Economist Cameron Bagrie speaks to Bayleys Real Estate’s managing director Mike Bayley about the economic fallout of the COVID-19 pandemic.
“New Zealand is facing an extremely difficult economic environment – the likes of which we have not seen before,” says Cameron Bagrie, chief economist and managing director of Bagrie Economics.
The COVID-19 reality
“Looking at the glass half-full, the Government is a good position to provide support with net debt sitting around 20 percent of Gross Domestic Product (GDP).
“This is excellent when contrast with the likes of Italy at more than 100 percent and the USA approaching that mark,” Bagrie says.
The Reserve Bank of New Zealand (RBNZ) is pulling multiple levers beyond cutting the Official Cash Rate (OCR) and the Government is pumping huge amounts of money into the system by way of mammoth support packages.
“This will make the recession less extreme but cannot avert one and individuals must be constructive by reassessing personal plans and creating financial strategies,” he adds.
The reality is that the longer the COVID-19 pandemic continues and the economy remains in lock-down, the more economic damage and greater number of redundancies and rising unemployment – which has the potential to create pricing instability.
“When it becomes more difficult for borrowers to pay the mortgage, due to outright job losses, we can expect to see forced property listings appear on the market for sale,” Bagrie says.
While retail banks are now offering a six-month mortgage holiday package which will relieve financial tension for some, the big issue is rising unemployment – with nearly 8.4 percent of New Zealand’s workforce employed in the tourism sector which has been hardest hit by the economic crisis.
While the nation-wide lockdown has halted residential sales activity, adversely affecting sale volumes, it can take a little longer to see the impact on property prices.
But, Bagrie says, while home owners will fight like hell to pay the mortgage, buoyed by funding initiatives, house prices will fall and we should not shy away from stating the obvious.
“What we mustn’t forget is that whether the residential property market is moving upwards or downwards, opportunity exists for all sides,” he explains.
In Auckland for example, house prices have surged some 94 percent since January 2010, pricing many Kiwis out of the market and forcing them to watch from the side-lines as wage inflation has failed to keep pace with rising home values.
The impending recession, Bagrie says, will yield opportunities for these buyers and those that see value in the ‘safe’ nature of bricks and mortar investment - as the performance of the property market over the last 10 years has been nothing short of spectacular, especially when contrast with fluctuations across the equity market.
“As asset prices fall, the returns on these assets will begin to look more attractive, allowing spectators a foot in the door.
“The question is, at what price?”
Where some retail banks are predicting a seven percent decline in property values through to the second half of 2020, its worthwhile keeping things in perspective.
As a comparison, New Zealand’s residential property market rose 8.6 percent in the three months to November 2019 alone, according to data from the Real Estate Institute of New Zealand (REINZ).
“While it’s not helpful to get caught-up in scaremongering commentary, the reality of COVID-19 is that the New Zealand economy is entering a recession and it’s going to be extremely difficult for many Kiwi households and businesses.”
This in turn will have an impact on both the residential and commercial property markets.
Bagrie says that while the economic situation may be grim, this recession has the potential to present some of the most rewarding buying opportunities not seen since the last millennium.
“Opportunities exist for those that approach the challenges with maturity – think about what’s important; health, family, then the financials - liquidity, cash-flow, risk management.
“Take one hell of a deep breath as your best decisions are sometimes made during these challenging times,” Bagrie says.