Will the sky soon fall on house prices? Retail’s loss is industrial’s gain. 10 more insights affecting investors in property news this week…
In property news this week…
- Will the sky soon fall on house prices?
- Interest rates
- ASB slashes forecasts for term deposit rates
- Retail’s loss is industrial’s gain
- Provincia building escapes disaster, again!
- Barfoot & Thompson’s sales at same level as last property boom
- The depression that wasn’t
- National insolvency cliff looming
- Export prices hit record high
- Small businesses show promising strength in July
- Businesses ‘look through’ re-emergence of Covid-19
- Keeping Wellington’s character means keeping people in cold and mouldy homes
Grab a cuppa and enjoy your property news this week…
Will the sky soon fall on house prices?
Tony Alexander, ex-BNZ chief economist, says ASB’s recent housing confidence survey (reported in last week’s Property News this Week) reflects the current residential real estate market and challenges those still clinging to the view that the sky will soon fall on house prices.
“The latest ASB survey shows that a net 18% of people in Auckland and 21% nationwide feel that now is a good time to buy a house. These are the strongest results since 2011 and 2012 respectively.
“The June quarter results were 1% and -1% from 11% and 9% in the March quarter. These numbers tell us people got a shock, pulled back, but since lockdown have changed their thinking drastically on housing.”
Alexander says investors and first-home buyers in particular have been “piling in”.
Surprisingly, they are not buying because they expect prices to go up. Alexander says they are not “driven by some greedy expectation of tax-free capital gain, as many haters would have us believe.”
“A net 17% of people expect Auckland prices to fall over the next 12 months, and a net 11% nationwide expect prices to go down over the same time period. (I do not share their views). These are the lowest results since the GFC.
“People are buying despite thinking that prices will go down. They are thinking and acting now as they did during the GFC. Why? Because price expectations are not the only driver of house purchase decisions.
“For investors, the alternative to buying a house may be leaving their money on deposit earning an already low, and still declining, rate of return.”
“In NZ currently, the five-year term deposit rate averages 1.5%. It looks like inflation may average 1.5%, so you’ll go backwards by about 0.5% a year after tax then inflation.”
“What are the chances that the average … student hovel you might purchase right now will decline in price over the next five years? Not very high.”
Alexander says that if the Reserve Bank of New Zealand follows the Federal Reserve and targets inflation above a 2% average (given that here the rate has averaged just 1.7%), they will keep rates at low levels for many years. Plus, they will be in no hurry to raise them when inflation lifts a bit.
“Throw in still falling term deposit rates and we get a central bank running a policy they know will boost housing investment over an extended period of time. The price implications are obvious.”
Over 2021 it is likely that average house prices in New Zealand will be firmly back on a rising track – even if labour market weakness continues for a while and GDP growth is more muted than the common current expectation.
Fixed-term mortgage interest rates have temporarily plateaued for the last two weeks, but term deposit rates continue to slide. Our NZ Interest Rates Forecast page contains all the latest rates (scroll down to near the bottom).
“After many years of being losers when interest rates were high, borrowers are now winners,” says Tony Alexander.
“After many years of being winners when interest rates were strong, savers are now losers.”
“Basically, you win some, you lose some.”
What are the chances of the Reserve Bank intervening to prop up term deposit rates? Don’t hold your breath.
Alexander says the Reserve Bank didn’t force banks to lower high mortgage rates when the outlook for growth and inflation didn’t warrant it, just as it won’t force banks to raise deposit rates to help savers now.
ASB slashes forecasts for term deposit rates
On Monday ASB Bank said, “Our forecasts for term deposit rates and mortgage rates have been slashed.”
“We think that an RBNZ scheme to lower the OCR below zero and lend directly to banks, if introduced, would heap downward pressure onto term deposit rates.
“This is especially so now that the banks’ minimum core funding ratio has been lowered to 50% from 75%. Cheaper bank funding costs (term deposits account for around 60% of bank funding) would flow through to lower mortgage and business lending rates.
“They’re already at rock-bottom levels, but we see further downside.
“Our Senior Wealth Economist released his latest forecasts this morning. In short, we think term deposit rates could fall below 1% with mortgage rates for some terms below 2%.”
ASB then went on to say, “The promise of extremely low interest rates for years to come will continue to boost asset prices.”
“Our previous forecast for a 6% fall in NZ house prices (itself one of the least pessimistic around) was upgraded last week to ‘just’ a 3% fall.
“It’s worth remembering that all of this is exactly what the Reserve Bank is trying to engineer as it tries to reflate the economy.
“Boosting asset prices, encouraging debt accumulation, and the associated increase in inequality are unfortunate side-effects of the way easy monetary policy works.
