Will Covid-19 just make New Zealand’s rich richer? Probably

Analysis: If you have assets, a home loan or a sustainable business, you might be safely aboard the ark. Susan Edmunds reports.

New Zealand’s monetary response to the Covid-19 pandemic may create increasing inequality, leaving the wealthy better off and those who were already struggling even further behind.

Many headlines in the first half of this year have pointed to impending economic doom, but there are now signs that the downturn may not be as bad as some feared – and some people in particular will actually benefit.

Although house prices are still expected to drop over the rest of the year, and unemployment to increase, quantitative easing by the Reserve Bank (you might know it as money printing) is pushing large amounts of money into markets.

Quantitative easing drives down interest rates, and the combination of the extra cash floating around and the lower rates is expected to push up the price of assets such as houses and shares.

Although the owners of those assets benefit from capital gains, their costs of holding investments will fall in many cases. Money borrowed to buy houses or to fund businesses will become cheaper. If you were coming to the end of a 20-year $400,000 loan fixed at 4 per cent now, you could probably roll over to 2.5 per cent, leaving you an extra $140 a fortnight better off.

Interest-free loans are being offered to help business owners through at rates that are not available on personal loans for people who are struggling.

About 60,000 people have taken up the option of deferring their home-loan payments – although that doesn’t get them out of the debt, and interest still accrues, it’s a lifeline that isn’t available to renters.

Combined, all these factors could mean that people who have assets, home loans or sustainable businesses can make it to the other side of the downturn in a pretty solid position.

There’s the caveat that you probably need to maintain your income through this period but there, too, the job losses in large numbers seem to be coming in hospitality, retail and tourism roles – and less in higher-paid industries. Data from the Ministry of Social Development last week showed European JobSeeker numbers dropping between May and June while numbers increased for

Ma¯ ori.

Dominick Stephens, chief economist at Westpac, said asset prices would ‘‘certainly be higher’’ than they would have been without quantitative easing.

‘‘Quantitative easing is nothing special, what’s important is interest rates. The ordinary person doesn’t care that the central bank is quantitative easing. They look at interest rates.

‘‘Quantitative easing tends to bring interest rates down and very low interest rates tend to support asset prices.’’

Stephens said he had expected that an economic downturn, unemployment and general uncertainty about the future would result in a ‘‘fire sale’’ and drop in asset prices followed by a vigorous recovery.

He said that appeared to have already happened, and very rapidly, in share markets, which dropped in March but then bounced back. Although he still expected to see some of that effect in house prices and commercial property values, the evidence so far was ‘‘pretty minimal’’. Real Estate Institute data this week

The wealthiest people would need to realise that patience for them continuing to become wealthier might wear out at some point.

indicated the market was back to levels similar to pre-lockdown.

‘‘Interest rates can only stay low if inflation is low. If in three years inflation is still low and interest rates are still low, asset prices could be rising rapidly,’’

Stephens said.

People who owned assets – such as houses – would be better off, he said, while those who were waiting to buy them were worse off.

The Opportunities Party (TOP) leader Geoff Simmons said quantitative easing was ‘‘trickledown at its finest’’. The people to whom it was meant to trickle would rarely see the benefit.

The Reserve Bank and Government were cushioning mortgage-holders and some business owners, and international evidence showed quantitative easing was rarely unwound.

‘‘Effectively we’re talking about printing money to keep interest rates down, the effect overseas seems to be that you create even more capital looking for a home; real estate and share prices go up.’’

Sam Stubbs, founder of KiwiSaver provider Simplicity, said it would be a ‘‘silver lining’’ of the pandemic – but only reserved for the better-off of New Zealand. The wealthiest people would need to realise that patience for them continuing to become wealthier might wear out at some point, he said.

The risk to this scenario is inflation. Stubbs said that, internationally, quantitative easing had not been seen to be a particularly inflationary force. But if the pandemic disrupted supply chains or pushed general prices up in another way, central banks might start to have to raise rates. That could start to make property and shares a less attractive place to be.