If anyone says to you that they have a good feel for what is going to happen during the global shutdown as we fight the COVID-19 pandemic, ask them this simple question. What is it you saw happen during the previous pandemics?
There are zero datapoints available to us to make any reasonable guess as to how things will develop over coming months and what the impact will be on our economy and our property markets. For that reason, whenever I am asked where I see the unemployment rate or house prices going, I follow the script of the Reserve Bank Governor and say this is not about forecasting.
It’s about, as best as possible, getting as many of our jobs and businesses through to the other side. At worst that other side is 18 months away when the scientists tell us a vaccine will be available. At best it is perhaps three months away based on the near two months it took for China to eradicate all domestic transmission of the virus, and an assumption I’ll make here that after one more month people there will once again be moving fairly freely.
Many governments have spoken in terms of six months. So, let’s use that time period for when we think people will look through the remaining constriction of economic activity and base their decisions on the light they will see at the end of the tunnel – even though we will still be in that tunnel.
I’ll make some comments first about housing, then commercial and industrial property.
What are our housing markets likely to do?
The main thing is they will go quiet. Turnover will likely fall away very sharply for a variety of reasons. One is that buyers will back away because of uncertainty about how bad things will get in the short-term, when recovery will come, and what prices might do. Plus, many will either lose their jobs in travel, hospitality, and retailing particularly, or lose hours of work.
But key to what housing does during a downturn is what sellers do. Will they cram forward to quit their assets as we see happening in sharemarkets? Almost certainly not. Their financing and alternative asset interest rates are at record lows and set to stay low for many years. No property owner has just seen their portfolio value fall 30% as share funds have. Banks will pull out all stops to get as many mortgagors through to the other side as possible, with widespread mortgage holidays likely.
The long-term fundamentals of our housing market have also not changed – insufficient supply and strong demand growth from both investors and owner-occupiers.
Prices are highly likely to fall away in our tourism hotspots, and there will be some weakness in the regions. This latter development will reflect drought plus unemployed people shifting to the cities for work.
Does this mean city prices will continue to rise?
Probably not, but any falls are likely to be very limited. Consider for instance that Auckland prices fell by 4.5% from 2016-19 and no one panicked.
The main housing market development for the remainder of this year is likely to be a fall in annual turnover to below the total of 53,500 seen in the year to early-2009 from 75,000 in the past year (Dammit, that was a forecast.) Because turnover will be so low, actual sales will be disproportionately stressed ones, and that will give a downward bias to average and median sales price measures which will likely make for some sensationalised headlines.
But there is a timeline on this crisis and astute buyers, when they can see the light at the end of the tunnel whilst still being in it, are likely to re-enter before any sense of communal acceptance that the worst is in fact over.
For commercial property there is a different dynamic. Many businesses will not make it through this deep economic shock. Demand for retail, small business, and to a lesser extent office space is likely to fall away. In some locations finding new tenants will be difficult, perhaps even when domestic and after that international tourism pick up again. Investors will find themselves having to cut rents and offer refit packages to get properties leased again. Market values are likely to fall, but with support from low interest rates.
This will be less so for industrial properties for which the main impact will be initial weakness as some businesses have production temporarily interrupted by absence of some inputs brought in from China. After the crisis, a global move toward reshoring of production previously moved to China could have a positive impact. This however may be more relevant in countries with bigger and more integrated manufacturing sectors than our own.
A movement toward less reliance on a just-in-time inventory model will open up some warehousing opportunities. A likely lift in the agricultural sector associated with higher demand for food from a world newly worried about scarcity could occur.
Written by Tony Alexander, Economist
This article featured in NAI Harcourts Market Leader Issue 2, 2020