“We can at least take comfort that we’re not alone. The US Federal Reserve’s commitment last week to allow inflation and employment to run hotter for longer, by keeping interest rates lower for longer than it might have in past cycles, promises to underpin all of these trends for some time to come.”
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Retail’s loss is industrial’s gain
The changing retail landscape is not good for retail property investors but great for the industrial and logistics market.
For example, I reported last week that Office Max is shutting down all of its retail stores as it transitions to an online-only business. As part of this process, Office Max is increasing its warehousing space by over 7,000 m2 in Auckland. Retail’s loss is industrial’s gain.
Businesses operating in ‘essential services’ or those who supply to these services are increasing their warehousing and logistics footprints at a huge rate to keep up with demand.
James Group says they expect to see some big names completing some big deals in the next few months.
Provincia building escapes disaster, again!
A building owned by Provincia Property Fund escaped unscathed from a fire that gutted THL Rentals next door on Richard Pearse Drive, sending toxic smoke billowing over the region and closing roads.
Photo: Matthew Theunissen, RNZ
Fire crews were called to the camper van rental business around 5am yesterday. The building was “well involved” in flames on arrival, shift manager Daniel Nicholson said. Staff from nearby buildings, including the 24/7 Fitness gym in Provincia’s building next door, were evacuated.
Nicholson said 19 fire trucks were at the scene at 6:30 AM, and the fire was at the fifth alarm stage.
Grant Webster, chief executive of THL, which owns Maui, Britz and Mighty campervan companies, said no staff were at the site when the fire started and that the business would be “inoperable for some weeks”.
It is the second time in recent months that a Provincia building has escaped disaster. On 27 June a tornado stuck East Tamaki, causing substantial damage to properties in Arwen Place.
Across the road from Northpower, who occupy a building owned by Provincia Property Fund, a building was partially destroyed.
Two doors up the road another building suffered substantial damage and a container was lifted and thrown through a fence onto the neighbouring property.
Meanwhile, Provincia’s building escaped with nothing more than a small branch through a window.
Feeling blessed 😇
Barfoot & Thompson’s sales at same level as last property boom
The latest Covid-19 Level-3 lockdown restrictions in Auckland had a negligible impact on Barfoot & Thompson sales with prices hitting a new all-time high in August and sales numbers being their highest for an August for five years.
“During the first, more restrictive lockdown, the Auckland property market was stopped in its tracks but in August the market sailed through the latest restrictions,” said Peter Thompson, managing director of Barfoot & Thompson.
“August trading was exceptional, and from a price perspective even better than July’s trading.
“Buyer demand was strong and consistent, and for the second consecutive month sales numbers for this time of the year were at a level last seen at the height of the last property cycle.”
The depression that wasn’t
Something very strange and remarkable is happening in the United States right now, says John Mauldin of Mauldin Economics.
“In the second quarter of this year, US GDP dropped a staggering 31.7%. Unemployment has skyrocketed – the worst-hit states are New York and Massachusetts, with 15.9% and 16.1%, respectively.
“We are in deep-recession territory and, as many of my expert friends and I agree, are headed squarely for a depression.
“And yet, at the same time, the stock market is booming. On August 18, the S&P 500 finished at a record 3,389.78, its first all-time closing high since February 19. On the same day, the Nasdaq finished at 11,210.84 – its 34th record close of the year.
“You’d be forgiven to think you’d fallen asleep and woken up in some “Alice in Wonderland”-type mirror world.
“As I said in a recent Thoughts from the Frontline issue, this recession is unlike anything we have experienced in the history of the US. That’s because we’ve never witnessed an economic disaster like we are witnessing today.
“We’ll likely see a very uneven recovery. Some sectors of the economy will break, some will slowly get better, and others will hit the ball out of the park.
“I do believe that in the midst of all this turmoil lies the seed of a transformation that will leave us in better shape than before.”
Source: John Mauldin Email
National insolvency cliff looming
The industry body for chartered accountants says the Government’s Covid support measures such as the wage subsidies have had unintended consequences of propping up businesses that might have failed in “normal times”.
And the accountants say there’s now a “national insolvency cliff looming” with the end of various support measures coming.
Chartered Accountants Australia and New Zealand (CAANZ) business reform leader Karen McWilliams said the wage subsidies, various tax relief measures and a ‘safe harbour’ from insolvent trading for directors “have had the unintended consequence of also propping up some businesses which would have failed in the natural course of events.”
McWilliams said liquidation statistics, “backed up by reports of looming large-scale closures in certain sectors such as hospitality,” represented a significant problem.
“A reality check will be coming for some once the various forms of Government business support are turned off,” she said.
