Property Investment Lending

What will happen to the housing market?

3rd Apr 2020 | Ben Pauley


The short answer to this question is that I really don’t know – and in all honesty no one does. It’s important to point out that we are only one week into this lockdown. We haven’t yet seen the real impact of Covid-19. I have however posited below some of my wider thoughts on what is going on and what may happen. Firstly, I address some of the issues that we might see that will put downward pressure on property prices. I will then address some of the fundamentals behind the housing market and things that may prop house prices up.


It is certain that any business affiliated with tourism, whether domestic or international will face some serious financial headwinds coming out of this crisis. Our main tourism sectors are in for a bit of a beating and it will be interesting to see how this flows through to property prices.

There are a couple things at play here. The first is that there could be a wave of unemployment with people who are associated with this industry. You only need to look at Air New Zealand who are talking about becoming a domestic carrier with their revenues falling from $6bn to $500mn. These people will either lose their jobs entirely or have their incomes seriously affected at least in the short term which will take demand out of the market. The second side of this is the amount of properties across NZ that are supported on Air BnB income. International tourism is almost certainly going to dry up for 2 – 3 years. I was talking to a Hotel expert yesterday and his best estimate was that we will not be seeing tourism figures close to where they were for 2 – 3 years. This was broadly seconded by a Hotel operator I spoke to. Air BnB operators will need to rely almost entirely on domestic travel for the foreseeable future and because of that we will see landlords move their properties from short term accommodation into longer fixed term tenancies. With that demand for short term accommodation falling there will be a number of people who will be struggling to meet their commitments with mortgages and properties and will likely look at selling. Buyers looking at these properties will be considering different fundamentals than their previous. Yields will be down, occupancy possibly also. If you are looking at an Air BnB asset in the future, to get the same return you will be paying a lower price. The bright side here for first home buyers is that a lot of this stock can be effectively repurposed to owner occupied or affordable rental accommodation.

Retail / SME

This market is going to be hit really hard from the shutdown. Depending on who you speak to, there is a widely held belief that we are in for a 6 – 8 week period of level 4 which will really see the chickens come home to roost. The consensus from a number of professionals speaking to SME’s across NZ is that at 4 weeks there will be a lot that fail but most will come through with more debt than they wanted. At 8 weeks, things start to look a lot worse.

As most of you will be aware NZ is a nation built on small businesses. Most of us will know of a dozen different people that own or have a stake in their own business and it is almost as wedded to the kiwi dream as owning a quarter acre is. A lot of these people face losing their businesses and their incomes if the lockdown drags on and we then face a really tough economic recovery at the back end.

Needless to say, there is going to be some pressure put on house prices as people find themselves out of work.


In simple terms, with our borders somewhat closed, the turmoil internationally and immanent recession we all face there is likely to be a slow down (possibly drastically) of immigration to NZ. On average there have been 50,000+ people immigrating to NZ each year which has kept the demand for property (particularly in Auckland) high. If this number falls significantly for an extended period of time we may find that the supply shortage spoken so often about alleviates – particularly if coupled with traditionally Air BnB accommodation being offered as longer term rental or owner occupied – and prices fall (simple economic theory).

Credit Policy

There is almost certainly going to be a tightening of credit policy following this crisis. We’re already seeing this with banks largely closing the door to new clients and focusing purely on their existing ones.

Banks will be facing a number of defaulting or struggling debts and will need to spend some time getting their houses in order following the crisis and shut down. I anticipate this taking the best part of 12 – 18 months to begin to stabilise and settle down. Through that time expect to see banks be cautious with their lending policies requiring further information to support applications and less appetite in the business and development space.

It will also be intriguing to watch the development / recovery of the near-bank and non-bank sectors. Most lenders in this space have heavily retrenched if not completely withdrawn from the market. A lot of them are reliant on main bank funding lines for liquidity and how the banks view these post the slowdown will be interesting. There is almost certainly however going to be a reduction in liquidity in the market which will be passed through to property activity and prices.

International Capital

With our borders closed and the turmoil that the world has faced I expect that we will see a dearth of international capital applied to NZ in the near future. This is going to stem from a couple things, firstly being the opportunity for that capital to be applied in it’s respective homeland. As businesses suffer there will be an opportunity to achieve returns that weren’t previously available in some of the worlds larger economies as investors (some would have them as vultures) can buy at the bottom of the market.

The supporting cast to this will be the fact that there is going to be a lot of hurt in a lot of countries and people will invest first and foremost somewhere they know and understand. It is hard to get your head around investing into a country that you can’t easily visit and check in on / do DD on your investment prior. Expect to see a number of investors looking domestically in the short to apply their capital.

Now for some more positive notes!

Bank Balance Sheets

Thankfully the banks across NZ are well capitalised and have reasonably strong balance sheets. There is little to no expectation that any of these lenders will fail over the coming years and they will comfortably be able to absorb the level of defaults expected and ride out the storm. This will result in them coming back to the market and being able to lend sooner rather than later so whilst there, as I mentioned above, is likely to be a tightening of bank policy in the near term expect the hand brake to be released in the mid term and some normality to resume.

Interest Rates

Interest rates are now at all-time lows and that won’t change for some time. Most economists are picking rates to remain at these levels for 2 – 3 years minimum which is great news for borrowers. This naturally alleviates some of the servicing stress on borrowers and will likely lead to slightly lower test rates from banks allowing for people to more easily get into the housing market. Although that latter comment is unlikely to happen until we have a bit more confidence around the market. It will also allow some investors to hold onto their portfolios where otherwise they may have been forced to sell.

Domestic Tourism

There are going to be a lot of people out there who after being coupled up in the homes for 6 – 8 weeks are going to be itching for a holiday. Borders are also expected to remain closed or at least heavily monitored until there is a global solution to the crisis. Both of those points lead to a noticeable pick up in domestic tourism that will go some way (not all the way) to filling the void left by international visitors.

There will also be those of you that have overseas travel already booked and chances are those plans will have to change. However, you’ll still want to go somewhere. Expect centres like Queenstown to do OK out of this as they attract visitors most the year round.

They will not perform as well as they had with open borders and natural travel, however, there should be enough to tide them over.

Supply and Demand

I did mention above that there is likely to be a flux of supply from the repurpose of property (no longer short term accommodation) and possibly a fall in demand from a drop in immigration that may impact prices. What will likely keep them buoyant or at the very least slow the fall is that there is a long way to catch up for NZ. I wrote recently about the property market and one statistic that caught my eye when writing that was that NZ has on average had their population growing at a rate of 4.5 people per new home each year for the last 3 years.

I expect there to be sufficient demand in the market to combat any fall in immigration or influx of supply, albeit this will without doubt differ region to region.

Those are my fairly sporadic current thoughts on the market, right now it would be fair to say I am straddled fairly down the centre of the fence. I am reasonably sure there will be some short-term pain but the rebound could also be pretty quick.

It will all become more evident as time goes by.

If you want to chat about that or anything else, please reach out.

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