House price declines, a V-shaped bounce back, malls reinvented and 7 more important insights affecting investors in property news this week…
The reading list in property news this week…
- NZ economy heading for ‘V-shaped bounce back’ but not Oz
- Interest rates will remain close to current levels for the rest of 2020
- What Kiwibank’s interest rate cut means and why they did it
- How to lose an election – Greens envy tax
- Clickbait policy seals Greens’ fate as a non-starter
- Impacts of Covid-19 on the NZ tourism sector
- How Covid-19 changed the way we think about our homes
- No evidence of substantial house price decline since Covid-19
- Tony Alexander explains why house prices are so resilient
- Commercial Bay changes everything you thought you knew about malls
NZ economy heading for ‘V-shaped bounce back’ but not Oz
HSBC Australia and New Zealand chief economist Paul Bloxham is suggesting the New Zealand economy could be in for a V-shaped bounce back from its COVID-19 induced recession, while Australia faces a U-shaped economic recovery.
“The difference between elimination and suppression of the virus is on vivid display in Australia and New Zealand at present,” Bloxham says in a research note.
“The state of Victoria has had a spike in new case numbers in the past week, which has seen authorities slow the state’s reopening and ramp up testing. By contrast, in New Zealand, improved confidence as a result of elimination was once again apparent, with a third weekend of sold out rugby matches.”
Here’s the best line in the research note…
“Sold out toilet paper in some parts of Australia; sold out rugby matches in New Zealand – the signals from these differing phenomena support our contrasting ‘U-shaped’ versus ‘V-shaped’ recovery profiles for the antipodeans.”
QUESTION: Do you agree? Do me a favour and scroll down to the bottom of Property News This Week and leave a comment with your thoughts on which way our recovery will go.
Interest rates will remain close to current levels for the rest of 2020
Wholesale interest rates have not changed by much this past week and unless we see a radical change in the outlook for world growth the chances are rates will be close to current levels for the remainder of this year, says Tony Alexander.
“That is good news for borrowers because rates are so low, but bad news for investors because the chances of banks raising term deposit rates in the next few months are minimal. If anything, rates may decline slightly further.
“This is because demand for credit from the business and farming sectors has fallen away quite sharply. This is to be expected given the high levels of pessimism in these sectors and their intentions to reduce capital expenditure. This just reinforces yet again one of the key factors behind business and farming spending decisions – there needs to be confidence in the future.
“Low interest rates won’t drive business investment, and high interest rates also won’t impede it if there is confidence that good conditions lie ahead. Currently such confidence is not there.”
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What Kiwibank’s interest rate cut means and why they did it
This month, Kiwibank reset its variable interest rates by 1%, from 4.4% to 3.4%. Kiwibank’s general manager of business banking Nigel Gaudin discusses why this is a big deal for local businesses.
How to lose an election – Greens envy tax
The Green Party has unveiled a sweeping new welfare policy that would guarantee a universal income of at least $325 a week after tax, paid for by a new tax on assets and two new income tax brackets on high-earners.
The $325 guaranteed minimum income would be paid to every adult not in full-time paid work, including students, part-time workers, and the unemployed.
Sole parents would get $435 a week, and the current best start payment would increase by 67% from $60 per child to $100 per child, and made universal for children up to three instead of two.
The plan will cost $8 Billion a year, almost twice what is currently spent on current working age benefits.
Paying for this would be a “wealth tax” on assets and two new top income tax bands: 37% on income over $100,000 and 42% on income over $150,000.
Greens co-leader Marama Davidson says, “It will replace the dehumanising and unliveable social safety net we currently have, which we know does not allow people to live good lives.”
Labour party finance spokesman and current finance minister Grant Robertson said, “Labour is committed to reducing poverty and inequality and we’ve made significant investment in our first term. We will make our own policy announcements during the course of the campaign.”
National party finance spokesman Paul Goldsmith said the policy would punish Kiwis doing well rather than celebrating them. “At a time when we need our successful small business people to invest and create more jobs, the Greens want to tax them more.” National have pledged to not increase taxes at all in their first term if elected.
ACT leader David Seymour says, “the answer is to raise up those at the bottom with world-class education, a welfare system that doesn’t encourage dependence, a functioning housing market, and an economy that is growing and creating high-paying jobs. The alternative is divisive class warfare where the majority takes someone else’s property simply because it can.”
TOP leader Geoff Simmons says, “the Greens proposal taxes both the returns a business makes (income tax) and also the means of making that return (wealth tax) every year. It is anti-investment economic sabotage.”
