Economic pain is expected to roll in from overseas like a wave and drive down New Zealand house prices. Photo / 123rf
Covid-19 turned the lights out on New Zealand's tourist industry as if by the flick of a switch.
But its impact on house prices is expected to move more slowly, rolling in like a wave.
As global economic pain mounts, Westpac chief economist Dominick Stephens says it's not a matter of whether house prices fall but by how much.
"The wave is coming," he said.
Economists now tip prices to drop between 7 per cent and 15 per cent or more in the next year.
And that should give Kiwis reason to worry.
Our homes have been estimated by the Reserve Bank to account for 75 per cent of our household wealth and many see investing in property as the path to a comfy retirement.
Home ownership also helps set families up for better health and education outcomes, non-profit groups say.
Yet there is also reason to pause and take breath.
Plunging prices are indeed a problem for those in financial distress, who can no longer afford their home loan repayments and are forced into a sale.
But for the majority of home owners - able to ride out a storm without selling - house prices will largely remain a number on paper with no real-world impact on their finances.
Here experts and investors share their views on what to expect for property prices in a post-Covid-19 world.
New Zealand house prices fell 2.9 per cent in the early-1990s, 4.6 per cent in 1998 following the Asian Financial Crisis and 10.5 per cent during the Global Financial Crisis in 2008-2009.
When the GFC hit, national prices began a 15-month downward spiral. It then took just over three years for prices to recover to their pre-GFC levels, according to Westpac's Stephens.
But even with these price dips, new research by analysts OneRoof-Valocity found most homes sold during the GFC actually made a profit.
Owen Vaughan, editor of NZME-owned property listing platform OneRoof.co.nz, and James Wilson, director of valuations at OneRoof's data partner Valocity, examined the properties bought in the two years leading up to the global financial crash, between June 2005 and June 2007.
They reasoned that these homeowners bought at the top of the market and were therefore more vulnerable to price drops.
Wilson said: "The research found 15 per cent of these properties were later resold during the GFC – from July 2007 to March 2009 - while another 12.5 per cent were resold in the following two years, from April 2009 to July 2011.
"Of those resold during the crisis, nearly 80 per cent made a profit at a median gain of $52,000. Among those resold between 2009 and 2011, 65 per cent made a median profit of $45,000."
Vaughan said the median loss for the properties that did take a hit was $24,000 during the GFC and $22,000 in the two years after. "Interestingly - despite prices beginning to recover between 2009 and 2011 - more of the homes resold at this time made a loss than during the GFC years," he said.
Looking across all recent boom and bust cycles, house prices have performed strongly.
Auckland home values surged more than 250 per cent from $235,000 in 1999 to above $900,000 today.
National house prices leapt post-GFC from $359,000 in October 2011 to $680,000 last month - an 89 per cent increase.
Most pundits had earlier tipped prices to continue rising to new record heights through 2020.
The only thing that could ruin the party, they said, was an unknown global shock arriving from outside New Zealand.
When New Zealand rushed into its hard-line, alert level 4 lockdown on March 25, house sales virtually came to a standstill.
Seventy-nine per cent fewer homes sold in April compared to the same month a year earlier, a record drop, the Real Estate Institute reported.
Yet since the country eased back into the less restrictive alert levels 3 and 2, real estate agents have been surprised by the market's rebound.
Remarkably, Auckland's median sale price hit $925,000 in April, the second-highest price on record.
Peter Thompson, managing director of Auckland's largest real estate agency, Barfoot & Thompson, said while some buyers and sellers were hesitant, overall, there was "good activity".
His company sold 229 properties last week, down only 5 per cent on the same week last year.
Ray White Remuera's Steen Nielsen said his team sold 12 homes since the end of alert level 4 at prices ranging from $2.6 million to $7.3m.
The team had also taken 300 people through open-home inspections since the easing of alert level 4 and now had 42 "auction campaigns" planned for before June 30.
One home, a three-bedroom brick and tile unit at 34C Edmund Street in St Heliers, sold at auction for $1.71m. That was more than $500,000 above its council valuation.
Nielsen said buyers had initially been coming to open homes post-lockdown feeling entitled to a bargain.
But what they were finding was that by making low offers they were ending up in competitive auctions or "multi-offer" sales that ultimately drove prices up, he said.
The main thing holding the market back was a shortage of new homes being listed for sale, he said.
Loan Market mortgage adviser Bruce Patten also said there had been a pick-up in customers applying for home loans in the past few weeks and that he was encouraged by the banks offering record low interest rates in a bid to fight for customers.
Yet against these positives comes caution.
The Real Estate Institute's house price index - which attempts to give a more accurate picture of overall home values compared to median sales prices - showed national house values dropped 1.8 per cent during April.
"That is the largest monthly house price decline since May 2008, and the seventh-largest monthly decline this century," Westpac's Stephens said.
The Covid-19 pandemic's lightning spread across the globe has brought economic pain faster than traditional recessions.
There are now more than 5 million coronavirus cases globally with many countries still struggling to reopen their economies after rushing into hard lockdowns.
In the United States alone, nearly 39 million people lost their jobs in nine weeks – a scale of job loss not seen since the Great Depression in the 1930s.
"The outlook is grim with an unprecedented global economic slump under way," ANZ chief economist Sharon Zollner said.
She tipped New Zealand's gross domestic product to drop 8-10 per cent this year.
Tourism, hospitality and retail all faced ongoing slumps in customer demand, while the construction sector and some export industries also faced major challenges, she said.
