Global Financial Market Meltdown in Progress Update #4
The New Zealand Property Market
In our last blog update #3 we touched on the NZ property market and gave you a snap shot of what lay ahead. We said there will be a DROP in Real estate prices which will escalate as current conditions take a hold on the economy. We said there will be a flow on ripple effect from the slowdown in certain parts of our economy which will have a massive impact on the property market. In this update we will look at how this is all starting to play out.
Firstly let’s get something very clear from the outset.
If you receive weekly e-mails or newsletters from Real Estate companies and agents you will have noticed the theme where they are stating they are “Continuing to sell a lot of property and expect the market to remain strong after the lockdown” – Are these people Delusional?!
Delusional I think not, but desperate and hopeful most certainly….
You must always remember when people make statements like this, they often have a big vested interest and an agenda, they are trying hard to restore calm and stop people running scared – as their businesses and livelihoods depend on it!
What’s really going on?
The Booming New Zealand property market is undergoing a rapid change due to the economic effects of the Covid-19 Virus. This change is similar to electric shock treatment, it is going to hit hard and have lasting effects! Here is why:
As we speak the world Airbnb market has collapsed, some are calling it the Airbnb apocalypse. Due to the world shutdown of international and domestic travel Airbnb bookings have stopped. This has prompted Airbnb owners to list their properties on the residential rental market which has in turn flooded that market. In London alone rental listings have had a 45% increase due to the flood of Airbnb properties. With NZ having seen a big swing to Airbnb (short term stay, motel like) accommodation over the last few years it’s a big deal here too.
For many Airbnb properties, the annual income they will generate via a normal long term stay tenancy will be greatly less than the income they would have normally received via short term stays via Airbnb, this will now make many of these property investments unviable and it will mean the owners now have to top up their mortgage payments out of their own pocket which they hadn’t planned on when they purchased them.
International Students & Seasonal Workers
Many have already departed and there is going to be a huge drop in International students and seasonal workers coming to New Zealand for at least the next two years. This not only hits Auckland hard but regional New Zealand where the seasonal fruit picking and harvesting takes place.
Worldwide unemployment has skyrocketed. The U.S has seen an increase of 17 Million people claiming unemployment benefits in the last 3 weeks! and New Zealand is no different. Due to the lockdown and the rapid demise of the tourism industry suddenly we have a lot of layoffs and redundancies in the aviation, tourism, hospitality, travel, and services industries to name just a few. Then we have all of the closure of the SME’s (Small to Medium size enterprises) Restaurants, retail shops, fast food, commercial business’s to name a few again. Many of these operate on a shoestring already and won’t be able to take this current hit and unfortunately just won’t survive. Yes the Government is handing out subsidies to ease the pain but for many this won’t be enough, and if they do survive, they will have to survive on an even tighter budget.
The Kicker…The Rental Market
Where this all takes us to is the New Zealand Rental market. Remember the rental shortage we had and sky high rents? Well things are about to change.
When you combine all of the above the end result is a flooded rental market, we are already seeing tenant requests for reduced rent and rent payments stopping altogether. Combine this with a big increase of rental properties to rent and the end result will be a reduction in rental prices.
Now I think it’s important here to mention the division in the rental property market, for simplicity sake let’s split the rental housing stock into just two groups.
- Medium to lower-end homes and units
- Higher end more expensive homes/Top end rents
When there is any kind of downturn in the economy, higher unemployment and businesses failing in numbers, the higher end rental properties suffer the most and take the biggest hit, as many of those tenants can no longer afford the high rent to live in a top end home. In harder times people tend to ‘downgrade’ their lives, cutting out on luxury or non-essential expenditure. Opting to rent a less expensive property and reduce their main out goings where they can.
We are predominantly cash-flow investors we tend not to invest in that higher end of the market anyway, preferring to invest in the medium to lower end where we are able to generate higher rental yields, which somewhat makes our investing more recession proof when compared to the investors in the higher end of the market.
Flow on effects for the investors who own these higher end rentals and Airbnb type property is they will struggle to keep up with mortgage payments to the bank. We are talking Residential AND Commercial property here, it’s going to be a double whammy!
Be prepared for an increase in investment property listings, some of these vendors will be Highly Motivated and will need to exit quickly as they over extended themselves and now with reduced or no rental income at all are in a pile of trouble with their banks.