Simmons also says the Greens claims about top tax rates of 42% being common overseas are wrong when it comes to investments. “When it comes to income taxes they are right. But in New Zealand income taxes apply to the income from investments also. This is not the case in places like Europe that the Greens love to compare themselves with. There they have payroll taxes which allow high income taxes but keep the taxes on investment income down. In the case of retirement savings, many countries exempt it entirely.”
“Here in New Zealand we tax the returns for most investments at the marginal tax rate. This can be as high as 33%, which is very high compared to similar taxes overseas. Even the inflation component of investment returns is taxed, which means that effective tax rates can be very high indeed.
“Take the most extreme example – current bank deposit rates. If you have money in the bank currently you are lucky to get 2% interest. Some of that will get taxed, leaving you with roughly a 1.4% return – not enough to cover inflation. The effective tax rate is over 100% – people are currently losing money by keeping it in the bank.
“If you increase the top marginal tax rate this problem gets worse. Adding a wealth tax on top of that will mean anyone with more than $1m in the bank will be going backwards every year. More than $2m? No chance. Effectively it would become a cap on wealth.”
OPINION: Is punishing success the right way to solve poverty? A wealth tax will remove the incentive to invest in business. The super rich are likely to take their money overseas, as happened in France. And owner-occupied housing will still be the best place to put money from a tax perspective, which means more McMansions and less rental housing, driving up rents.
I’m all for equal opportunity, but the Greens are shooting for equal outcomes by stealing from the hard working and handing it out like lollies to the less successful. Their wealth tax is a well meaning idea with huge unintended consequences.
Clickbait policy seals Greens’ fate as a non-starter
The Greens’ tax and welfare package released last weekend is a bold statement designed more to keep the Greens’ party vote above 5% than to ever be implemented. But will it backfire on them? asks Peter Dunne.
Impacts of Covid-19 on the NZ tourism sector
ASB’s Economic Note on Tuesday reported on the impacts of Covid-19 on the New Zealand tourism sector. Senior economist Mark Smith says…
“COVID-19 represents a substantial negative shock to the NZ and global economy, arguably of greater severity than the Global Financial Crisis (GFC). Physical distancing and border closures have incurred a more significant toll on some sectors more than others, with tourism being the most visible casualty.”
“Domestic tourism within New Zealand is 40% larger than inbound tourism, and the switch towards domestic tourist experiences of New Zealanders will lessen the economic hit.
“Despite this, our estimates suggest that, with closed borders, NZ’s GDP will be 3-5% lower than it would otherwise be. Job losses are expected to be sizeable, with large direct impacts in the accommodation, hospitality, transport, educational and retail sectors.
“Tough decisions on whether some business operations will remain viable will need to be made. Business failures and job losses in the tourism sector look inevitable which will be gut-wrenching for people whose livelihoods are threatened by the outbreak.”
How Covid-19 changed the way we think about our homes
Covid-19 forced us to reconsider our relationship with the places we occupy, writes architect Mat Brown – and these new priorities will influence the design of our spaces in future.
No evidence of substantial house price decline since Covid-19
New Zealand property values have fallen just 1% since the start of the Covid-19 crisis, according to a new index designed by OneRoof and its data partner Valocity.
Of the 16 major regions in New Zealand, 12 have seen declines since March 25 – the day before the country went into month-long lockdown – with values in the remaining regions stalling.
Auckland values bounced back from their post lockdown drop and are currently down 1.6% from March 25.
James Wilson, director of valuation at Valocity, said: “With the index, we can start to judge whether the better than expected market activity post lockdown is a dead cat bounce or an indication that the underlying drivers of the market pre-lockdown are still in play.”
Wilson notes that the index clearly shows the erosion in property values isn’t a crash. “For example, North Shore values are where they were at the start of February, when the market there was picking up speed. Auckland City is back to where it was at the end of January,” he says.
Tony Alexander explains why house prices are so resilient
Tony Alexander says there are some large factors offsetting the negatives of rising unemployment, falling business incomes, business closures, pessimism, reduced net immigration and tighter bank lending rules.
Alexander has been emphasising the various positive and offsetting factors since before we went into lockdown late in March. Here they are again, in no particular order of importance…
Record low interest rates
Investors are actively looking for returns better than what they can get on bank term deposits, of which they have too many having saved up extra money during lockdown.
Money saved not travelling overseas
These lump sums can go a long way toward building a deposit for a property whether to live in oneself or as an investment.
