KIWIS RETURNING HOME
There are one million Kiwis overseas, including near 650,000 in Australia. Many have long-term plans to return to New Zealand and it is likely that many will choose to bring forward those plans in light of virus worries and lockdowns which have made us focus attention on our lifestyles and family. Returning Kiwis will bring their partners and children. While some will go to the regions, most will seek a home and employment in one of our major cities. Partly this is because that is where the greatest opportunities lie. But partly also because they may be coming from a large city, their partner may have spent their entire life in a large city, and migrating to a country town could be too much culture shock.
In every recession people pull back from purchasing large things like cars, couches, and houses. This may not be a problem for vendors who already own a property. They stay put. But builders with unsold property need sales to meet expenses in an environment where banks always pull back from the property development sector. These builders are now highly motivated to sell – at a discount if necessary. Motivating them to sell quickly will be the imminent removal of LVRs which will encourage buyers back to existing properties as new builds were exempt.
LOAN TO VALUE RATIOS TO BE REMOVED
The Reserve Bank is highly likely to remove LVRs in a few days. In response banks, needing lending business which will generate profits to help offset losses expected to come from business sector lending, will ease up their loan criteria. Home ownership and property investment will now be within the reach of a lot more people.
THE LVR CUTS MIGHT BE TEMPORARY
The Reserve Bank is expected to say there will be no LVRs for at least 12 months. Concern about their re-imposition in 12 months will provide potential buyers with an incentive to purchase sooner rather than later.
TELECOMMUTING FROM A DISTANCE
The new-found ability and willingness of people to work from home and bosses to tolerate it will lead to more than just reduced demand for central city office space. Some people will realise that they can live further away from the CBD than previously thought given fewer commuting days. So, some shifting to the further environs of Auckland is likely.
WORKING FROM HOME COMFORT
Some people will want to keep undertaking some of their work from home but their current home is not optimal for it. Seeking some greater separation between family rooms and the home office some people are likely to shift to a more suitable house type.
LONG-TERM INVESTORS SEEKING OPPORTUNITIES
Professional investors with good capital and long time horisons will know that the best purchases can be made during recessions. They are likely to be highly willing to transact over the coming year and we know already many have contacted real estate agents expressing their interest in distressed sales.
INVESTORS RETURNING FROM THE REGIONS
Since 2016 average Auckland house prices have risen by 7 % while in the rest of New Zealand gains have been 30%. Auckland is less relatively highly priced than before. Investors are likely to more naturally consider purchasing back in Auckland now, incentivised by the tourism downturn cutting economic activity more obviously in regional locations than in Auckland.
JOB-SEEKERS MOVING TO THE CITIES
In times of high unemployment people shift to where there is the greatest chance of finding employment. That means relocating to our larger cities.
Some people will want to free up capital in order to help insulate their finances against the effects of job disruption. One means of doing this is selling one’s house and either renting, or purchasing something priced lower.
SELLING TO SUPPORT ONE’S BUSINESS
Businesses can quickly run out of cash during recessions. One way by which owners of SMEs free up capital to assist their businesses is by selling their property assets. First to go are likely to be holiday homes and investment properties. But some will also have to sell their family home.
RECORD LOW INTEREST RATES
Interest rates have been cut to record lows and are likely to stay there for 3-5 years as the Reserve Bank is unlikely to face inflationary pressures in the short- to medium-term.
LOW ALTERNATIVE RETURNS
Low interest rates assist first home buyers. But they are a problem for investors who see returns on low risk investments decline. Seeking to maintain yields some will be incentivised to purchase other assets such as shares and property.
The experience of countries which printed money after the Global Financial Crisis is that some of that money found its way into asset markets – especially property and shares. The Reserve Bank of NZ is printing money for the first time ever via purchases of government bonds and this is likely to see slight extra upward pressure on house prices. Knowledge of this tendency will attract investor interest and shorten the period during which buyers generally sit waiting for prices to fall so they can get a bargain.
RECENT LOW HOUSEHOLD DEBT GROWTH
Over the past five years household debt in NZ grew by 40% compared with over 80% in the five years leading into the GFC. Ability of people to buy a property is less debt-dented than back then.
The imposition of LVRs from 2013 means that the number of people with unsafe debt levels going into this recession is small. That reduces pressure to sell in order to preserve their equity. But it also means bank home lending books are in good shape and that provides increased scope for banks to seek to attract mortgage business than if debt ratios had been high.
Some people have invested in properties for Airbnb rent but face unchanging costs yet minimal revenue for the next 18 months. A number are likely to seek to sell rather than enter the normal rental market.
BUYER MEMORIES OF HOUSING SHORTAGES
Since around 2012 there has been growing awareness in Auckland of a housing shortage which started in the mid-2000s. Those memories are likely to encourage more people to actively search for property during this buyers’ market phase than if no shortage worries existed.
GENERAL ELECTION IN SEPTEMBER
The government will want people to feel confident and optimistic about their futures going into the general election in five months’ time. That means they will not want house prices to be falling. Neither will Treasury, the Reserve Bank, or banks. The government is likely to throw the kitchen sink at turning sentiment levels upward ahead of the election and that sought-after surge in sentiment will tend to also boost housing market sentiment and willingness to transact.
Some people will end up spending seven weeks locked down in their apartment. Desire to avoid this happening again may lead some to sell their apartment and purchase a property with a section.
FIRST HOME BUYERS SAVING A DEPOSIT
FHBs have seen their deposit size shrink because of KiwiSaver falls. However, in some seven weeks of lockdown they will see how quickly savings can grow if one restrains spending on coffees, alcohol, overseas travel, and new clothing. This experience may encourage a continuation of frugal habits and potentially rapid growth of a house deposit.
NO FOREIGN TRAVEL
Unable to travel offshore some people will choose to use saved funds to purchase a holiday home in NZ, or upgrade their existing home.
NEW PROPERTY PREFERENCE
Many young people, having seen KiwiSaver balances decline, will now understand why so many Baby Boomers have preferred property over equities since the 1987 sharemarket crash. This effect may not be all that large however as equity price falls this time are minor compared with 60% or so back then followed by some four years of recession.
SWITCH BACK FROM COMMERCIAL PROPERTY
Over the past 3-5 years many investors have switched from residential property investment towards commercial property, upset at new constraints and costs imposed on landlords. However, with commercial properties losing tenants because of business closures, rental flow interruptions, and changes in the way we work, a flow back toward residential property investment is likely. Having said that, this flow will be mitigated by reinstatement of depreciation allowances on commercial properties.