As Covid-19 shockwaves continue to ripple through global and local property markets, it’s easy to panic.
Our latest valuation figures, in the interactive below, show suburb values on March 25, just before alert level 4 restrictions came into effect, and are our new benchmark, against which we will measure future market activity and gauge where house prices will land post-Covid-19.
But the figures by themselves won't mean much without context. OneRoof puts the questions that matter most to James Wilson, valuation director for OneRoof’s data partner Valocity. In the Q&A that follows the interactive, Wilson says keeping a cool head and looking at the emerging statistics is vital, because good data is the best way to see how your own neighbourhood is faring.
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OneRoof: How do you measure the real estate market in a period of lockdown?
Wilson: During the month-long lockdown there were very few house sales, and typically we use house sales and market activity to determine property values. But the lack of transactions during April doesn’t mean property values fell off a cliff overnight. It just means the market has ground to a halt. There are a raft of other metrics you can look at to get a wider picture of the property market. What people tend to do during a time like this is fall back on data sets that give a good indicator as to what market participants might be thinking. Business or consumer confidence surveys are often looked at when there’s a lack of sales evidence. Other economic indicators are important to consider, but given the lockdown was an unprecedented event, the key message is you really can’t accurately measure a property market until it reopens.
What are the figures Kiwis need to track now that the lockdown is lifted and we're heading into alert level 2?
Over the next few weeks and months there will be a lot of scary real estate numbers that will make the news. It is now more important than ever to understand what those numbers are saying and what they are not saying. The first important set of figures to come out will be the country's median sale price, which will measure what properties are selling for post lockdown. Other important metrics to consider are the number of properties that have sold and the number of properties that are being listed for sale. How properties are being sold - auction, tender, fixed price - will also be a key. On top of that, there are a raft of economic and other financial metrics, such as interest rates, availability of credit and GDP.
What's the difference between median value and median sale price?
The median sale price looks at every property that has sold in the period you’re looking at so represents the mid-point of what sold. It’s heavily influenced by the nature of what is selling. For example, if you had five properties that sold for $1m and then one property that sold for $10m, it would skew the median sale price upwards. We know we’re going to have a period of lower sales volumes so the impact, or the volatility, of median sale price is made worse by low sales volumes. If you’ve only had 10 sales and they’re all low then it’s going to look and feel like there’s a massive drop away in median sale price but in reality it just reflects the fact that there used to be 100 sales. It can be a very volatile statistic. Median value generally looks at a wider range of sales and a wider time period. It also looks at what has sold but it breaks that down into what is the nature of those properties, and then it relates that to individual properties in that location. It’s generally a far more robust way to measure an actual market movement and is less impacted by the nature of what is selling.
For example, post-GFC it looked as if the median sale price dropped only slightly in some locations and went up in others. But a closer inspection of the figures showed that while higher value properties were selling there was a big drop-off in properties at the lower end. Investor-owned properties just literally dropped out of the market overnight. The markets were still heavily impacted – it just looked and felt like from a median sale price point of view that wasn’t the case.
What about sales volumes? Are those something Kiwis should keep an eye on?
Absolutely. Sales volumes are one of the most important metrics when you’re looking at a property market, but they need to be seen in context. If sales volumes suddenly drop away, that's not necessarily a sign the market is dropping in value. What it may tell you is that sellers are showing caution at a time of uncertainty. It’s also important to look at what property types are selling and where. The why is also key. For example, post-GFC people were wary of committing to a new build so there was a drop away in those sales volumes, and that was potentially an indicator of more pain to come.
If there are no sales in a particular suburb or region, will that affect property values of homeowners living there?
Fewer sales or no sales don’t automatically spell down. You can’t sit back and assume your property has gone down purely because there have been no sales. A key thing to consider is what might be forcing down values in your area, because the drivers to support value levels within our key urban markets are still pretty strong. We’re going to have even lower-than-ever historic interest rates. We’re going to have banks that are still pretty willing to keep lines of funding open. In theory, from that point of view there’s nothing that would be forcing homeowners’ values down. Of course, the loss of a job or income for a period of time could be an impact, but if you haven’t lost your job or income and can afford to keep paying the mortgage then what does a drop in value mean to you? Probably nothing in the short term. And if you see stats that show the median sale price in your location has gone down, it doesn’t mean your individual property value has gone down. It might just be reflective of lower-priced properties now selling in your area, whereas before Covid-19, higher-priced properties were selling.
