Childcare centres fear for their future. The housing ‘correction’ is behind us. And 9 more insights affecting investors in property news this week…
Distilled property news for investors. Our aim is to glean the important economic and property insights affecting investors from the torrent of information filling our newsfeeds each week so you don’t have to. We then present them in digestible snack form – tasters, if you like, for the full article.
Read on and enjoy your economic and property news this week.
In property news this week…
- Childcare centres fear for their future
- Negative interest rates edging closer
- No end to the interest rate cuts for savers
- Rents for central Auckland apartments down by $60 a week
- The housing ‘correction’ is behind us
- Double-dip recession next year, but housing rolls on
- First-home buyers take a record share of the housing market
- Lift in traffic volumes ‘a story of resilience’
- Unemployment prospects
- Kiwis coming home in ‘crazy numbers’
- Good news you probably didn’t hear about
Childcare centres fear for their future
Childcare centres are worried about their financial sustainability. They say attendance is down because parents are working fewer hours, working from home, or not working at all.
Centre managers say Government subsidies only account for half their income, with the other half coming from parents’ fees, which they cannot survive without.
In July, a month after New Zealand had moved back down to Alert Level 1, many childcare centres were reported to be struggling because thousands of children were staying away.
About 20% of under-fives had still not returned to early learning after lockdown, the Early Childhood Council said.
With fewer enrolments, centres get less income and some have too few children to be sustainable.
Sarah Alexander from ChildForum said for some centres the drop in attendance might not be temporary.
“For some services parents have lost their jobs, and it’s unlikely that the demand for childcare will return to normal unless the parents have jobs again, and are earning at similar levels to be able to afford care.”
Early Childhood Council chief executive Peter Reynolds said the average of 20% of children away was not spread evenly – some centres had a lot more missing, and there was no clear pattern.
He expected some would be forced to close before the end of the year.
Maria Johnson owns several centres and said, “It’s not an easy sector to be in, we’ve had so many cuts over the past 10, 12 years where we’ve just really been ground down.”
Darius Singh of Chrysalis Early Learning Centres in Auckland and Tauranga said in July that up to 5% of children might normally be away during winter because of sickness, but about 30% were now not coming in.
He said extra government funding provided during lockdown shielded the industry from the immediate effects, but it was now beginning to cut deep.
“We obviously can’t sustain this… I think the ultimatum is closure for a lot of centres.”
Singh said many families who had lost jobs were unable to afford the fees, but others were keeping children home over fears about Covid-19. The most frustrating thing, he said, was that every quarantine breach added to those fears.
Professor Linda Mitchell and her University of Waikato colleagues surveyed 156 managers from Early Childhood Education (ECE) providers on the impact of the Covid-19 pandemic.
Mitchell says “When Covid-19 happened and we had changes in enrolment patterns, people in the community losing their jobs, some who no longer find full day education suitable for them, that’s when the problems in the ‘for profit’ approach have been accentuated. It has meant that managers of education and care services are really worried about their future financial sustainability.”
The report, published in August and reported on in the New Zealand Educational Institute’s AKO Journal in September, explores challenges concerning the sustainability of ECE services and raises critical questions regarding funding and planning.
Mitchell’s research found that in the first week after the country had moved back down to Lockdown Level 2 in May, a third of centres had only a small proportion of children returning, while only 5% said all had returned.
The report says the sustainability of services has been highlighted as many ECE services coped with financial pressures, and 16% of centres even had to apply for a rent reduction.
Deeper in the report is this worrying nugget for the sector: “There is an urgent need to address the government’s aim to deter for-profit entrepreneurs and ‘[turn] the tide away from private profit-focused provision’ (Hipkins, 2018, p. 4).”
COMMENT: Investment companies often tout things like Government income or insurance from Lloyds of London as reassuring benefits for investors. The unspoken implication is that your money is pseudo guaranteed. What could go wrong?
