Only two months ago it looked like our economy was going to grow by 2 percent and perhaps a bit more this year. It looked like the upturn in Auckland’s housing market and markets in the regions from July last year would also continue. But everything has changed in a record short period of time to the point where we are probably in recession right now and will continue shrinking through to the September or December quarters.
The ban on foreign visitors is the biggest hit to our economy coming from our part in global efforts to stop the spread of Covid-19. Inward tourism accounts for about 40 percent of all tourist spending in New Zealand and contributes just over 4 percent to our GDP whilst providing employment to near 165,000 people.
Many of these people are going to lose their jobs. Many will also lose employment in the entertainment and hospitality sector as we all engage in various forms of social distancing to limit our chances of both catching and spreading the new virus.
Clearly, with these impacts running through our economy, and people concerned about developments offshore, the outlook for our housing market has shifted. Will prices now fall, rather than rising as we were expecting just two months ago?
Start your property search
In tourism hotspots the answer is almost certainly yes. These locations like Queenstown and Rotorua have boomed on the back of a rise in visitor numbers from 1.6 million in 1999 to 3.9 million in 2019. In other regions the combined effects of weak tourism, consumer and business pessimism, a sizeable lift in the unemployment rate from the current 4 percent, and drought, will also probably produce some declines.
Finance Minister Grant Robertson announces the $12 billion rescue plan. Photo / Getty Images
In the main centres however, things may be less bad. Turnover will slow as always happens during a recession, and there will be downward pressure on prices. After all, during the Asian Financial Crisis of 1997/98 average NZ prices fell by 6 percent as the economy shrank 1 percent and the unemployment rate rose 1.7 percent to a 7.9 percent peak. During the 2008-09 GFC average house prices fell 11 percent as the economy shrank 3 percent and the unemployment rate rose 3.4 percent to 6.7 percent.
This time around the economy looks likely to shrink at least 1 percent and the unemployment rate rise at least 2 percent from the recent 4 percent.
But there are a great number of factors which will help insulate our main centres against the worst effects of the recession.
1. Property owners have not been crushed recently and placed in a position of having to sell by high interest rates which in the past have preceded house price declines. Mortgage rates have been at record lows and are now headed even lower courtesy of the Reserve Bank’s aggressive easing of monetary policy.
2. Housing debt grew by 90 percent in the five years leading into the late-2008 GFC. Growth for the past five years has been just 41 percent.
3. Banks are likely to tighten lending criteria. But their capital bases and funding lines are not under threat to the same degree as during the GFC so the drive to curtail lending will be less.
4. There is light at the end of the tunnel, though few in the West are seeing it at the moment. China has got its outbreak under control, emergency hospitals have been closed, and people are emerging from their homes while factories gear production back up – though there is still some way to go. Daily new infection numbers are also falling in South Korea.
5. The long-term fundamentals for our housing market are unchanged. There are shortages in the major cities, many young people eager to buy, and many investors increasingly disappointed with term deposit rates (and maybe now more wary of volatile sharemarkets).
6. The Government’s massive 4 percent of GDP fiscal support package (with more to come in the May 14 Budget) will help mitigate though not fully offset the weakness in our economy coming from Covid-19 effects.
7. Listings are in short supply and there are reports that in the United States vendors are taking their properties off the market through fear of visiting potential buyers spreading the virus.
8. During recessions people tend to move from the regions to the cities looking for work.
These factors do not add up to a positive picture set alongside the extreme short-term shock we are at the start of experiencing. But they do reinforce the need to make one’s property decisions on the basis of the many positive long-term factors I have striven to highlight since 2008. These include…
• Insufficient building of houses.
• Lack of construction of enough lower-priced new dwellings.
• Structurally lower interest rates boosting affordability and encouraging investors away from bank deposits.
• Good credit availability.
• High and still rising development costs.
• A shift up in net migration inflows over the past three decades.
And perhaps there is now one new factor to put in – at least temporarily. Kiwis were set to make over 3.2 million trips overseas this year. Now they won’t. Where will the saved billions of dollars go? Some will go on domestic holidays, some into savings, some on electronics, and some might go toward financing a new house or a property investment.
For housing, as for virtually all sectors bar healthcare, a recession means weakness. But the long-term fundamentals remain the same and one way or the other within a few months this recession will end – either with the virus being successfully contained and dying out, or passing through the entire world’s population.
We all need to focus on getting through to the other side of this global pandemic, protecting cash flows and our employees where possible, perhaps remembering these final few numbers. In the five years after the Asian Crisis average NZ house prices rose by 45 percent after rising by 24% in the three years preceding the recession. In the five years after the GFC average prices rose by 24 percent nationwide with Auckland ahead 58 percent, after prices rose just 14 percent in the past three years with Auckland ahead only 2 percent. Hang on in there is ultimately the message.
- Tony Alexander is an economics commentator and former chief economist for BNZ.
