Source: ANZ Property Focus Report
With the country under Level 4 lockdown, the property market is eerily quiet. It’s a highly uncertain time. We can’t predict exactly what will happen for the property market from here; it will depend crucially on how the COVID-19 outbreak evolves. But at this stage we expect the following:
- The economic impact will be enormous. We expect GDP will be 8-10% lower this year, affecting household incomes and some firms’ viability
- Property market data will be all over the place in the period ahead, with liquidity thin, uncertainty huge and economic activity volatile
- It may take a while for trends to become evident. But demand pressures will be significantly curbed on the other side of this
- Financial pressures will increase with many people in limbo. Construction firms and the like will incur significant delay costs, in particular
- Credit is likely to be constrained, but we expect the financial system will function smoothly
- Reduced income prospects and a fundamental shift in the supply-demand balance will see rents under downward pressure
- House prices will fall significantly. We expect to see a drop of 10-15% at this stage, with downside risk
- Commercial property could be even more affected than residential, given its clear links to business activity.
Economic Overview
We are in the midst of an unprecedented health crisis. New Zealand is making encouraging progress at curbing the COVID-19 outbreak on our shores, but the human impact worldwide remains troubling. Lockdown measures have been necessary, and effective. However, the economic impact will be large, with a sharp recession underway. We currently expect GDP to fall 22% over the first half of this year, and 8-10% over 2020. There will be an initial but incomplete rebound with a protracted recovery from there. Over the long-term, the economy will likely be reshaped to some degree, with some industries shrinking and new opportunities arising. The Government will need to provide stimulus for quite some time, with more spending in the pipeline. We think the RBNZ will need to roughly double its quantitative easing programme. See this section inside for a brief explanation of how that works.
Mortgage Borrowing Strategy
Mortgage rates continue to fall, with average special rates offered by the major banks now at all-time lows, at every duration. The average 1-year rate is now close to 3%, having fallen the most in recent weeks. With the RBNZ now pursuing quantitative easing in a bid to drive down long-term wholesale interest rates, there is less incentive to fix to “hide” from possible increases. Equally, with the RBNZ committed to keeping the OCR on hold, choosing floating on the expectation that floating rates may fall has limited appeal. With a big gap between average floating and 1-year rates, we favour the 1-year term in this low-rate environment we now find ourselves in.