Export prices hit record high
ASB Bank’s latest economic note released Wednesday reports Q2 Terms of Trade and NZ goods export prices have posted a new record high. Goods export and import volumes, however, have fallen on Covid-19 disruption, but pockets of relative strength are encouraging.
The strength of our export prices and Terms of Trade highlight how the country’s role as a food exporter is likely to provide the economy with a buffer as the global economy is rocked by the pandemic.
Traded goods volumes fell over Q2, with imports more impacted than exports. Export volumes have held up relatively well considering the disruption caused by Covid-19 lockdowns.
“However, StatsNZ has signalled that exports of services have slumped, as international visitors are locked out of New Zealand,” says Jane Turner, ASB senior economist.
“On balance, today’s trade data suggest that the decline in Q2 GDP may not be as severe as initially feared.
“The trade data echo some earlier data, such as retail spending and concrete sales, that suggest activity in some sectors may have recovered better than we expected from the initial Level 4 lockdown and that more activity was able to take place during the Alert Level 3 and Alert Level 2 restrictions.”
Small businesses show promising strength in July
The Xero Small Business Insights (SBI) data for July, released on Monday, showed New Zealand small business continued to steadily rebuild in July.
“Since April’s Alert Level 4 lockdown, we’ve seen a steady upward trend during May and June across both small business revenue and employment figures. The data from July has begun to level out and return to close to the numbers from 2019.”
“Encouragingly, small businesses continued to hire in July with a 0.8% monthly rise in jobs. This rise comes after jobs fell in the latter half of June, potentially as small businesses adjusted to the new Wage Subsidy Scheme criteria.”
“It is important to remember these figures are an average representation though, as it’s clear that a number of businesses across different industries and regions are still suffering from the economic impact of COVID-19.
“Looking at different industries, many showed an increase in revenue in July. Revenue for both hospitality and retail were up 6% compared to a year ago, and the manufacturing sector recorded a 13% growth in revenue year-on-year.
“These results could reflect pent up spending demand as New Zealanders emerged from lockdown, as well as a returning level of confidence in spending locally in shops and restaurants as the country almost completely removed health restrictions.
“On the other hand, the professional services sector took a hit, down 17% year-on-year.”
Businesses ‘look through’ re-emergence of Covid-19
Activity indicators in the ANZ Business Outlook survey slipped a little from their early-August preliminary reads, but on the whole, were relatively robust to the re-emergence of Covid-19 in the community on 12 August, to take a glass half-full view of things.
“The recent re-emergence of Covid-19 is disheartening, and has taken a real toll on businesses, particularly in Auckland. However, it appears that firms are looking through it to some extent, in that intentions and expectations saw relatively modest falls compared to the first half of the month.”
Headline business confidence, at -41.8%, was little changed from the early-month read, as was own activity, at -17.5%. Both of these reads are weaker than July, but didn’t deteriorate markedly as August progressed.
The retail sector has driven much of the rebound in activity indicators since June, but is losing heart rapidly.
The retail sector has been on a wild ride in recent times. “Retail is a tough gig, with relatively low barriers to entry and the move to online retail and increasingly indebted consumers making for a downbeat sector in a relative sense.”
“But in June and July, for a brief period, retail was relatively optimistic, as the bounce out of the initial lockdown period was more vigorous than anticipated. However, in August the sector fell back below the other sectors.
“That’s consistent with our consumer confidence survey, indicating households’ wariness about spending is increasing in this uncertain environment.”
Keeping Wellington’s character means keeping people in cold and mouldy homes
Wellington will be home to up to 80,000 more people by 2050, and the question of where they’re going to live is becoming increasingly pressing. Should the look of the central suburbs really take priority over warm, dry, affordable housing?
New Zealand is one of the few developed countries to suffer rheumatic fever, a disease linked to sub-standard housing, and each winter 25,000 to 30,000 children are hospitalised with preventable illnesses linked to damp homes.
Wellington City Council (WCC) is currently consulting on a draft spatial plan that aims to deal with the people likely to move to Wellington over the next 30 years. The plan would deregulate some housing construction, allowing new, warm, dry, affordable homes to be built.
But Keep Wellington’s Character (KWC), a campaign spearheaded by heritage experts and advocates including Historic Places Wellington, is calling for the council to plan for a smaller population growth scenario.
It also wants the council to reverse a proposal that resource consent no longer be required to demolish pre-1930s buildings in heritage suburbs.
Not only are many of these pre-1930s homes mouldy, cold and damp, but heritage protection has meant that most of them have been almost impossible to demolish. KWC would keep it that way.
Isla Stewart says KWC is aiming to preserve a rose-tinted past at the expense of everyone in Wellington who suffers the cost of higher rents, and at the expense of Wellington’s future growth.
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