Ask the 14,367 investors who trusted money to Bridgecorp. They were reassured Bridgecorp’s loans were guaranteed by Lloyd’s of London insurance. Bridgecorp collapsed in 2007. Receivers took over 10 years to wrap up its affairs and investors got back 13.98c in the dollar.
Or ask my friend who established a tertiary training institute two decades ago when student fees were mostly funded by the Government. What could go wrong? Despite his experience and class-leading programs, he nearly went under. NZQA criteria and funding constantly change, and there’s latent animosity towards for-profit education. Whilst my friend held on, many others have failed.
Banks too, those most secure of tenants, are notorious for selling branch buildings to investors at handsome prices then failing to renew the lease, leaving investors out of pocket.
Even Government departments are subject to changes in sentiment, causing them to exit leases and consolidate staff into fewer and flashier buildings.
The moral of the story is that governments, insurance companies, banks and the like may not provide the security you’ve been ‘sold’ on. Seek good advice and keep your wits about you!
Negative interest rates edging closer
ASB Bank senior economist Mark Smith says entrenched low inflation provides a free hit and allows the RBNZ to deploy additional policy stimulus.
“We have pencilled in a negative OCR from April next year but note this is conditional on the economic outlook, operational hurdles being cleared, and the RBNZ being confident this is the best policy option available.”
“We expect annual headline inflation to dip at the start of next year but for annual CPI deflation to be avoided. The NZ economy has proved to be more resilient than we expected, the housing market is booming, and some of the downside risks for the economy and medium-term inflation look to have dissipated.”
“Policymakers in NZ and abroad have pulled out all the stops and will maintain highly stimulatory settings until they are confident economic activity has turned the corner. This will mean tolerating higher inflation if need be.
“We expect the RBNZ to introduce a funding for lending programme (FLP) before the end of the year, to maintain a sizeable pace of asset purchases under the LSAP [large scale asset purchases programme] and to continue to flag the likelihood of a lower OCR.
“Whether the RBNZ will actually go down the negative OCR route is still unclear and will be contingent on the economic outlook.
“We have pencilled in a -0.50% OCR by April next year, but the risk is shifting towards the RBNZ doing less.”
COMMENT: If and when the OCR goes negative, it bodes well for borrowers as mortgage rates will be pushed even lower, but not so well for first-home buyers as house prices are pushed ever higher by their increased ability to borrow more.
But it does not bode well for those reliant on income from bank deposits. A negative OCR will heap more downward pressure onto already historically-low term deposit rates.
No end to the interest rate cuts for savers – how low will they go?
ASB’s term deposit rate cuts set a new low benchmark ahead of the next Reserve Bank Monetary Policy Statement, writes David Chaston.
“Just 25 days out from the next Reserve Bank Monetary Policy Statement, term deposit interest rates have fallen again with one bank now reducing all its key offers below 1%.
“ASB now has all its rates for terms out to two years below 1%, the first bank to sink to this level.
“This move accentuates the negative after-tax, after inflation returns from holding money at a bank. (Inflation is running at 1.5%).
“The Official Cash Rate has fallen from 1.00% to 0.25% so far this year. But term deposit offers have fallen more than that. In mid September when we last checked the downshift, it was -1.25% in average bank rates. It is now fallen to -1.52% over the past month.”
Chaston says banks are not trying to attract funds. “In fact, the reverse is happening and offers tend to be grudging, minimum offers out of ‘sympathy’ for depositors – and don’t count too much on the ‘sympathy’.”
COMMENT: ASB has just cut its 1-year, 18-month and 2-year term deposit interest rates to 0.9% as reported in our Interest Rates Forecast page. ANZ, Kiwibank, TSB and Westpac have also cut their rates.
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Rents for central Auckland apartments down by $60 a week
There has been a significant decline in rents for central Auckland apartments over the last 4 months, writes Greg Ninness.
“The latest bond data from Tenancy Services shows the median rent for all newly tenanted apartments in central Auckland has dropped from $520 a week in May to $460 a week in September.
“That’s a drop of $60 a week (-11.5%) over four months. It also means the median rent for apartments in central Auckland is now $40 a week cheaper than it was in September last year.
