OPINION: When something big and bad comes along, our natural instinct is to run and hide until it passes by. We can’t help it. So, I think we can all be forgiven for adopting some fairly negative views on the housing market when we learned about Covid-19 and what it would take to stop its spread in our community.
It was common back in February and March to see forecasts that average NZ house prices would fall between 10 and 15 percent (some punters who get their price forecasts wrong every cycle picked declines of 20 percent).
My personal pick was for an average price decline of five to 10 percent. But even this optimistic view – based on things like listings shortages, falling construction, sustained low interest rates, and most unemployed not owning houses – has so far proved too pessimistic.
If we take as our starting point the three months running into February, then we see that for the month of June, average house prices around New Zealand were up 1.2 percent from that period. Or, if you’re of the pessimistic bent you can say that June prices on average were down 1.2 percent from the month of March (which was up 9.1 percent from a year earlier).
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I can produce data “proving” prices are both rising and falling, but I’m going to mash all these things together and say this: prices on average are now flat. In Auckland price rises the past year were averaging 1.6 percent a quarter, and they are flat. Outside Auckland price rises were averaging 2.4 percent a quarter, and they also are flat.
Could it be that the price falls so widely predicted have simply been delayed? Those who believe this commonly cite these factors:
• Mortgage holidays end in September for some borrowers;
• Wage subsidies end by September and this will likely lead to more unemployment;
• There is a risk (shown by Victoria) of a second wave;
• The effects of near-zero net monthly migration will begin biting;
• Hopes of an early Trans-Tasman bubble have been dashed;
• Banks will soon be having hard conversations and forcing business closures and mortgagee sales.
I agree with all these factors. But there are some big ones offsetting them which in all probability will continue to dominate. Here are the main ones, though I could easily list more.
1. Owner-occupiers are choosing to upgrade their existing house rather than trade it for a new one. This will suppress listings and keep buyers scrambling for whatever may come on the market.
Tony Alexander: "Given the long-term damage Covid-19 has and will cause, I am not yet willing to deliver the headline 'Economist says house price falls are over'." Photo / Supplied
2. Statistics NZ originally told us that in the year to November 2019 the next migration gain was 42,000. So, at the start of this year we analysts figured maybe a 40,000 gain would optimistically occur this year, giving a full two calendar year gain of about 80,000 people. The net estimated flow for the 12 months to November is now 64,000, and the net gain since then has been another 41,000 over the six months to May. If the net gain for the rest of the year is zero, the two-year gain will be 105,000. Covid-19 has so far boosted our net migration gain and housing demand, not reduced it.
3. This recession is not a normal one which involves intense weakness in manufacturing and/or farming and construction. It is largely happening in the services sector, peopled by employees who are young, on variable incomes, earning lowish wages – and not owning houses.
4. Confidence about interest rates remaining low is likely even more intense now than four months ago. This doesn’t just mean low mortgage financing costs. It also means continuing low (and still falling) term deposit rates which will encourage more investors to seek other assets like property – which is exactly the intention of the Reserve Bank in printing money.
Given the long-term damage which our fight against Covid-19 has and will cause, I am not yet willing to deliver the headline "Economist says house price falls are over". But I find myself saying exactly the same thing now as I was saying from the second half of 2009 following the Global Financial Crisis. If anyone looking to purchase a property were to ask me whether they should act now or wait for potential price falls, my response will be, as it was back then, I see no good reason for waiting and would be looking for a property now.
After all, if we have flat house prices now with banks making getting a mortgage the hardest any of us have seen since 1984, imagine what will happen when they revert to more normal lending practices.
- Tony Alexander is an economics commentator and a former chief economist at BNZ. Subscribe to Tony's View here
