When Covid touched down in New Zealand in late February 2020, many expected the housing market to tank but instead Kiwis jumped in and went on a buying spree, driving prices up like never before.
That frenzy ended in 2022, but James Wilson, head of valuation for OneRoof’s data partner Valocity, says the swings and roundabouts of the Covid years has taught lessons about people’s obsession with property, including a changing conversation around how Kiwis fund their futures.
1. Low interest rates drove the market
The most obvious lesson has been the power of cheap money, Wilson says. Going into Covid, the country was already seeing historically low interest rates but after the virus arrived interest rates went even lower.
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“Once the interest rates dropped below 4% it was game on – every graph you look at just goes one way and that’s straight up.”
It didn’t matter what the government did, such as turning LVR restrictions on and off, the power of cheap money overrode everything and created a FOMO (fear of missing out) effect.
“It just carried on fuelling the fire until it’s suddenly not so cheap, or going the other way, and we see the market we’re in now, so that cheap money effect is very real as one of the learnings.”
Alongside cheap money there were closed borders, meaning migration effectively came to a halt, but that did not slow the market with domestic buyers driving the market. Even record numbers of homes being consented and built did not slow the market; Wilson says economic theory around supply and demand simply went out the window. While these factors were playing out around the world they were playing out on a big scale in New Zealand with first-home buyers also swept up in FOMO thinking they were mad if they did not jump in.
“The scale of that sort of hype I think was unprecedented. Even if you look at it on the back of other growth factors we’ve never had a rate of growth of that size.”
The scale of the cheap money and FOMO also spread to the regions and saw other centres, such as Wellington, catch up to Auckland a bit in price increases, Wilson says.
“You had an evening out of the market effect that we hadn’t seen in previous booms because it wasn’t such a cheap money effect. That was a new trend.”
2. Growth of the little guy
Despite people buying homes left, right and centre, New Zealand is not a nation of speculators, Wilson says.
“We weren’t buying and trading and flicking them off and making a three-month cash growth. Yes, that occurs in any market but the majority of people buying in New Zealand are longer-term thinkers, so they’re buying for either long-term investment as an investor, or if you’re a first-home buyer or owner-occupier you’re buying for a long-term occupation of the property.”
Data also shows a lot of the buyers were small investors and not “Scrooge McDuck” investors with 20-plus properties.
“It was mum and dad thinking it was a good time to use some equity and buying the second or maybe a third property.”
Valocity head of valuations says James Wilson says purchases by mum and dad investors were a large part of the housing market during the boom. Photo / Fiona Goodall
That are pros and cons to the rise of small-scale investors, Wilson says. “The good impact is it’s not that speculator making all that money and the rest of us missing out, it’s a spreading of the wealth into what I’ll call ‘mum and dad New Zealand’, which is where you want your housing wealth to sit.”
The flip side, however, is many of those people are not professional investors so there can be some naivety around what it means to own an investment property, such as how much a property costs to maintain and upgrade, and what to do if things don’t work out the way they planned.
“What happens if you were banking on positive yield but because of the cost, or the way the market’s moving, can you afford to ride that long-term? I think there’s probably some learnings to come.”
3. Policymakers take note
The rise of mum and dad investors has implications for government and local housing policymakers, Wilson says.
“If we’ve got a wee bit of a move towards smaller investors owning the stock, tarring them with the same brush as longer-term or institutional investors can have implications. You want to have policy that gets them on board with where you want to move the dial as opposed to painting them as the big, bad investor.
Grant Robertson and Jacinda Ardern in March 2021 announcing changes to tax laws for investment properties in 2021. The new policy was designed to "level the playing field". Photo / Getty Images
“It’s an important nuance and I think policy makers need to take the time, now the market is falling, to understand what data is out there, who does own our stock and what does that mean for our policy moving forward.”
The bulk of New Zealand’s rental properties are owned by smaller investors, Wilson says, and they’re important because they buy housing for people to rent.
“I think they’re an easy group to beat up on but let’s recognise that for the most they’re just mums and dads playing the game as everyone’s told them to; get a property, get some equity and buy the next property.”
4. Buying a home to increase wealth
Wilson says home ownership brings many benefits to society, from wealth to economic to health benefits, but in big international markets, especially in cities like London, young couples or first-home buyers often won’t consider buying a property where they live and work.
“They will often rent there, because that’s where their work is, and they will invest somewhere else. Sometimes they will be long-term renters and they will use other mechanisms for generating wealth, such as shares or equities and things like that.”
Covid has accelerated the “internationalising” of the New Zealand market in terms of the types of housing being built and the runaway prices seen in the first two years of Covid started to challenge New Zealanders about other ways to generate wealth for retirement.
“Does it have to be a house? A house as a home is one thing but it doesn’t have to be the investment path you’re looking to. The jury’s still out but I think we have seen more and more talk around that theme, which I think is a healthy thing.”
CoreLogic head of research Nick Goodall: "There are obviously other options out there. You don’t need hundreds of thousands of dollars to start a share portfolio any more." Photo / Supplied
Nick Goodall, head of research for CoreLogic, agrees that the conversation around homeownership has moved forward with younger Kiwis feeling shut out of the market turning to other forms of investment to provide them security.
Covid’s impacts have taken New Zealand to a new place of unaffordability and inequality that’s likely to stick around for longer and will impact Kiwis in the future, he says.
“There will be a greater proportion of people who may not be able to buy their first home for a lot longer, and some probably ever, because it has taken asset values so far away than where they were prior to the pandemic.”
With some giving up their dream of a first home, Goodall thinks the pandemic has probably widened the thinking around what kind of investments could work for retirement rather than such a dependence on buying a house.
“Maybe it’s accelerated that thinking, or the necessity of that thinking. There are obviously other options out there. You don’t need hundreds of thousands of dollars to start a share portfolio any more, you can access the likes of Sharesies.
“That will certainly become much clearer in the younger generation to have that as an option for saving for their retirement.”
5. Working from home
Another big acceleration has been the consideration of a move to the regions and/or working from home, with more people looking to buy a property with an office or potential for an office.
Sub-national population estimates in October showed Auckland, Wellington and some of the main centres had seen a decrease in population which could be evidence of people taking advantage of the work-from-home momentum the lockdowns brought, Goodall says.
“Whether it sticks around long-term who knows but it certainly looks like there is some data to back that up.”
Goodall says it’s taken a pandemic to not only get people taking stock of their lives but also to get bosses on board and accepting of the work-from-home trend.
“If you don’t offer flexibility then it’s pretty hard to gain and retain staff so it not only changed consumers but the bosses and the corporations as well.”