“The decline appears to have affected all types of apartments, with rents for one, two and three bedroom units all declining over the last few months.”
“With no indication yet on when overseas tourists and students will be allowed to enter New Zealand in significant numbers again, the short term outlook for apartment rents in Auckland’s CBD looks grim.”
“Investors in particular are being very cautious on price, because it is so difficult to gauge a CBD apartment’s potential rental income stream at the moment. However rent rises have been relatively modest in most parts of the country over the last 12 months.”
The housing ‘correction’ is behind us
ASB Bank senior economist Mike Jones says, “Blink and you would’ve missed it. The housing ‘correction’ is behind us.”
“A more severe housing shortage, a less gloomy outlook for the labour market, and the RBNZ’s effective ‘green light’ for asset price cycles all promise to keep house prices rising at a rapid clip over the coming 12 months,” says Jones.
Jones says New Zealand’s long-running residential construction under-build has produced a shortage of around 60,000 to 65,000 houses, around twice what was previously assumed.
And he says, “Flat-lining net migration and some roll-back of policy support will slow rather than stall the market next year.”
As a result ASB has materially upgraded its forecasts. They now expect annual house price inflation of 9% by year end, and have flipped their previous small negative prediction for June 2021 to an 11% positive annual increase.
Double-dip recession next year, but housing rolls on
The economy is expected to slip back into recession early next year as delayed job losses, falling consumer spending, and the absence of international tourists bites into growth.
Economics consultancy Infometrics’ chief forecaster, Gareth Kiernan, said the economy had fared better than expected as it emerged from the first impact of the Covid-19 pandemic but was facing a crunch early next year.
The economy is in a technical recession after contracting in the first half of the year.
However, it’s expected to show a solid rebound in the three months ended September.
Kiernan said the loss of international visitors would be felt during summer, while retailers would be hoping for consumer spending going into Christmas.
“Other businesses are also likely to reassess their staffing requirements heading into the new year if there is any softness in demand conditions.”
Infometrics expected the housing market to remain buoyant with demand driven by a spike in returning New Zealanders and record low interest rates, although the growth in house prices was expected to slow over the next year.
“Renewed house price rises have been a side effect of the Reserve Bank’s efforts to stimulate the economy,” he said.
“Job losses to date have been concentrated among segments of the population that are less likely to be homeowners.”
First-home buyers take a record share of the housing market
First-home buyers and investors now account for over half of all residential property sales as existing home owners sit tight, says Kelvin Davidson from CoreLogic.
The share going to first-home buyers of 25% was their highest figure on record, surpassing the previous peak of 24% in 2006-07. KiwiSaver withdrawals remain one important factor in their ability to stay active in the market.
“First-home buyers have obviously also benefitted from low mortgage rates, while a willingness to switch from standalone dwellings to instead purchasing an apartment or townhouse has helped too.
“But first-home buyers have also been tapping their KiwiSaver funds, with more than 44,300 withdrawals for first home purchase in the year to March 2020, up from about 39,600 the previous year.”
Davidson says a factor in owner-occupiers sitting tight is the shortage of listings, which means they can’t find the next property to move to.
Kiwis coming home in ‘crazy numbers’
New Zealanders are coming home in “crazy numbers”, in what’s becoming known as the ‘brain gain’. One expert says we’re seeing decision making under extreme uncertainty.
They’re midwives, nurses, teachers, CEOs, engineering professionals, people who work in the service industries … all the industries the country has a shortage in. They’re cutting their overseas adventures short, packing up their lives in more exciting locations, running from rolling lockdowns and heading home. They’re bringing connections and skills. The Kiwi diaspora is reversing.
Today on RNZ podcast The Detail Sharon Brettkelly talks to economist Julie Fry, who straddles living in New York and New Zealand. She looks at migration policy issues.
“New Zealand looks very attractive right now,” she says.
At the moment the numbers are crazy. We’ve gone from losing nearly 20,000 New Zealanders a year to foreign countries, to gaining 7,200 in the year to March. As the borders closed they continued to arrive, choosing to spend two weeks in a hotel room in isolation to be here.
