Amid a widespread pandemic, the global economy is caught between cushioning the blow of a recession and planning for recovery. The impact on the property finance market will be significant, albeit mitigated by early policy responses from the NZ government and Reserve Bank. Comprehensive post-lockdown data is yet to be reported, and clarity as to what a post-lockdown economy will look like remains elusive. What is clear is that uncertainty will be a key factor in the property market over the next 12 months, and investment decisions need to be tailored accordingly.
Instead of floundering, the key is to look at economic indicators and use them to predict where the property market is going. Now is an optimal time for well-capitalised investors and developers to exploit current market conditions and prime themselves for a future where interest rates refuse to climb, and property prices detach from fundamentals. So, what should property investors do to survive the COVID-19 recession and recover on top?
Forecasting Economic Change & Recession Recovery
Many models of post-COVID recovery have been created assuming that we will be aiming for a “return to normal”, but this cannot be the yardstick we use. Big changes are predicted by financial analysts like Forbes’ Nishan Degnarain and the UK government, as data points continue to reveal potential changes to the “norm” and the adoption of a “new normal”.
A YouGov poll taken in Britain demonstrated that only 9% of people want to return to the ways of pre-COVID life, while the rest want to see changes in how their government approaches issues of the environment, the economy, and civilian aid. If these results are reflected in the wider world, this will mean potentially significant changes to consumer behaviour, altering the hierarchy of different sectors and adjusting the world to a “new norm”.
Factors closer to home must also be taken into account, such as the reduction in domestic travel between regions in New Zealand, decrease in international tourism, volatile ROI rates, job opportunity rates rising or lowering in different areas, and more.
Ultimately, it is important to remember that there are few (if any) facts to predict the future, and that the vast majority of theories about the future are extrapolations from past events. What we are experiencing as a global community has never been seen before, so we need to remain sceptical as to the possible outcomes.
Recovery Models for the Economy
Below are the best- and worst-case scenarios for recession recovery.
An L-shaped recession is the worst-case scenario for recovery, signifying long-term damage to the economy and minimal recovery for quite a few years. Luckily, this recession is unlikely due to governmental responses to the virus and stimulus packages being granted in many countries. However, this pattern is not impossible.
A V-shaped recession is the best-case scenario for a post-COVID world, indicating short but harsh consequences and a quick rebound with minimal long-term damage. This could be the future for New Zealand’s economy thanks to the quick reaction on the part of Jacinda Ardern’s government.
Economists are recommending approaches that benefit from the volatility and uncertain future promises, i.e. employ strategies that enhance returns whether the market shifts up or down. These conditions create an opportunity to protect against downside risk and increase income if the investor refrains from reactionary investment.
What New Zealand’s Economy Means for Property Investment
Forecasting is certainly not foolproof. However, using economic indicators and predictions from the country’s financial institutions can give us a glimpse into the potential future of the property industry.
Economic Indicators and Predictions in New Zealand
According to the New Zealand Treasury:
- Three of New Zealand’s major banks have downgraded their economic forecasts to be more pessimistic than they were, predicting a contraction of close to 20% in the June quarter and unemployment nearing 10% by the end of the year.
- Retail spending in every product (apart from consumables) has taken a sharp downturn in spending because of the lockdown, while unemployment claims from work-ready individuals have soared to nearly 120,000.
- If restrictions ease further in the coming weeks, the Treasury predicts the GDP will rebound in the September quarter (predicted at around 8.5 points of growth by major banks).
The current forecast is an appreciable rebound in September for New Zealand. So, what does the above mean for property investors specifically?
For Property Investors
The likelihood is that New Zealand’s recession will be short but harsh, creating buying opportunities for investors with strong balance sheets. Low interest rates mean that smart, well-capitalised investors can use this time to expand their portfolio and ride the wave upward, but only if they’ve accounted for their other costs in the worst periods of the recession. It is important to remember that availability to credit will likely remain tight over the near term, making early engagement with your funder a must. As it stands, market feedback has indicated that banks are limiting exposure to certain high-risk sectors with funding support limited to existing clientele.
Our recommendations are as follows:
- Have a clear investment strategy that accounts for positive and negative changes. Be a realist and consistently consult data to determine your next move.
- Manage your risks, don’t over-invest.
- If you’re looking for loans, spread your lenders across bank and non-bank sectors if possible. If you’re not an existing client of a bank, consult a reputable non-bank lender that can help you with your investment strategy.
- Keep your focus on long-term fundamentals, such as low mortgage rates, dwelling shortage in urban cities, and more. (Source: Tony Alexander)
Here’s a shortlist of what we should all be keeping an eye on over the coming months:
- Unemployment
- Mortgage rates
- Migration
- Supply/demand
- Reserve bank policy
- Retail bank credit policy
- Rates of return for all asset classes
- Sales & listing data
Keep up with the latest shifts in property development finance with ASAP Finance
We’re New Zealand’s market-leading non-bank lender for property development finance, and we offer everything from bridging loans to joint venture investments. For more information on our services or to consult us about a hassle-free property loan, get in touch with a lending manager from ASAP Finance today.