Buying a home after lockdown - what you need to know

Housing Market Written by John Bolton, Apr 20 2020

This article is split into two sections. We’ll first explore the supply and demand issues, and secondly get into some tips and tricks to consider.

So, what drives the housing market and what does that mean post COVID-19? Ultimately any market will be driven by overall confidence and then by supply and demand issues. To state the obvious consumer confidence will take a hammering and house prices will fall but it is also an opportunity.

Supply side considerations

House prices typically fall the most when there is an oversupply of newly built and unsold houses. There is no oversupply of housing in New Zealand. Although a reduction in temporary visa and foreign students will reduce rental demand, this is partially offset by an influx of Kiwis coming back to New Zealand from overseas.

The majority of newly built houses are targeting the first home market, are priced competitively and reflect the underlying build costs and land values.

There will not be a reduction in build costs. Our Government will be competing with the private sector by kicking off large scale infrastructure projects. And building material supply-chains are still broken.

There could be a reduction in land prices. But even before COVID-19, there was pressure on land prices and for the most part it was resolved by developing smaller sections and increasing density.

Demand side considerations

Mortgage rates are at record lows, which improves affordability. However, this will be offset by lower post-COVID incomes. There will be high unemployment initially, likely around 10%, but it will be concentrated in the non-home owning part of the population. The majority of job losses will be across low wage industries – tourism, retail and hospitality. It will also hit on the gig economy, and youth unemployment.  The latter will be somewhat unofficial and go unreported.  I can just imagine how many students will stay on for an extra year of study!

The impact on house prices will be magnified in markets that rely on tourism, and given lower levels of home ownership it will disproportionately impact on landlords in these regions.  Landlords will have to face into increasing rent arrears, lower rent yields, and other motivated vendors if they are trying to sell.

Rental properties are generally of poorer quality, and are expensive to rent. So there is always a strong incentive in New Zealand to want to buy and that won’t change. In many cases now, it is cheaper to own than to rent and that equation will improve further as house prices fall.

Keys on a key ring

Consumer confidence

The biggest factor driving demand will be sentiment. How will prospective buyers and sellers feel about their current situation and their future?  At its simplest house prices are a reflection of our view of the future, but that can also be self-reinforcing. People will feel less confident if they expect house prices to fall and that will push house prices lower.  In a deeply pessimistic market there would be no floor to how much prices could fall, but most Kiwis are still optimistic about the future and see this as a short-term correction.

Nonetheless, in the short-term there will be an increase in the number of vendors who need to sell. Any immediate pressure will be partial offset by the ability to take a six month loan deferral ,and by very low mortgages rates.  Vendors who don't need to sell, won't sell.  Sales volumes will plummet, but not necessarily prices.  We've been here before with a frozen market in Auckland for the past two years.  House prices only fell 3%.

This time will clearly be worse.  The greatest pressure to sell will come from small business owners. They will be motivated vendors and prepared to take a lower price in favour of getting a deal done. Just how many need to sell, is an unknown, but will temporarily drop headline house prices.

Business owners and other motivated vendors (who may have lost their jobs) will be in the market now.  And they will continue to be in the market for the next 12 months. The headline numbers reported by the media take months before they accurately pick up a fall in house prices.  April will be an outlier and will be ignored. May will be surprisingly strong and likely a record month for settlements due to an accumulation of deferred purchases.  I'm not expecting to see prices officially falling until the June numbers coming out in early July.

First home buyers will not have the confidence to transact in this market. However, those that do will have more opportunities to (1) find better properties with less competition, and (2) secure a property at a lower price. This will be a temporary phenomenon until the economy eventually kicks back into recovery.

Any loss of confidence is cyclical and temporary.  The market will eventually recover and its hard to ignore very low interest rates and long-term migration. Buyers will procrastinate on the fence for a couple of years, miss the opportunity, and then surge back into the market like lemmings at the same time as everyone else as prices take off again; presuming construction stalls over the next couple of years and there is a lack of supply.

My thoughts on buying in this market

If you bought just before COVID-19 don’t worry about what you can't control – long-term, you’ll be fine. House prices will ease but not collapse, and any reduction will be short-term. The underlying drivers of growth in our economy are too strong and interest rates are exceptionally low.

The fall in house prices will be more pronounced in the top half of the market. If you own an expensive house, then expect to get hit with a reasonable price fall.  The simple answer is don't get divorced because that is now even more expensive!  In the lower half of the market, I would expect entry-level prices in good areas to stay largely unchanged.

Don’t wait to be told by the media that it is a good time to buy

The opportunities will be out there now. It’s a myth that house prices fall gradually - that's simply the way it's reported in market statistics.  At a transactional level, prices can fall quickly when vendors are motivated to sell.  The task is to find sufficiently motivated vendors and the good news, is they already exist.

Be patient

It is now a buyer’s market. Look at lots of properties to establish what good value looks like.  There is no need to rush. But value is not just price - it is also quality. In a hot property market, it can be much harder to buy quality properties, or to buy in the right locations without feeling you've paid over the odds.

Sure prices will be low for a while, but you will never find a good deal if you don't look.  You need to put the effort in and have the confidence to zig when others are zagging.

Make sure you understand your risks

Stability is important, especially employment and relationships. This is not a market that you want to be forced to sell into, at least for a couple of years.  Stay employed and stay married.

If you are in a secure but lower paying job like teaching or the public service, then this could be an excellent opportunity to get into the market but be patient.

There will be far less hype in this market, so take the opportunity to be more conservative and work on a mortgage that requires less than 40% of your after-tax income for servicing. That equates to five times household gross (pre-tax) annual income. (Use our mortgage calculator to play around with some numbers).

We are going into a period where, despite changes to the 20% LVR rules, bank criteria is tightening and there will be emphasis on post COVID-19 income stability and bigger deposits.

Lock-down has shown how easy it is to reduce discretionary expenses. Take the learnings. Save more deposit or pay-off consumer finance debt and student loans as quickly as possible. This will free up income and will help us with your mortgage approval. We can steer you towards the best strategy.

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