House prices may not suffer steep fall post COVID-19

Past four weeks have been a rollercoaster for many as the impact of the COVID-19 has swept the world over with unprecedented uncertainty, the full effect on the housing market is yet to be seen. Quick and decisive action from the Government has helped the country flatten the curve while injecting much needed aid into local businesses and supporting home owners with much needed assistance.

But as we head back slowly into normalcy beginning with Level 3 lockdown this week, many will be looking at how the property market can rebound and the road to full recovery.

Tony Alexander, renowned NZ Economics Analyst has shared his views as why house prices may not suffer steep fall post COVID-19.

Here’s what you need to know:

The Market Before The Lockdown

Data from The Real Estate Institute of NZ has revealed that the market was heading to a new peak in sales before the COVID-19 brought things to a standstill, with Auckland, in particular, being a standout. In Auckland, sales were particularly strong in the month of March, with 2307 properties sold which were up 10.8% compared to the same time last year, with a record median price of $950,000, up 11.1% from March last year.

The Future of The Market

Many experts are predicting that the repercussions of the COVID-19 may not be as tough as some may have predicted, the fast turnaround of recovery and low interest rates may keep the market afloat and build foundations for a stable future. Interest rates were already at record lows before the pandemic reached New Zealand, the Reserve Bank dropped the Official Cash Rate (OCR) on 16 March to a record low 0.25 percent from 1 percent - the lowest point since the cash rate was introduced in March 1999 in an attempt to support the economy against the impact of the Covid-19.

Experts predict that in response to the OCR and the Covid-19 outbreak, the interest rates are likely to stay low for three to five years. Low rates not only improve affordability for owner-occupiers like first-home buyers, they also encourage investors away from term deposits (eventually) toward other assets, like shares and property.

Thousands of homeowners have taken up Mortgage deferrals from banks to buy time to adjust their spending and will go a long way toward containing forced and unwilling sellers.

Reserve Bank has also initiated a seven-day consultation period on 21 April to remove all loan-to-value restrictions. It will help more people access the mortgage than if the restrictions had been left in place. If the decision is made to remove the restrictions, the Reserve Bank will monitor lending activity and feedback from retail banks over the next 12 months as the economic impact of the COVID-19 pandemic becomes clearer. After that period, RBNZ will review whether to reinstate LVR restrictions.

The return of investors to the residential property market will come from many investors potentially losing faith in the commercial property market, as many business tenants may move to working from home, will seek long-lasting rent reductions, or simply cannot afford current rents and vacate their premises.

Many investors moved to invest in commercial property in the last two years after uncertainty around changes in the residential property market, but this could soon change as residential property becomes more attractive again.

These factors may help prices to stop from falling over, and it may be an optimal time to reinvest in the property market again.

-Ravi Mehta