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Housing confidence whipsawed by COVID-19

Expectations of a continued housing upswing through 2020 have been dashed by the economic fallout from COVID-19, the latest ASB Housing Confidence Survey shows.

Confidence in the housing market outlook has fallen to a near eight-year-low with expectations for this to fall further in the coming months.

House price expectations took a substantial knock in the three months to April, with a net 14% of respondents now expecting higher house prices over the next year, well down on last quarter’s 54%.

ASB chief economist Nick Tuffley says with recessionary economic conditions triggering job cuts and a big hit to household income growth, the survey’s results are not surprising.

“The housing market was literally stopped in its tracks during the lockdown.  And respondents will be increasingly aware that there are tough times ahead.  Some people are likely to have added concerns about their job security and take a more cautious attitude towards jumping into the housing market.  The jump in the number of people receiving income support and mortgage holidays highlights that homeownership conditions are more challenging and that recent price momentum is likely to stall”, says Tuffley.

Similar to house price expectations, interest rates also took a hit this quarter, with net 19% of respondents now expecting interest rates to fall.

“The fact that interest rate expectations didn’t fall further likely reflects the unprecedented situation facing the New Zealand economy and the Reserve Bank.

“The Bank’s key policy rate has been lowered as far as it can go and government bond purchases are now the Bank’s weapon of choice. We expect the Reserve Bank’s policy rate to remain at 0.25% for many years, but there may be some scope for mortgage and business interest rates to fall further,” says Tuffley.

Price outlook fades fast

The net balance of respondents expecting house prices to increase over the next year was knocked back substantially in the three months to April, dropping from net 54% last quarter to just 14% this quarter.

The decline in expectations was by far the largest in the South Island (excluding Canterbury). A very high starting point of 65% was no doubt part of the story in the 45 percentage-point drop, and the loss of foreign tourist visitors and flow-on to the Central Otago lakes district may also be shaping perceptions. Auckland experienced the smallest decline, with net price expectations slipping from 42% to 10%.

Meanwhile North Islanders, excluding Aucklanders, remain the least pessimistic on the house price front, with a net 20% of respondents still expecting house prices to rise over the coming year.

“If anything, we’d expected the fall in housing confidence to be larger. Our latest research points to a house price decline of 5-10% in the wake of the COVID-19 crisis,” says Tuffley.

“This is broadly similar in magnitude to what we saw during the Global Financial Crisis. Yet during that period, we saw housing confidence collapse to -50%. Either we are too pessimistic, or housing confidence has further to fall. Next quarter’s results will reveal all,” says Tuffley.

House buying sentiment continued to stutter in the three months to April. A slim majority of respondents now believe it is a bad time to buy a house, down from a net 9% saying it was a good time to buy last quarter.

“Perceptions of whether it’s a good time to buy are generally closely linked to housing affordability. With COVID-19 disruptions prompting job cuts as well as slamming the brakes on household income growth, it’s no surprise we’re seeing house buying sentiment take another hit. Further falls appear likely,” says Tuffley.

Rate expectations – flipped again

As with house price expectations, household interest rate expectations were whipsawed in the second quarter of the year. Last quarter respondents were split on whether interest rates would rise or fall over the coming 12 months, however this quarter, the “falls” have it again with a net 19% expecting interest rates to fall.

Looking at the figures, 14% of respondents expect higher interest rates over the coming year, while 33% expect interest rates to fall. Aucklanders were the most negative on interest rates with a net 26% expecting a fall, compared to just 5% last quarter.

“Government bond purchases, or quantitative easing, are now the Bank’s main weapon in the fight to keep economic stimulus flowing. So it’s not that surprising that surveyed participants didn’t expect lower interest rates en masse,” says Tuffley.

“There may be some scope for mortgage and business interest rates to move lower though, if the RBNZ quantitative easing keeps downward pressure on wholesale rates – as we expect – and credit conditions continue to gradually normalise. But the housing market is likely to feel further pressure over the remainder of 2020,” says Tuffley.

The full ASB Housing Confidence Survey for the three months to April 2020 will be available online at www.asb.co.nz. Other recent ASB reports that also include housing commentary can be accessed via a Search page https://reports.asb.co.nz by selecting the keyword ‘Housing’.

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