Business / Covid 19

Covid-19: Economist predicts house prices to fall at least 10 percent

12:53 pm on 22 April 2020

House prices will fall at least 10 percent during the Covid-19 pandemic, according to economist Cameron Bagrie.

Photo: 123rf

Bagrie made the comments on Morning Report while discussing what impact lighter restrictions loan to value ratios (LVR) would have on the housing market.

Yesterday, the Reserve Bank of New Zealand (RBNZ) announced it is considering removing LVR limits on low deposit borrowers to counter the economic downturn brought on by Covid-19.

LVRs limit retail banks to having no more than 20 percent of their lending to buyers with less than a 20 percent deposit, with no more than 5 percent of loans to property investors with less than a 30 percent deposit.

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The limits - known as a macro-prudential tool - were brought in six years ago to ensure bank finances were not threatened by risky lending, as well as to take the heat out of a surging housing market.

Bagrie said from looking at historical data, the relaxation of the rules would have little impact on the housing market.

"House prices are going to move down, the extent of that move is going to be proportional to how high the unemployment rate moves up.

"If we look at what happened during the Global Financial Crisis (GFC) house prices were down 7-8 percent, the unemployment rate was up to about 6.7 percent. This downturn, this recession, whatever you want to call it, is looking a hell of a lot worse than what we experienced during the Global Financial Crisis.

"As a starting point, I would pencil in house prices down at least 10 percent and what is the Reserve Bank doing by relaxing Loan to Value ratio restrictions? It's a marginal tweak, it's a little bit of support, it's going to help that marginal buyer that probably has job security but doesn't have a high deposit going to get into the market. Is it really going to change the fortunes of the property market? The answer is no."

"It's all about credit risk in the current economic environment" - Economist Cameron Bagrie

Bagrie said both buyers and sellers get spooked out of the housing market during a downturn.

"There's a lot of talk about the banks having money to go around but the bottom line is that your banks are going to want to make sure that they're going to get their money back.

"It's all about credit risk in the current economic environment, so the bottom line is that if you're going into a bank and asking for a loan today, you're going to get asked more questions than what you were asked three to four months ago because the economic environment has fundamentally shifted."

Real Estate Institute chief executive Bindi Norwell agreed that banks will be more stringent, but she believed the LVR changes would be of some use.

"Obviously they'll (banks) be very strict with their criteria and they'll go through that process, but what it will do is ... it (LVR) really did impede quite a few people in the market, so now it will just help those who have been impeded before and open up opportunities.

"What it will do is it will provide people some support and definitely some flexibility in terms of the deposit required to for a property, so I think it's (LVR) been quite prohibitive for people, the 20 percent deposit, particularly first home buyers, that's nearly $180,000 if you're an $850,000-$900,000 house, so it's a significant amount of money. With the fact that KiwiSavers have been impacted through the Covid-19, this will just allow more people more flexibility in terms of getting a loan," she said.

"I think we will get through this" - Real Estate Institute chief executive Bindi Norwell

Bagrie said he wasn't convinced the relaxation of LVR rules would produce in a shift of power from first home buyers to property investors as all corners of the market will be affected.

"If you've got a weak balance sheet and you don't have strong cashflow, liquidity, you're going to be vulnerable," he said.

"Those people that are going to benefit out of the downturn are those people that have got strong liquidity, strong cashflow and they've got a balance sheet to pick up some assets when they are cheap on the other side.

"Of course it's still pretty early days here yet in regards to what we've seen, house prices haven't really started to fall yet, nothing is transacting. The commercial property market is going to come back over the coming sort of 12 months, I think investors aren't going to be in any hurry to jump into it."

Cameron Bagrie. Photo: RNZ / Alexander Robertson

Norwell, meanwhile, was more optimistic and said people should be keep their eyes on the future.

"It (the housing market) will bounce back, there's a lot of economic stimulus pumped into the economy in terms of what the government is trying to do, they do not want people to lose their homes as well, they're providing a huge amount of support.

"Hopefully this will provide some support for the housing market, as well as the economic activity and people across the country. I think we will get through this, it will take some time, but property is a long term investment, it will recover."

Norwell said the real estate industry had been working closely with the government to develop strict guidelines that would allow potential buyers to attend open homes during the level 3 lockdown.

She said she hoped to hear back from the government today on whether it will be approved.

Meanwhile, the RBNZ is consulting about the LVR move over the next week, and any relaxation would last for at least 12 months, but might be re-imposed depending on the economic impact of the virus.

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