Here's why Covid-19 will hit rents, not house prices

OPINION: Unemployment is going up as a result of the Covid-19 crisis and because many businesses are using the shock as a trigger for some long overdue restructuring, there will be redundancies of people across the entire income spectrum.

However, the greatest numbers of people who will lose their jobs will be from the tourism, retail and hospitality sectors.

Some people in those sectors are certainly on good incomes, maybe as business owners. But the bulk of their employees will be on lower than average wages. Many will be on migrant visas, many will be on highly variable hours and weekly incomes, and many will have worked for a variety of employers.

People with these characteristics will, in most cases, not have comfortably met the criteria set by banks for advancing a mortgage. Many won’t have even been thinking about buying a house.

That is why I’ve emphasised since February that a key characteristic of this downturn will be the absence of a wave of forced sellers.

This is especially the case when we consider the record low level of interest rates. Household debt servicing costs (interest payments as a proportion of disposable income) sit at less than 7 per cent compared with over 14 per cent during the Global Financial Crisis.

Plus, ahead of the 2008 GFC there were 56,000 properties listed for sale around New Zealand.

Early this year there were only 19,000.

The greatest housing impact of the Covid-19 crisis is likely to be on rents, especially in tourism destinations and inner-city Auckland.

Next will be house construction with volumes down maybe 25 per cent or so. High household pessimism will naturally make people wary of committing to getting a house built, especially considering the predictions of smaller building operators going broke.

Banks will also close the door for a while (until next year probably) for new housing developments, land development in particular.

We’ve yet to see these stories, but at some stage before the end of the year we will see reports of spec builders going under because they have been unable to sell all of the units in their townhouse development.

This might especially be the case in Auckland where the Unitary Plan has initiated a wave of smaller construction jobs around the city.

But does this mean Auckland is set for substantial price declines?

In the case of spec builders trying to save their businesses the answer may in some cases be yes. But for the city as a whole, no. In fact, to continue our ranking of housing effects of this recession, house prices will experience the smallest proportionate change after construction and rents.

But this comment is directed at the nationwide average, and especially our three major cities.

Auckland has seen minimal price movement for four years. It has not entered this downturn with an over-stretched housing market. Canterbury prices on average remain well below their long-term relativities with the rest of the country. Wellington remains severely short of listings and stable government employment will act as a substantial economic cushion.

Our three biggest cities, accounting for 57 per cent of New Zealand’s population, will feel only slight house price effects. The bigger impact will be in the regions, though not so much in the likes of Hamilton and Tauranga.

It is to the regions that investors went looking for good yield and cheaper house prices some four years back when Auckland topped out.

But it is in the regions that the negative hits will be more obvious from falls in tourism, retailing, and hospitality. Town centres risk losing their cohesion as some shops close down. Plus, dairy incomes are expected to be down this coming milking season.

Faced with the re-emergence of some of the long-term underlying challenges in our regions, people looking for work will shift to the cities. The investors will too – especially as once banks get their books in order, they will cut minimum investor deposits below the old 30 per cent mandated by the loan-to-value ratio rules. That might happen as we head into summer.

Tony Alexander is an independent economist and speaker.

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