Here's why the economic hit of Covid-19 might not be as bad as everyone thought

Too often people choose to focus on the negatives and forget that often the groups affected by new factors are small, and their actions are not replicated across the entire economy or population.

Employment is one of these things. People are clearly losing jobs as a result of the fight against Covid-19, and using the filled jobs data supplied monthly by Statistics New Zealand it looks like the level of employment is about 35,000 lower than would have been the case without the pandemic. But that means almost 2.2 million other people are still in work.

They might be working fewer hours, getting lower wages, and some are still to be laid off come the ending of the second tranche of wage subsidies on September 1. But the overwhelming majority of people are not seeing any substantial dent in their ability to service a mortgage.

In fact, for the 43 per cent of homeowners who have no mortgage there is no debt servicing problem anyway, and for the one-third of people renting, again there is no servicing problem.

Also, the bulk of people losing their jobs so far are in sectors with generally variable, and often low pay, which has precluded eligibility for a mortgage, or not driven thoughts of getting one in the first place – including migrants on temporary work visas. These sectors include hospitality, tourism, entertainment, and retailing.

For the remainder who do have mortgages to service, there is something important to consider.

Interest rates have fallen to record low levels and with promises by the central bank to keep rates low, there are not likely to be many property owners thinking they had best sell now before mortgage rates shoot back up again.

To get true weakness in house prices you need lots of sellers and they are simply not stepping forward. We can see this in the latest data released by the Real Estate Institute this week. Averaging over the June quarter rather than just looking at the month of June, we see that nationwide house prices have declined by just 0.3 per cent. Only in three locations have prices fallen more than 3 per cent in the quarter and declined from levels of a year ago – Buller District, Queenstown-Lakes District, and Kaikoura.

people are not seeing any substantial dent in their ability to service a mortgage.

Optimistic as I am, it would seem premature to conclude that an average price decline of 0.3 per cent is all we are going to see from this shock. There are still redundancies to come, mortgage holidays will end, post-lockdown shopping therapy will pass, and disappointments related to border opening seem more likely than early opening going by the new waves of virus outbreaks happening overseas.

But, whereas my view from March was average price declines of 5 per cent to 10 per cent, which I then biased toward the low end of that range a few weeks back, it could turn out that declines might not even reach 5 per cent on average. One factor which might contribute to this good outcome is the fresh news on net migration flows.

In January, Statistics NZ estimated that our country enjoyed a net gain to our population from migration flows in the year to November of 41,500 people. Based on that number and the generally downward trend, most of us analysts figured that come the end of 2020 the net gain might be just above 40,000 if we were lucky.

But now, Statistics NZ estimate that the annual flow ending in November was over 22,000 higher at 64,000. And, the flow soared to 85,000 in March.

In fact, the net flow so far this calendar year adds up to 34,000 people. Even if we see zero net migration gain for the rest of this year, right now we have perhaps 10,000 to 15,000 more people in the country than we thought would be the case come December 2020.

Closure of our borders to foreigners has not produced a house price-sapping migration collapse because before the close-off date we saw a spectacular net inflow surge. One cause of that surge is the net flow of Kiwis booming.

On average since 2001 we have seen a net annual loss of Kiwis from New Zealand of almost 20,000. That flow was a never-before-seen gain of 1600 over calendar 2019, and now that flow stands at 14,800. It’s no wonder the government has had to get airlines to ration seat space.

There are more than one million Kiwi citizens and residents offshore and many of them want to come back. So much for the old brain drain. It’s now all brain gain and that can only be a good thing for our economy over the longer term – which is one reason why I have a glass half-full outlook for our 2021 recovery and beyond.


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