Overseas experience post-GFC and as admitted by the Reserve Bank, quantitative easing places upward pressure on asset prices.
Migration not collapsing
Not only was there a net inward migration boom of Kiwis just ahead of lockdown, our compatriots continue to flood back in. This raises the question, with 33,000 extra people beyond estimates in the country in April, and the net 2020 flow likely to be well above zero, could Covid-19 actually boost net flows for calendar 2020 above what they would otherwise have been?
Building businesses are currently busy finishing jobs. But with banks pulling back from funding property development the rate of growth in housing supply will slow over the next couple of years.
Low debt growth
We went into this crisis with low growth in risky bank mortgage lending. LVRs were in place from 2013, and banks have been applying high test interest rates for calculating debt servicing ability.
Job losses of renters
The majority (not all) of people losing employment during this crisis work in the generally low-paying sectors of hospitality, tourism, entertainment, and retailing. Most will not own property. In addition, whereas in the GFC 4% of jobs in NZ were held by migrants on temporary work visas, the proportion this crisis is 8%. They are not property owners and many will find they have to leave New Zealand.
The Covid-19 crisis has not slashed willingness to take risks and invest. The opposite is happening with young people in particular flocking into the sharemarket. This investing attitude will likely naturally roll over into property investment also. In fact, my Spending Plan Survey shows that a net 15% of people aged at or below 30 and a net 16% of those aged 31-50 plan boosting investment in property.
Working from home
This boosts housing demand because it is easier to remodel one’s own house to accommodating working remotely than to expect a landlord to do it.
Temporary downturn – a “new” factor
The health-induced recession of 2020 involves a temporary cessation of some economic activity, not decimation of our economic base. Standard and Poors estimate that whereas three years after the GFC our economy was 10% smaller than it would otherwise have been, this time they think the decline will be just 3%. Three years after the GFC NZ average house prices were exactly the same (on average as in 2008. With far less economic destruction this time the implication for where NZ house prices will be in three years from now is fairly clear.
We went into this crisis with only 19,000 properties listed for sale compared with 46,000 heading into the GFC. There is a long queue of frustrated buyers hoping that the Covid-19 downturn will bring forth sellers so they can finally secure a property.
Commercial Bay changes everything you thought you knew about malls
Duncan Greive says the new Commercial Bay mall in downtown Auckland flips the traditional mall model on its head, prizing food over shopping and public transport over private.
“The great malls of our time are defined by having near infinite carparks and existing near to motorway on- and off-ramps.”
“Like a casino, which has no visible clocks, natural light or exit that anyone can find, mall operators want you to stay as long as possible and spend as much as you can. This is why food courts became a key bolt-on to the mall experience – if people get hungry, they might leave. Let them eat, so that they might stay.”
“They were conceived of and constructed so their owners could extract the maximum possible rent from retailers. And each is still situated next to motorways, with frankly eerie amounts of parking around everywhere.”
“Commercial Bay flips the whole thing on its head. It cost $1 billion, or 50 times what LynnMall did back in ’63, but the tag is misleading – it also includes 38-storey PWC tower and an Intercontinental for good measure. More than the price inflation, it’s the inversion of the classic mall archetype that shows just what a quantum leap it is.
“Firstly, rather than a bunch of retail with a food court attached, Commercial Bay is a food court with a bit of retail attached.”
“But even that understates the gravity of the shift. The hospitality areas – divided into multiple distinct areas, with different price points and pace – are clearly the result of meticulous care and thought. There are none of the chains that have dominated food courts for decades here – no McDonalds, no KFC, no Subway or Coffee Club.”
“Instead it is tenanted by outposts of a swathe of hospitality clients that barely existed five years ago, like vegan bakery Tart, or cannot be found anywhere else, like super buzzy and great new Korean restaurant Gochu.
“The function of the food is no longer to energise a hungry leisure shopper. It’s now there to attract them in the first place. Food has gone from a cynical afterthought to the main attraction.”
“It’s also not near a motorway, and if there’s carparking I never saw a sign for it. It’s the first major development to face a future where the private car is not the default transport mode.”
“This is extremely big and consequential, for New Zealand, and for our economy. It is the confluence of a number of megatrends, and seems to anticipate them, rather than resist them, the way other recent megamalls do.”
“Commercial Bay is the new mall of our dreams, at once familiar and in its own way, quite radical.”
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That’s it for property news this week. I hope you enjoy the read and have a great weekend!
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