What might the New Zealand property market recovery look like?

PROP038 What Does A Potential Recovery Look Like

There will be winners and losers in the new world post-COVID-19 – food producers have proven their value, share markets have revealed their shakiness when the unpredictable happens, while commercial property owners may be facing a diminishing demand for office space as more office workers prefer the working from home situation once the kids are back at school. 

As for residential real estate, never have our homes been so tested for their ability to accommodate us in comfort, they have been reconfigured to make room for home offices in unused corners or bedrooms and to provide extra spaces for the kids to play and homeschool. In some cases our homes haven’t proven up to the task and for those who have survived the lockdown and maintained jobs, we will be house hunting energetically the first chance we get. For others, that kind of thing may have to wait until some certainty has returned to the job market.  

After an initial slowing of Trade Me Property audience activity at the beginning of lockdown, the country’s no.1 property website saw daily listing views up by almost 50% by the end of lockdown. Engaged audiences were up even more, Watchlist adds up 61% and daily email enquiries up by 2.3x.

Head of Trade Me Property, Nigel Jeffries says the early signs after the decision was made last week to move to Alert Level 3, allowing for a resumption of buying, selling and renting activities, are that the pent up demand which was cut off over a month ago, has not gone anywhere, and all players in real estate are keen to resume activities.   

Mr Jeffries says that for the May and June period, Trade Me expects that new listing volumes will take a month or so to get back to normal levels but there is plenty of “for sale” and “for rent” inventory on site for buyers and renters to choose from.  

“May and June are early winter months where we start to see a tail off of activity however we think activity may in fact remain higher than normal due to consumers reacting to all the issues brought about by the challenging times.” 

   

How markets are responding internationally 

New Zealand property market followers are casting their eyes overseas to see how real estate markets in countries ahead of us on COVID-19, are rebounding after an enforced period of hibernation during lockdown.

US-based real estate tech strategist, Mike DelPrete, former Trade Me Head of Ventures and Strategy, has described the rebounds he is seeing around the world as like a tick or checkmark ✔. 

It begins with a severe, immediate drop, lasts three to four weeks, and is followed by a gradual recovery,” he says. 

From his base in Colorado, Mr DelPrete, says: “In general I would expect the recovery in New Zealand to look similar to other overseas markets, which appears to be a checkmark. Steep decline, in stasis for a few weeks, then a slow recovery. I think it's just kinda how it works in this situation.”

Head of a real estate agency in France, Coldwell Banker France CEO’s Laurent Demeure, speaking to Inman.com, the American news website for real estate agents, spoke of a marked increase in leads and website consultations from buyers and sellers in the lead up to the end of France’s lockdown on 11 May. 

He is expecting “demand will explode” after a slow adjustment period. This boost in activity will be triggered by people looking for more space or even a baby boom nine months after lockdown. He also forecasts that people will be looking to move closer to work, or quite the opposite – having proven they can work remotely, they’ll be looking to move out of cities. 

Closer to home, Mr Jeffries says the Australian real estate market which has been operating at a level similar to New Zealand’s alert level 3, has experienced relatively strong demand and supply, with transaction volumes off by around 25%. 

   

A market rebound from alert level 3 onwards

For CoreLogic senior property economist, Kelvin Davidson, he is estimating there will be a phase 1 a busy period immediately after the business of real estate buying and selling is allowed thanks to pent up demand kept at bay since the alert level 4 lockdown.

“I think there could be a surge of deferred settlements and pent up demand by people keen to move who are able to potentially rush in and make some purchases,” he says. 

There were supply constraints at the time of going into lockdown and these will influence the market, he says.

“I think there will be a phase of six or eight weeks, where there is a bit of a rush in activity, but listings will still probably be relatively low,” he says. This could be a kind of “phoney war” for the market and prices will hold. 

Then the winter arrival might see the market going through a tricky phase, he says.

The good news is, in the current low interest rate environment, independent economist Tony Alexander doesn’t see people having to sell if they lose income or want to cash up.

With interest rates at record lows, people will be able to hold on, he says. Household debt over the past five years has only risen 40 percent versus 80 percent in the run up to the GFC. 

“So price weakness will be limited by people not being forced to sell,” he says.

The other point the economist makes is, those suffering the most in the economy will be people in tourism and hospitality and they tend to be younger, also people on working visas in some cases, and they don’t tend to own a home or be planning to buy. 

   

Spring 2020 could be the real test

Mr Davidson believes the spring selling season could be when the true market becomes evident. At this time, mortgage deferrals will be coming to an end and homeowners who might have lost income may have to answer some harsh financial questions.