To be able to predict how many of those people will stay is looking into a very murky crystal ball. “This is decision making under extreme uncertainty,” says Fry. “Who knows when there’ll be a vaccine, who knows whether people will be able to go back to where they’ve come from, everyone’s facing hard choices.”
Julie Fry also dismisses the ideas that returning kiwis are buying houses and pushing up the prices, saying the numbers aren’t there for that. “If you think we’ve got a net gain of 7,200 kiwis relative to an average year where we might have net migration of 56,000 people … numerically you would expect that impact to be smaller. If you look at what population pressures have been from inflows in previous years, it’s just nowhere near that kind of scale.
“The real issue is the lack of housing supply. You can’t blame them for something that’s been going on for years.”
Brettkelly also talks to recent returnee Jonathan Milne, the new editor of NewsroomPro, who’s brought his family back from a stint in the Cook Islands. He tells her what was behind their decision to uproot earlier than planned and come back home in these uncertain times.
“I think it could be an inspiring and innovating time for New Zealand,” he says.
Lift in traffic volumes ‘a story of resilience’
ANZ’s Truckometer represents a timely barometer of economic momentum. It shows heavy traffic volumes – a real time and real-world proxy for economic activity – lifted 4.1% in September.
Light traffic, which has a 6-month lead on activity as measured by GDP, bounced back 12.3% in September as the Alert Level restrictions eased.
“Both indexes are higher versus a year ago, reflecting catch-up activity rather than an economy running hot… But it’s a story of resilience nonetheless.”
Tony Alexander has a theory he’s been running on since early in the Covid-19 shock which goes like this.
“The extent to which the unemployment rate rises will be a lot less than people are thinking. There are many reasons for this… But the one I want to highlight at the moment is my view that many older people, seeing the shock to the labour market from the impact on businesses of fighting Covid-19, will choose to leave the labour market.
“Some will have been minimally connected, simply doing some work because it yielded good social connectivity. Others will have been coasting along as we all do, happy with life and seeing no need to initiate any big changes.
“But Covid-19 has generated a wave of soul searching around the world which seems to have led many people to focus anew on the things which are most important to them. Many people seem to have decided to initiate lifestyle changes either earlier than they were planning, or which they had simply let slide.
“For some this has meant buying a retirement home in a desired location earlier than planned, and this seems to be a phenomenon in Otago with older people buying properties in the Queenstown Lakes District. I imagine the same thing is happening all over the country.
“They may not move in right away, and they might rent the properties out for a while or simply use them as holiday homes. But they are solidifying their retirement plans.”
“With regard briefly to other reasons why the unemployment rate is unlikely to scale the heights many people predicted back in March we have the following.
“First, the employment rate (not the unemployment rate) in New Zealand has averaged 67% in recent years compared with 65% ahead of the GFC. A lot of people have entered the workforce (accepted jobs) who don’t have families to support but simply opted to accept a position because so many jobs were on offer.
“Despite the image you are invited to accept of everyone in work desperately needing the job to put food on the table, the truth is somewhat different. For many people, working in paid employment is a choice. And for some of them, seeing the pain being felt by predominantly young people, will shift from paid to unpaid volunteer work with no loss of feelings of either worth or contribution.
“Second, we have become dependent upon the labour of foreigners. We need them to pick our fruit, prune our vines, tend to us in old folks’ homes, drive equipment on our motorway construction projects, erect our multi-storey buildings, and increasingly work in our house building sector. Without them we have a problem.
“The burden of some job losses will be borne by these people, [who make up] 8% of job numbers heading into this crisis as compared with 4% heading into the GFC.
“Interestingly, one of the labour market developments of this crisis has not been the wholesale loss of jobs across many sectors. It has been the negative impact of the absence of these workers locked outside our borders in many industries.
“Third, we went into this crisis with a shortage not just of skilled motivated people, skilled unmotivated people, unskilled motivated people, but unskilled unmotivated people also.
