Roller coaster is always on a loop cycle
Covid-19 may have been an early trigger for the housing market surge but boom was bound to happen
Higher house prices have made us wealthier as a nation and are the single biggest reason that New Zealand is now the fifth wealthiest nation in the world.
If you base your view of the property market on media reports and commentary you’ll have been hard pressed to form any sort of consistent view over the past 12 months because the market has been on a roller-coaster ride.
As recently as May last year some commentators were picking a drop in house prices in the wake of Covid 19 — with at least one of the major trading banks predicting that house prices would plunge by up to 15 per cent. Now, we’re in a period of sustained house price growth with house prices increasing by 14.8 per cent since the beginning of the lockdown according to data company Valocity. That’s a 30 per cent spread between the worst Covid-related prediction and the actual performance of the market — so it would be an understatement to say that these are unusual times.
It also makes it very difficult to identify who are the “winners and losers” of the market. This may be a favourite pursuit of media companies who like to present things in absolutes — but precisely who the winners are can change from month to month. This was best demonstrated by an email I recently received from someone who had read one of my recent articles and was taking me to task over my support of property investors. His argument was that investors are closing first-home buyers out of the market and need to be regulated to curtail their excess.
I understood his frustration — but his statement was only true if you look at the property market through a very narrow lens of just a few short months. However, if you look at the market in a broader context we know that first-home buyers have been the dominant buyer group in most of the country for the majority of the time since 2013. This makes picking a “winner” subjective and ultimately meaningless.
There’s also a question over how much Covid has really impacted the market and how much of what’s currently taking place would have happened anyway or has happened as a result of responses to Covid rather than Covid itself.
Let me provide two examples to make my point:
• House prices in Auckland would have been starting to increase whether Covid had happened or not, and I’ve been predicting this in my commentary since as far back as 2017. This is because of something called the property cycle in which house prices increase in six or seven of every 10 years and stay flat in the other three to four — so while Covid related initiatives may have brought the next Auckland boom forward by a few months, it was due to happen anyway. Covid didn’t create it.
• The burst of Property Investor activity prior to the reimposition of the Loan-tovalue-ratio (LVR) restrictions is arguably an unintended consequence of those same restrictions. In other words, if there were no LVR restrictions there would be no panic to beat them and Investors would be acting in a more considered way. In this respect, the Reserve Bank continues to be the architect of the very conditions it claims to be trying to address.
So are there any “winners” who can be reasonably said to have benefited from Covid in a way that would not have happened if the Covid pandemic had never taken place? I can think of three:
1. Anyone who has a mortgage. While the trajectory of mortgage interest rates has been down over the past (almost) 40 years — it’s unlikely that rates would be at their current historically low levels if Covid had never happened — so anyone who has a mortgage is better off as a result of the pandemic.
2. Property owners in the regions. While the property cycle means that Auckland house prices would be starting to go up about now whether Covid had happened or not — the rest of the country generally runs about three years behind Auckland and regional house prices should have been starting to flatten off about now. The fact that they haven’t is almost certainly a consequence of the cheap money currently available to those buying property. There’s a question over how long this can last — but for now, it’s increasing the wealth of those in the regions.
3. First-home buyers. Although first home buyers should always be the No. 1 focus of government housing policy, recent events have brought about a renewed focus on their needs and will almost certainly lead to a suite of government initiatives, to assist them, later this year. While the major obstacle to buying a first home is actually the ill-considered LVR restrictions (which are about to be reimposed) and not the market itself — any moves to support them will be welcome.
I haven’t listed any “losers” from Covid because I don’t believe that there any victims when house prices increase if the market is left to its own devices. Indeed, higher house prices have made us wealthier as a nation and are the single biggest reason that New Zealand is now the fifth wealthiest nation in the world.