“That could be when we see phase 2, and a rise in listings will put some of the pressure on what the true strength of demand is. These listings may come from mortgaged investors who have come into the market relatively recently, mum and dad investors, and have not built up much equity in these homes. They may have lost a tenant, or be relying on Airbnb international tenants which are not as plentiful,” he says.

The initial flurry of activity may then give way to a quieter market which may have price implications. 

CoreLogic is forecasting that sales over 2020 could be down 15% to 20% on 2019. The property economist thinks prices may dip by something like 5%, nothing like the 10 to 15% being talked about by some of the country’s economists.

Ray White agent, Steve Koerber, is not fazed by predictions of sales drops in the coming months. In his market of Remuera, the median price can vary by 20 percent month by month. 

“If the market is 10% down, then that’s a great opportunity to buy, that’s when you buy,” he says. He is currently busy talking to active buyers who were missing out on properties in the run up to the lockdown in March. 

“They are ready to go and they want to buy a house,” he says.

Mr Koerber was heartened by the sale of a property last week that had sat on the market for almost two years. It had needed a price change and the owner, thanks to the pandemic, had finally got themselves into a “headspace” of amending the price because of what was going on in the world. It still sold at a good market rate, says the agent.

Meanwhile in the first home buyer part of the market, one of the positives to come out of the lockdown is that millennials will realise how much money they can actually save when they are not eating out and travelling all the time, says Mr Alexander. 

He sees there being opportunities for first home buyers in new developments in the coming months. With the lifting of LVRs, there will be less incentive for investors to buy new they have not needed to find a 30% deposit when buying new under current LVR guidelines which has made new developments more attractive to them and this will make it a bit harder for property developers to sell their units.  

 

Don’t forget it’s an election year 

And to home buyers who are feeling in the doldrums and low in confidence about employment and the economy, Mr Alexander says don’t forget that it is an election year and the Government will be spending more in the coming months to try to get confidence up and the economy kickstarted.

“The Government will throw the kitchen sink and the bench it’s attached to,” he says. 

Once the election has been held in September, the real estate market in October and November will be very hot, predicts Ray White’s Steve Koerber. He is also bracing for a “boomer of a month” in May thanks to the pent up demand he sees in the current market.

   

Banks will be backing the real estate market

The good news is banks are and will be playing their part to help support homeowners and business owners – they are in a much stronger position than they were around the GFC, said Mr Davidson.

“I certainly hear banks are standing by customers deferrals it’s in nobody’s interest to call in loans. I think anecdotally banks are being positive players.” 

The Reserve Bank of New Zealand has been extremely active in the last few weeks, its latest move to lift loan to value (LVR) restrictions aimed at supporting homeowners and small business owners. Since 2013, banks have only been able to lend 80% of the property value. Traditionally, buyers have had to find 20%, and investors have had to find a 30% deposit. 

While a lack of LVR would help some, investors and first home buyers especially, he says banks would continue to be pretty cautious on their lending policies.

   

Housing affordability plays a part in the recovery equation

In an interesting comparison, the CoreLogic economist said in the run up to the GFC in 2007 to 2009, 80% of new homeowners’ mortgage payments were taking up half their income compared with the current norm of about 30%.

“It’s still a big chunk but housing is less expensive than it was prior to the GFC.”

There may well be some regional differences in the real estate market with those regions which showed resilience during the pandemic performing well – places like Napier, Invercargill, Gisborne. Towns like Queenstown, so beholden to the tourism market, have been much more vulnerable and will be affected more.

The country’s largest cities, Auckland, Christchurch and Wellington, are likely to recover with some good resilience, predicts Mr Davidson. All have relatively diverse economies especially Auckland, while Wellington is always a bit immune from economic recession as the seat of government. 

  

The buyers post alert level 4  

Who will the buyers be after the lockdown lifts? There could be some cashed-up investors buying properties from other more recent investors. Investors were driving the momentum before lockdown, and these were mortgaged investors, he said. 

They will also be people with secure incomes making the usual life choices, either downsizing and the active market will happily pick up larger homes or people relocating after this period of lockdown proved they can work from home quite effectively. 

In stable real estate markets like Wellington with many government jobs, so arguably a bit more sheltered than the rest of the country, buyers will be active once again, according to local agents.

Nicki Cruickshank, senior Tommy’s agent, who says her office has seen huge enquiries and sales for new developments in Karori and Berhampore in the past couple of weeks says “All we can see at the moment is good demand out there. Supply was quite short in Wellington and it will now be okay but not amazing.  

People may be tempted to wait to buy or sell, which may be the wrong decision, she says.

“People have had time to talk to each other (about whether to sell) and they’ve probably had time to do things to the house,” says Ms Cruickshank.