Our economy has been placed in suspended animation. That’s perhaps the best way to try and get your head around what has just happened. Essential services will remain operating, but everything else we do is now on hold.
This means that when, eventually, we get data showing us the magnitude of economic shrinkage over the coming weeks and maybe months, they will be meaningless in the normal sense with which you and I judge economic data.
Usually, if we economists tell you we think the economy will have a recession you react with great worry. That is because it means some people will lose their jobs and have to sacrifice their short-term dreams and plans. Some people will lose their houses. Some will not be able to afford their rent and will be evicted. Some businesses will fail and the owner’s wealth and dreams disappear.
We judge our outlook for the economy in terms of how we believe it will impact the way we live and the things we aspire to as individuals, families, communities, and as a country. But most of these things now have little meaning because what the government is able to do is pick up our economy and time-shift it. They can freeze the things we know usually happen during a recession and only let them happen again down the track when recovery is underway and the drive for them to occur will not be there to the same degree.
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They can do this through the things we saw the Finance Minister announce on Monday and last week, and announcements also from the Reserve Bank Governor working with banks.
The no-cause ending of tenancies will be extended for a time period we have yet to be told. This is a different version of a policy we have seen overseas of a ban on evictions. While our economy is in suspended animation and operating weaker than before for a period afterward, no tenant will be forced from their home.
The government will pay $585 a week of the wages of all staff for all businesses who keep people on they would otherwise have had to let go because of the Covid-19 virus effects. Unemployment will still rise but not by as much as would otherwise happen.
There is news to come of “significant measures” to help mortgage holders. That may mean that on top of banks offering to let people reduce or defer their mortgage repayments, a more solid structure to address repayments will be put in place. This will undoubtedly be aimed at taking away the need for some people to sell their house because they cannot service their mortgage. Forced, or what we call weak selling, will be frozen for a period of time.
Which brings us to the housing market. Last week I wrote that turnover would likely fall away. Now turnover will virtually cease for one to two months for all but sales about to go through or be settled which were agreed on in recent days or weeks. No Open Homes, auctions, or home inspections can be held. No builders or LIM checks can be undertaken. No one will be staffing real estate offices.
Some transactions may occur over the internet, but they are likely to be very low in number.
The real estate market will freeze in time and any numbers which eventually do come out regarding average or median prices of properties sold will be meaningless because of the small numbers involved. Real estate agents will apply for wage relief as will virtually every other business in New Zealand.
But does this freezing of activity and of our economy imply a different outlook for the housing market than the one I presented last week? No, if the government, Reserve Bank, and banks can pull this off. I listed six factors so let’s run through them again.
1. Interest rates are at record lows, heading lower, and still set to stay low for years.
2. We enter this period without a boom in housing debt.
3. Banks remain well capitalised and look like they are about to receive even more support for lending from the Reserve Bank and maybe Treasury.
4. China shows us that if implemented early enough lockdowns/self-isolation can work. There is light at the end of the tunnel and inhabitants of Wuhan are slowly leaving their homes, entering their streets and parks to once again start enjoying life.
5. The shortages are there, and now they will get worse because all house building is now on hold for 4-8 weeks.
6. There is a fiscal stimulus coming and the Minister of Finance has even told us when – in the May 14 “Recovery Budget”.
However, just because I can focus on the long-term fundamentals does not mean everyone can or will be able to once we come back blinkingly into the sun. When the lockdown ends, and then later this year when we see the light at the end of the tunnel, buyers will re-enter the market. But there are still likely to be more sellers, concerned about their previous expectations of rising wages, or needing to devote funds to resurrecting their moth-balled businesses. There will still be special weakness in tourism areas where customers may not return until some time in 2021, and then perhaps only slowly as people may choose to embrace less travelling overall.
The situation we are going through is unprecedented. None of us can outline what we have seen usually happen during pandemics, let alone lockdowns. But if the government is successful in its attempts to lift our economy up and shift it into the future, the weakness will not approach some of the more dire predictions some people are advancing.
- Tony Alexander is an economics commentator and former chief economist for BNZ.