Growing lack of Buyers
There will be a massive “Contraction” from buyers in the market from here on in. First home buyers have seen their Kiwi saver shrink just recently. And many who have been laid off or have had to shut their business down will be completely out of the market altogether. Expect the “Mum & Dad Investors” who drive the investment market in Boom times will completely disappear from the scene.
Developers, Construction & Building industry
You will see a lot of Developers vanish in a puff of smoke never to be seen again in this environment, a lot will go Bankrupt. Any developers who are in the middle of projects or readying to sell “off the plan” are in a pile of trouble currently. They will struggle for any sales moving forward and many buyers who have already bought off the plan but are yet to settle will find they are in a position where they can’t settle.
Construction companies will struggle to pick up more projects moving forward due to developers cancelling projects or going bankrupt. This is going to have a flow on effect for tradies who may not get paid for work completed and may find themselves looking for jobs in a barren landscape.
The Residential Building Industry will slow down to a crawl. Currently with the lockdown any half-finished homes are sitting stranded until the lockdown ends and the builders are allowed back on site. For some of these owners their circumstances will have changed due to business shutdown or unemployment and they may not be able to complete the job. Wanaka for example has a substantial number of new builds underway. For the owners who are speculators hoping to sell for a handy profit on completion, they will be in for a sad surprise with the buying pool for these expensive homes gone.
Be prepared for a lot of half-built homes to hit the market, even more so will be the large number of sections that will now come on the market from vendors who intended to build but due to financial constraints can no longer do so.
Mortgage Holidays (Beware)
Kiwis are lining up for ‘Mortgage Holidays’ in their thousands, on average up till this week each of the five major New Zealand banks had over 12,000 applications each, that’s over 60,000 applications and growing!
The big catch (and there is a catch!) is that interest accrues and at the end of the six months will have to be paid back or added onto the loan. For example a six month mortgage holiday on a $500,000 mortgage at 4% interest rate will add about $15,000 to the cost of the loan. For some who find themselves in a worse financial situation after six months this could spell pain.
If putting your mortgage/s onto interest only will reduce your outgoings enough to make ends meet then do that, only take a ‘mortgage holiday’ if its absolutely essential to get by.
We are not saying every property owner is headed for dire straits. Most property owners are sensible and live within their means and will be fine moving forward into an environment of a falling property market. But as we have stated in earlier Blogs there will be certain people who have overextended themselves and paid over and above market prices (In an already booming and peaked out market) for their slice of real estate. And these vendors will find themselves in a position where they will have to exit the market in a hurry.
With a growing number of highly motivated vendors who will be needing a quick escape from the market combined with a dwindling pool of ‘uneducated’ buyers either running scared or not in the financial position to be able to buy this will present a myriad of opportunities for organised buyers who are positioned well to pounce quickly.
This of course won’t all happen overnight, it will take some time to filter down and playout over the next few months at least. But once the Govt wage subsidies and mortgage holidays etc run out, the scale of the unemployment and business closures are realised and start to really bite the property market will most certainly change from a ‘seller’s market’ with large numbers of buyers around as it has been over the last few years, to a ‘buyer’s market’, where there will be lots more properties for sale with highly motivated vendors behind them, and with a greatly reduced number of buyers, this all adds up to one thing!
Massive opportunities to be able to negotiate without competition and purchase property at price levels you wouldn’t have been able to imagine over the last year or so.
It will be the educated investors who are able to strike quickly that will be able to pickup the great deals that will present.
Use this lockdown isolation period wisely, take advantage of the extra time you find yourself with, read books, watch videos, look at increasing your knowledge, attend free training webinars, invest in yourself! – Knowledge is power in this changing world.
It’s not what you know that holds you back, but what you don’t know!
Consider working closely with us in our e-Coaching Property Mentoring programme, where you work through all the training content from home and consult directly with Clint or Shane via online video meetings, absolutely perfect for these extremely unique times of home isolation and NZ wide lockdown and social distancing.
Take advantage of this unusual time and use it to change things up!
Free one-on-one strategy meetings
We are offering free one-on-one strategy calls via online video meetings, so if you’d like the opportunity to speak with one of us where we can meet properly, discuss your situation, ask a few questions and see if we are a good fit to help you move forward with property investing, then take this opportunity to schedule a call now!
Regards and take care,
Shane Allen & Clint Taylor