As the full impact of the coronavirus reveals itself around the globe with cases escalating daily, housing markets are inevitably caught in the crossfire.
New Zealanders buying or selling will be anxiously keeping an eye on what is happening overseas as this country introduces sweeping efforts to keep the virus at bay.
The New Zealand Reserve Bank’s dramatic drop of the Official Cash Rate to a historic .25 per cent is among measures designed to help people through the tough financial times ahead.
While the news is not great, it remains to be seen what effect this will have on the housing market.
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Across the ditch, Australia's realestate.com.au reported that the virus did little to temper Sydney’s surging housing market at recent hotly contested auctions.
Big prices were gained, with a luxury apartment with views over Lavender Bay selling for more than $1m over the already high reserve price.
In the United Kingdom, Forbes reported a drop in inquiry levels but that the UK marked had remained mostly resilient to the collateral impact of the coronavirus.
“Research conducted by the London-based estate agency Benham & Reeves found that on the whole buyers and sellers are returning to the market in confidence with 83 per cent of those surveyed responding they intend to continue with planned home sales or purchases this year despite the virus,” wrote property commentator Gary Barker last week.
The United Kingdom, however, has since announced social distancing and self-isolation measures.
How the New Zealand market fares remains to be seen. OneRoof canvassed economists and experts for their views.
What’s happening here?
We are entering a recession, or at the least a period where the economy is on the back foot, says ASB chief economist Nick Tuffley.
“That’s likely to make people a lot more cautious about purchasing at a time when they may have heightened concerns about their financial security.”
People’s behavior is beginning to change with some “social distancing” already, especially in the hospitality sector and to some extent the retail sector, and there’s the risk some people will be wary about going to open homes, he says.
“You’ve got concern over financial security. You’ve got concern over health and safety making people cautious, tempered slightly by lower interest rates, so for some period until some of those clouds disappear the housing market’s likely to be feeling a bit of short-term pressure.”
The price growth and increase in listings the housing market has seen in the last few months would likely halt, Tuffley says.
With a likely lift in unemployment, which may put pressure on some home owners to sell, what usually happens is if people don’t need to sell they won’t.
“That tends to help reduce the number of homes available for sale at precisely the time when people don’t want to buy.”
What is being done to help?
The Government’s assistance package will provide people with a lot of financial support, and banks will look after their customers, Tuffley says.
“We all want people to get through this as well. Those sorts of actions will minimise the financial stress that people will feel.
“I think that’s something we need to bear in mind. There will be a lot of effort to keep people afloat through this, collectively. It’s the Government and the Reserve Bank as well and banks standing by their customers.”
Should you panic?
Prepare, don’t panic, says Rupert Gough of the Mortgage Lab mortgage brokers.
Unlike the last big financial shock, the Global Financial Crisis of 2008, when “everything happened in one day”, Gough says this is a comparatively slower event so people have a chance to prepare themselves.
One way is to minimise expenses, Gough says, and while that won’t stop a recession, it will help protect people if they get made redundant.
Gough also advises homeowners build a buffer into their mortgages.
“My suggestion would be you set up your mortgage so the required payments to the bank are the minimum required but you are paying more than the minimum, so you’re building yourself a buffer,” he says.
“You wouldn’t just sign up for a 15-year mortgage if you could get a 30 year mortgage - but you would try and pay it as if it was a 15-year mortgage and then if things get back you can get that money back.”
First home buyers should heed advice to move hard-saved KiwiSaver deposits into a conservative fund if they are planning to buy in the next six months because the markets could go down further.
“You don’t want to turn up on settlement day short of money in your KiwiSaver.”
John Bolton, from Squirrel mortgage brokers, says the GFC is a reasonable proxy for what will happen. “There’s shock and scares then the fear subsides and people will get on with their lives, then stability and house prices come back and from then we’ll gradually go back to another cycle,” he says.
Will house prices plummet?
Most experts we spoke to say no, with a caveat of, well, it depends on how long and how bad the crisis is.
Gough hasn’t noticed a drop in mortgage applications but says he has had clients badly impacted - one is in tourism retail selling to Chinese tourists who are no longer coming, and another is a recruitment agency which has noticed businesses not hiring until they see the impact of the virus.
While some people might struggle with mortgages, Gough doesn’t think house prices will drop significantly.
The Reserve Bank’s OCR cut will help protect against a slump in the market and there are other things the bank can do, such as around loosening LVR restrictions and working with tax rates: “They haven’t fired all their guns at once.”
Tuffley says it’s hard to know if house prices will fall but says the recent strong upward momentum in prices is likely to give way to flat prices.
If prices did fall, however, that would likely be relatively short lived.
What about the regions?
Tuffley says there will be different regional aspects to the crisis.
People around the country will be cautious about going to open homes and about their job security. Auckland, a market starved of housing for some time, will have fewer new immigrant arrivals, but fewer people leaving as well so there are question marks over what will happen in our biggest city.
Some regions will fare better than others, Tuffley says.
“Tourism-exposed ones, like Queenstown and Rotorua, will be taking an income hit. Other areas that rely more on primary produce like dairy, meat and other foods are likely to fare relatively well because we are going to see that disruption with our Chinese-destined exports easing over time as China gets to a bit more normality.”
Benje Patterson, an economist based in Queenstown, says two thirds of the economy has been stopped in its tracks by travel restrictions which poses the risk of a hit on the property market.
There are many homeowners in Queenstown, for example, who have invested in Air B&B units. The prices for these properties are based on the returns the units make but with people not travelling to Queenstown the yields will be lower so the price buyers will be willing to pay for these properties will be lower, he says.
On the other hand, the lower interest rates for mortgage holders will be a huge help and will likely help keep up some demand for housing.
There may be some winners, too, further down the track, with Patterson predicting mortgagee sales for some, meaning others might be able to afford their dream house for less.
Will the housing market bounce back?
The housing market always bounces back, says Gough. “If you look at 2008 the timeline of that was probably two or three years before we knew if the banks were all going to fall over or stay alive.
“This one could be gone in two months - it doesn’t seem like we’re talking years of downturn.”
Tuffley says ASB economists certainly think the market will recover.
“I think it’s more a case of this is a period where for varying reasons people’s behavior is going to shift, whether it’s concern over financial security, whether it’s concern over physical safety and health, but against that what the fundamentals suggest is the housing market should be firm going forward.”
Cameron Bagrie, of Bagrie Economics, is less sure, saying: “I think the property market’s going to walk into a brick all in the next couple of months.”
The question mark is around movements to the unemployment rate, he says.
Lower interest rates stimulate the market but they only work when everyone’s employed and we will see a rise in unemployment over the next 12 months.
“The property market’s had one hell of a bull run over the last six months. Auckland’s fired up on lower interest rates but the biggest game in town over the coming months is whether you’ve got a job.”
Bagrie says if New Zealand gets an “orderly recession” it will still hurt but the collateral damage to the property market will not be overly large.
“But that is on the assumption we can contain this thing. What we do know is all the right things are happening. The Reserve Bank is acting aggressively. The Government is stepping up to the plate and they’re going to deliver a package that’s bigger than Ben Hur.”