How will we know the housing market is back on its feet?
Sales volumes returning to pre-Covid-19 levels is a sign we’re back to a healthier property market. But it depends what we mean by back on its feet. Are we talking about back to the days of rapid house value growth? I think we’re unlikely to see that for some period of time as globally everything will be somewhat subdued for at least a few years. If you can buy a house to live in for the next 10 years, what the values are around you is irrelevant. When homeowners adopt that position it’s going to make it an easier period to ride through. It will be important to keep an eye on parts of the country that have been hit hard economically by Covid-19 - areas where tourism was a big contributor to the local economy - and areas where recent house price escalation was supported more by equity growth than population growth. Some metrics can be tracked to give a sign as to where the pressure might be in the system, like mortgagee sales volumes. They tend to happen a bit further down the track, though. If we look at the GFC, we didn’t really see mortgagee sales volumes rise at all until 12 months after it first broke.
If you do need to sell what should you do?
If you have no choice, you should take time to understand what’s happening to your local property market. I would talk to valuers and agents that know your area well. One thing I’ve noted in the last five to six weeks is everybody’s being quite upfront and honest, so those local experts will be able to tell you what is happening. They’ll know what demand levels are like and they’ll understand your situation. A local expert might tell you your type of property is actually in demand because it’s a family home and people want to live in those. Take the time to do the research.
What cities and towns should Kiwis be taking notice of?
While the GFC is by no means a directly comparable event, the first thing we saw is what we call a reverse concentric rings theory. A property market usually grows fastest in the middle. For Auckland, the middle is the CBD and those higher level suburbs that fringe the CBD tend to grow in value quickly to start with. As they become unaffordable that flows out. The reverse happens when the market is not growing rapidly or is in high uncertainty. Then people tend to flock more towards the centre where it’s less impacted. Post-GFC, people tended to move from more lifestyle locations into more urban locations. Auckland fared pretty well post-GFC and it’s likely to again. There may be some sub market variation, so you might see more demand for more traditional family homes, but demand for investor-type stock might take a hit. I think you’ll see that same trend repeated in the other large urban centres, like Wellington and Tauranga. Some of the smaller urban locations, like Dunedin, will be interesting because they were fuelled by a lot of investor activity so they’ll be a watch-this- space. Where I think you’ll start to see markets reacting in a more drastic way will be in locations where we’ve seen equity-fuelled growth not backed up by population growth, so locations supported by a high level of tourism, like Queenstown and Wanaka, which are more aligned with the global economy. I think in other areas in regional New Zealand, which have been the boom areas on paper for the last five years but really haven’t had the underlying population growth to support those levels of value growth, we’re definitely going to see a disparate impact on the New Zealand property market.
What lessons can Kiwis learn from the housing market post-GFC and the Christchurch earthquakes?
The GFC was a narrow-focus banking crisis which had impacts on the availability of mortgage finance and consumer access to that, whereas now that’s not necessarily the case. In fact, the banks will be very much trying to support the lending system. However, there will be wider spread impacts in terms of potential job losses and economic impact at a nationwide level and people are referencing the Great Depression. Christchurch had similarities in that it was a shock impact to a specific market. Directly comparable? No. But in terms of how the market at a high level responded to those different crises, you can draw a few similarities as to what might begin to occur. With the GFC we saw a return to some stronger economic locations with economic hubs, like your main Auckland centres. There was an immediate effect on sales volumes with uncertainty in the market, and Kiwis taking that wait and see approach. I think we will definitely see that occur again across the country. What we saw in Christchurch was a rapid rebuild period. Supply caught up very quickly with demand and when that equation balances, you see the value impacts. With the GFC, some sub markets saw the reverse of that, where there was imbalance and over-supply. We can use that learning as to what could happen. Parts of New Zealand have had rapid new builds which have been targeted at the equity growth in the market and not necessarily population growth, so suddenly you’re going to get a situation where some markets have too much housing stock coming to market and a heavy drop in demand for that stock. Either those new builds will take a big hit in value or they won’t be able to be sold.
Can the numbers we have now tell us about the future of house prices in New Zealand?
It’s too early to tell. We just don’t have the immediate data that we need to see what has happened. We can look to a raft of numbers we do have, in terms of the composition of housing stock and what’s been built in the last few years, to work out the playing field but relly I think until the market unlocks and we see that data come through everything is just speculation and forecasting.