crisis-related rebound, however, did take over three years. Throughout the SARS epidemic, there wasn't any drop in prices.

The Reserve Bank is ready to kick off a quantitative easing (QE) programme, and has postponed the extra capital requirements for banks.

Quantitave Easing involves purchasing 'low risk' assets including government bonds to push down their yields, and encourage money flow into other sectors or asset classes such as shares, property, etc.

A $12bn fiscal injection to the economy by the Government (with the wage subsidy element in particular a key) is a direct support for households.

The economy will benefit from the extra health spending as well as the tax cuts for businesses. These support measures will be more relevant for the construction industry. It remains to be seen if the pace can be maintained as staff are required to self-isolate, and also as materials become more difficult to get.

Interest rates have been reduced again.

A record low official cash rate of 0.25% is set to stay put for at least 12 months. Fixed as well as floating mortgage rates are also at all-time lows.

There is no denying that this recession is serious.

A lack of tourism as well as people movement is particularly negative for New Zealand.

The unemployment rate is set to rise, and this will create mortgage repayment problems. Reassuringly though the starting point is starting low (4%).

Issues may be more pronounced in tourism heavy areas such as Queenstown and Rotorua.

Repayment problems could be quickly evident as a result of mortgage debt levels being higher than ever before.

Reduced housing affordability teamed with increased credit availability and larger mortgages show a price to income ratio of 6.2 for NZ as a whole (above the cyclical peak of 6.0 in 2007 and also above the long-term average of 5.6). The gross household income share that is required to service a typical mortgage looks less stretched (33% versus a long-term average of 36%), this is only due to very low mortgage interest rates.

Bearing the brunt of this recession would be the volume of sales. Property value growth is slowing but isn't necessarily turning negative.

Cautious buyers will not be able to attend auctions or open-homes. Many would-be sellers may feel that they should bide their time and list their property at a later stage. To avoid a fall in property values, a lot will depend on that balance of active supply and demand as well as the rise in unemployment being a moderate one. Businesses will want to keep their staff if they are able to. They will want to avoid facing redundancy costs as well as then having to re-hire.

A key support for property is the perception that many New Zealander's view it as a relatively safe asset class.

The recent share price collapse won't do anything to improve the kiwi attitude to this type of asset class. Recent months have seen mortgaged investors increase their presence in the market. Residential yields are often now better than term deposits. Property gives investors the control that they are looking for (as opposed to investments such as a syndicated property fund or shares). Due to the fact that Airbnb demand has dried up, many short-term rentals are moving back into the traditional long-term rental segment. The rise in supply will put a dampen on rents. Landlords will need to be careful about the risks of rental defaults if tenants do lose their jobs.

Although it’s a strange and challenging time for everyone right now, the real estate industry is still working. One thing remains true: every one needs a place to live, and that means that some people are out there buying and selling real estate, albeit with appropriate social distancing behaviors.