The Auckland apartment sector is expected to take a 10 per cent hit to both rental streams and valuations, with the "low point" expected in about 18 months.
Auckland apartment specialist Robbie King expects the impact will be most felt in the coming six months as tourism and shorter-term tenants disappear, with about 15 per cent of the stock of about 30,000 apartments back on the rental market.
King said with 70 per cent of the city's apartments owned by investors, the current glut of empty residences would represent a "major challenge" to income levels.
And that was likely to result in an overspill of apartments hitting the market, representing a vicious circle of demand, which could see more than 4,000 apartments come back into the rental market or be sold outright.
Of those, he expects 1,000 apartments to come out of the leased hotel pool, another 1,400 from Airbnb and other online booking agencies and 2,000 from foreign workers and international students.
Auckland Council chief economist David Norman said the apartment sector was generally more volatile than housing so could show a bigger correction than the 5 per cent to 7 per cent expected in the general housing market given the direct impact of tourism and lack of international students in particular.
Latest numbers show there were 66,000 international-fee-paying students in Auckland in 2018, although King said the impact of losing those students would be more muted as many of those were housed directly by the universities while shorter-course students opted to stay in hostels and boarding houses.
Fewer hotel rooms
King said because Auckland isn't viewed as a domestic tourism destination, a lot of city hotels were expected to close or at least reduce the number of floors available for up to 18 months.
Rooms that were managed on behalf of investors at hotels like the Heritage, Quadrant, Quest and Avani Auckland Metropolis, would come on to the rental market either by the owner or the hotel itself.
"Market income ultimately determines value, so to a strict investor a reduction in market rent or income of event $20 a week will reduce an apartment's value by about $16,000," he said.
Airbnb and booking.com
The Waitemata Local Board lists 2,600 Airbnb listings, as well as about 1,900 apartments being used as part of a serviced apartment offering in the city centre area, run under online booking agencies sch as Expedia and booking.com.
While King doesn't expect all of these apartments to come back into long term rental use, with "about 25 per cent remaining on Airbnb, being rented out to business and domestic tourism," he thinks about two-thirds of those will come on to the rental market in the next half year.
Norman said the pre-Covid housing shortage could help absorb the shock, with about 15,000 new dwellings consented last year, by far the highest figures since Auckland wide records began in 1992.
Building work delivered was also up 17 per cent year on year to December 2019.
But with fewer buyers with access to credit, he said development activity would probably slow down as "developers wait and see what happens to house prices" and the effects that may have on their development while banks would also be more cautious about lending and might impose stricter lending requirements on developers.
He thinks development activity could fall by half over the next three to six months before recovering toward the end of the year. "The message is to keep building, as we do still have a housing shortage in the tens of thousands but I anticipate developers and funders will be more cautious in the short term while the market re-establishes."
King said the scrapping of the mortgage loan-to-value ratio for 12 months, as well as huge government stimulus spending, could help the apartment sector to a soft landing, with the market potentially at its lowest level in 18 months.
"I expect values to start climbing again in two years and be back to where they were in three. So, unless you can put the money to better use or make more money somewhere else I don't recommend selling, as we will look back at this as just a speed bump."