Don’t get caught in the headlights

Back

As Covid-19 continues to spread globally with massive disruption to economic activity and peoples day to day lives there is a huge amount of negative sentiment around investment and financial activity at the moment.

Whilst there is merit to a lot of this thought, I believe there is also great opportunity to come once we are through the worst of this. Looking at property, it is worth considering that the underlying demand for property hasn’t changed and interest rates have been pushed lower.

Property Demand

The demand for affordable housing in New Zealand (particularly Auckland) remains. Population growth around Auckland and NZ isn’t going to stop, whilst migration has slowed in the interim it isn’t going to stop – NZ is still a great place to live.

There are a huge amount of statistics out there around housing, but I find it best to keep it simple and look at supply and demand drivers. In the 5 years between the 2013 and 2018 census there were 102,354 new homes built. New Zealand’s population grew by 457,707 over that same time – that is 4.5 people PER HOME. It has been evident for a long time now that NZ’s population is outstripping its available housing stock and there will remain a huge demand for property.

Interest Rates

We saw earlier this week the OCR cut to a never seen before low of 0.25% accompanied with commentary that it will be that low for at least 12 months. The banks have committed to pass this cut (at least in the short term) straight through to consumers and we are currently seeing fixed rates sit a little over 3%.

It is only a matter of time before these fall into the 2’s and I believe will stay there for a long time. What isn’t always appreciated is that whilst the market is soft, New Zealand needs to keep rates below those globally, to ensure our currency doesn’t appreciate too heavily, harming our exporters (Tourism and Dairy). I don’t anticipate global rates lifting materially any time soon and thus NZ rates will remain low for the foreseeable future.

The reserve bank has also given lenders a reprieve with their capital requirements pushing the new restrictions out 12 months. The consensus is that this has released somewhere close to $40bn+ available capital.

The cumulative effect of this is that we can expect an ease in credit policy with the banks providing greater access to capital to the general market.

Despite the above, the current travel restrictions, possible layoffs and general market sentiment is likely to see a compression in asset values as people wait to see what happens. This however will provide opportunity to a few who have a long enough horizon to look beyond the next 12 months and out to the future. The fundamentals point to a rebound at some stage and the best way to take advantage of it is to be in near the bottom. You may be on the hook for some short term pain in asset value but the long term gains could prove invaluable.

Don’t be a deer in the headlights – now is not the time to freeze but rather the time to seize.