“We are not the NZ of old. We no longer suffer a structural deficiency of jobs occasioned by the loss of market access from the UK entering the EC in 1973 and the soaring of oil prices. We suffer a deficiency of staff.
“And just in case you struggle to understand that…, here is a graph showing the exact opposite of everything you were told during the 1970s into the 2010s – namely that our terms of trade are falling and we are essentially munted.
“This graph shows the ratio of our export prices to our import prices (defined as the Terms of Trade) since 1957, a few years after the Korean wool boom which provided quite a boost to the NZ economy. A protracted war in a cold climate tended to be good for our economy.
“We all learnt during our studies in the 1980s that the terms of trade for New Zealand was headed downwards along with the NZ dollar. We imported increasingly expensive oil and manufactured goods, while we exported food and fibre the world did not want and was shutting out through tariffs etc.
“But since early this millennium our terms of trade have been rising. Oil prices have structurally declined and the phrase ‘peak oil’ has come back into use. But now, it does not refer to peak supply. It refers to peak demand.
“And with regard to manufactured goods, production keeps shifting to whichever country offers the cheapest wage rates and the most lax health and safety standards.
“But with food, the increasing demand is for quality-assured product from sustainable sources. That is what New Zealand offers.
“Fourth, the extent of the rise in our unemployment rate will be mitigated by the government’s useful implementation of wage subsidy schemes. When a shock arrives the inclination and instinct of most businesses will be to protect cash flows and working capital by cutting costs wherever possible – including staff. The wage subsidy scheme prevented that from happening, and we have now reached a point where businesses are still facing decisions regarding staffing numbers – but they are baulking.
“They remember the shortages which prevented them from growing over 2019. They see the increasing discussion about labour shortages. And they see the unwillingness of the government to make their lives easy and allow in a whole lot more migrants.
“They are learning that growth and survival from now on is not a matter of laying off staff, it is a matter of keeping them.”
And finally, in not-property news this week something too good not to share…
Good news you probably didn’t hear about
I love science and technology and good news. Here’s some good news you probably didn’t hear about.
The proportion of the world’s children under the age of 5 infected with hepatitis B has dropped to just under 1%, down from 5% in the early 2000s. 85% of kids around the world are now getting all three doses of the HBV vaccine – and Gavi says it is on track to avert a further 1.2 million infection-related deaths between 2021 and 2035. Science, bitch! WHO
This one did not appear in a single mainstream news publication. Perhaps it doesn’t fit the narrative? The US Justice Department has released its crime data for 2019, showing that violent crime in the United States decreased by 0.5% last year, the third consecutive year of declines, and property crime dropped by 4.1%, the 17th consecutive year of declines. Hellholes, anyone?
Crime is declining in France too. While the idea of ‘ensauvagement’ (descent into savagery) – long a dog whistle of the far right – is now being parroted by all sides of French politics, the truth is that nearly all major crimes are lower than they were a decade ago. Since 2006, acts of physical violence outside the home have decreased by 8% and thefts with physical violence or threat have dropped by 61% in the same period. NYT
Electric car sales in Europe have smashed through even the most optimistic forecasts by experts. One in 10 new cars sold in 2020 will be electric or hybrid, triple last year’s sales. New forecasts suggest that it will be one in seven in 2021, as manufacturers scramble to comply with tighter emissions standards. Smart regulation + great technology. It really can be that simple. Ars Technica
Here’s an even bigger market signal. The world’s largest cement producer, LafargeHolcim, has become the the first global building materials company to commit to reducing its emissions within the next decade, and says it will reach 100% carbon neutrality by 2050. Reminder: the cement industry causes 8% of global carbon emissions. FT
Singapore has created the new 400 hectare Sungei Buloh Park in the northern portion of the island, a refuelling site for migratory birds and home to oriental hornbills, otters, saltwater crocodiles, and many other species. It’s part of a wider initiative to turn disused industrial areas back into natural landscapes, and plant 1 million trees across the city-state by 2030. Mongabay
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