The property market could not stand alone, unaffected by this, Zollner said.
Westpac's Stephens said house price falls often lagged economic downturns.
This was because while financial markets settled transactions daily and could react fast to downturns, property market transactions often took months to negotiate and settle.
He consequently tipped house prices to drop 7 per cent by the end of this year, using past recessions as a base for his predictions.
Zollner tipped prices to fall 10-15 per cent or more.
Stephens said he was keeping a close watch on a major indicator that would likely dictate when and how hard house prices fell.
"Unemployment is key," he said.
House prices fall the most when large numbers of people sell under financial distress and are forced to accept cheaper prices than they paid, CoreLogic head of research Nick Goodall said.
That happened most often when people lost their jobs or their businesses failed and they could no longer afford their mortgage repayments.
When Covid-19 hit the economy last month, more than 1000 New Zealanders a day went on a benefit with Finance Minister Grant Robertson warning jobless numbers would keep rising.
New Zealand's unemployment rate was now expected to rise from 4 per cent in December to as high as double digits - as bad as the Great Depression. That would mean at least 100,000 more people on benefits.
The Government's wage subsidy scheme - paid to businesses to help keep workers employed - was so far helping stave off larger job losses.
More than half the nation's workforce were now being supported by it, Brad Olsen, senior economist with analysts Infometrics, said.
And while there had been recent high-profile job losses - 1000 at construction giant Fletcher and 1300 at Air New Zealand – this was just a "lull before the storm", Olsen said.
"We expect a second wave of job losses as the wage subsidy runs out, and another wave later in the year as the wage subsidy extension finishes," he said.
"As well as job losses, fewer hours worked and paycuts are rising in prominence."
Additionally, 113,000 home and business loan borrowers either reduced or deferred their loan repayments under a six-month reprieve offered by banks when New Zealand first went into its level 4 lockdown.
CoreLogic's Goodall said this made August to October a key period to watch when both the wage subsidy and loan deferral schemes ended.
Migration and rental prices were two additional forces likely to put downward pressure on house prices, experts said.
High migration levels had helped create demand for housing and push prices up before the coronavirus pandemic.
But with borders now closed and New Zealand facing a tough job market in the future, ANZ's Zollner tipped migration levels to remain low for the next few years.
CoreLogic's Goodall also expected rent prices to drop. He said job losses in tourism, hospitality and retail would hit younger Kiwis, who were mostly renters, hardest.
They were consequently more likely to move back home with family or into larger share houses.
This would reduce rental demand at a time when Airbnb and short-term accommodation homes were also being converted back to long-term rentals and boosting stock.
Drops in rents could subsequently make investment properties less attractive to investors, leading to fewer house sales and a drop in prices, Goodall said.
On the flip side, New Zealand still had a housing shortage, Zollner said.
And the Government's massive $60 billion quantitative easing spending meant New Zealand would come out of the recession with extremely low home loan rates, Westpac's Stephens said.
Low home rates had previously - in the pre-Covid-19 world - been the key factor pushing up house prices, he said.
That meant that Stephens expected house prices to remain flat next year, before rising sharply up to 11 per cent in 2022.
"That would be an earlier recovery than after previous recessions," he said.
Stephens said there was a myth among New Zealanders that Auckland house prices fell further in recessions than other regions.
"The actual history of regional house prices shows that prices tend to fall faster in Auckland and Wellington after recessions, but not further," he said.
"For example, after the Global Financial Crisis, it took 18 months for house prices to fall 12 per cent in Auckland, whereas it took 51 months for prices to fall 15 per cent in Hamilton."
However, ANZ's Zollner did see different regions being more vulnerable to price drops than others.
She listed Auckland, Hamilton and Tauranga as among the most vulnerable areas to price drops due to their exposure to drop-offs in new migrants and construction activity.
Queenstown, Nelson, and the Mackenzie and Kaikoura districts were also highly vulnerable because of their dependence on tourism.
Among homeowners, the most at risk were those who bought recently at high prices using small deposits, pundits said.
Hawke's Bay multi-millionaire Graeme Fowler said many investors like him had been through several recessions and "survived comfortably".
The downturn could also be a good time for investors and first-home buyers to buy, he said.
That was as long as the numbers behind the deal made sense and the buyer had good income and hadn't committed all their savings to the purchase.
Fowler said he had a loan-to-value ratio of under 35 per cent on his portfolio.
That meant if he were to sell his $25 million worth of property at current prices, less than 35 per cent would go to the banks to repay his remaining home loans.
The rest would go into his pocket as money he had already paid off the home loans and as equity he gained from his properties rising in value after he bought them.
Maintaining lower loan-to-value ratios helped give more buffer to absorb house price drops, and Fowler advised new buyers on homes worth up to $1m to ensure they had loan-to-value ratios no higher than 80 per cent.
In other words, they should put down deposits worth at least 20 per cent of their home's purchase price.
Loan Market's Patten also advised homeowners to fight hard to keep their properties.
He recalled two customers who both lost their manufacturing jobs in the GFC.
One panicked and sold for $70,000 less than the value of their home loan, meaning they lost their house and still had to pay the bank $70,000.
The other did whatever it took to pay off their mortgage, one week flying to New Plymouth for work, then spending two months in China on a short contract.
Ten years later, the second customer's house had doubled in value, more than paying off the hard work, Patten said.
"That attitude will be the difference between who survives and who doesn't in many cases," he said.
The median profit gain in Auckland for house resales was $356,000.