Macro View - Curious COVID effects

Defiant in the face of a second wave of lockdown-related restrictions, New Zealand’s residential real estate market has posted some extraordinary sale results, begging further analysis of the current economic recession.

Across the country, the volume of residential transactions has increased 24 percent year-on-year, with July’s sale results showing the most activity for the month in five years, according to data from the Real Estate Institute of New Zealand (REINZ).

Despite encouraging market progress which has offered renewed confidence, Kiwis know it’s a long ride to the finish line of COVID-19-related disruption.

“There are many risks out there of course,” says Tony Alexander, independent economist and author of industry publication Tony’s View.

“Most notably the failure to contain infection at the border and the return to social distancing, but what matters most is the direction of change in the market-place, and for now that direction is headed towards the better side of things,” he says.

“What matters most is the direction of change in the market-place, and for now that direction is headed toward the better side of things,” Mr Alexander says”

Fear of the unknown

In his monthly real estate survey conducted in partnership with the REINZ, Mr Alexander found strong interest across the residential real estate sector has continued unabated, buoyed in-part thanks to a decrease in concern about risks such as falling house prices, a loss of income and job security.

Despite a scale-up in restrictions for New Zealanders, both house price expectations and residential real estate activity have recovered from grim projections following the initial COVID-19 lockdown period.

Survey results show, Mr Alexander says, that more people have been attending auctions, open homes and perhaps most tellingly that fewer investors are hopeful of finding a bargain amongst the yet-to-materialise tranche of forced sales.

A variety of factors have come together to underpin this latest round of confidence across the market.

“Businesses are getting less despondent by the day with confidence around their outlook for activity levels lifting from a net 55 percent of pessimistic responses to just seven percent in July,” Mr Alexander says.

This, coupled with the extension of the wage subsidy, and the mortgage deferral scheme by the Government is offering guaranteed support for both businesses and workers affected by COVID-19.

“Furthermore, we’ve been here before,” Mr Alexander says.

“New Zealanders now know the lay of the land when it comes to lockdown restrictions, this time around employers and households are better equipped to deal with disruption and change,” he adds.

Social studies

“The unique aspect of this recession is it’s a temporary, voluntary crushing of the economy undertaken in order to save the lives and long-term health and happiness of thousands of people.”

Because of this, Mr Alexander says, some behavioural and social considerations apply.

“In terms of rising unemployment, the majority of those losing jobs in COVID-19-related conditions are in the services sector, and on low or variable wages.”

“This group tends not to be homeowners, and so the residential real estate market is escaping largely unscathed by the prospect of lost employment opportunities,” he says.

The change in personal circumstance has also dictated positive market performance.

Young New Zealanders poised to go on their OE are now homebound and anecdotal evidence has shown an uptick in first home buyer activity.

“A generation of young people have seen how rapidly a deposit for one’s first home can grow if spending is suspended for seven-weeks and overseas trips are not taken,” says Mr Alexander.

“Net population retention which has turned the brain drain into a brain gain has the potential to lift residential sales activity across main centres and into the regions as well,” Mr Alexander says.

“Net population retention which has turned the brain drain into a brain gain has the potential to lift residential sales activity across main centres and into the regions as well,” Mr Alexander says.

Lending

“The New Zealand Government, on our behalf, has one of the best fiscal tracks in the OECD (Organisation for Economic Co-operation and Development) and even at the pessimistic projection peak in the net debt-to-GDP ratio of 54-percent, our numbers will be better than pre-COVID starting points for many other economies,” Mr Alexander says.

Thanks to a healthy starting position, the Government and the Reserve Bank of New Zealand (RBNZ) have been able to offer a swift response by way of substantial fiscal support.

The latest comments in the RBNZ’s August Monetary Policy Statement (MPS) signalled further support for banks to stimulate lending and economic activity.

“Borrowing costs for home buyers have fallen to record lows with most fixed rates now below three-percent,” Mr Alexander says.

Mortgage advisors have reported that all of the big four banks have now dropped internal serviceability metrics, meaning that mortgage deposits will now go further for budding homeowners.

“Looking to 2021 I expect accelerating underlying economic growth - that means stripping out simple catch-up spending factors,” Mr Alexander says.

“Interest rates will remain low, even falling early in the year a little further, I also expect house prices on average to rise,” he adds.

Mr Alexander’s optimism is tempered with an awareness of the downside risks which include globally worsening conditions. However, he says the data we’re seeing as yet points to a reasonable level of support across the economy, the labour and the housing markets.

“We’re seeing continued, firm population growth, with greater potential yet to be unlocked when borders reopen maybe in 2022, this, paired with continued low interest rates and the evidence in our face right now that the deepest (short-lived) recession in our economy in yonks has failed to discourage home buyers to any obvious degree,” Mr Alexander says.

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