Early 2020 saw improvements in both price growth and sales volumes in Auckland, in spite of the level four lockdown.

They say a week is a long time in politics. Well, back in the second week of August New Zealand learned that it’s also a long time in the age of Covid-19.

The week started with the country notching up 102 days free of community transmission. Just over a day later, Covid-19 had reared its ugly head in the community again. The result was

Auckland was put back into alert level three lockdown and the rest of the country was returned to alert level two.

This came as a shock to everyone and it prompted a flood of dire predictions on both the health and economic front. However, at the time of writing, health officials seemed to be wresting the Auckland outbreak under control and Prime Minister Jacinda Ardern was emphasising there was no intention, or need, to move to alert level four.

While the alert levels were originally set to last for two weeks until August 26, they were reviewed on August 21, and it was announced on August 24 that they would be extended until midnight August 30.

Returning to the more restrictive alert levels, even for a relatively short period of time, came with an economic cost. But does that cost extend to the property market, too? We set out to discover what lockdown 2.0 might mean for Auckland’s property market and whether it could derail its nascent market resurgence.

The Market Pre-Lockdown 2.0

Heading into lockdown 2.0, the Auckland market was performing strongly. After several flat years, early 2020 saw improvements in both price growth and sales volumes. While the first lockdown put that progress on hold, post lockdown

Auckland’s market picked up where it had left off. The most recent REINZ data had the city’s sales volumes up by 30.3% year-on-year to 2,596 in July. This was the highest number of sales for the month of July in five years. It also showed that Auckland’s median house price increased by 11.5% to $920,000 in July.

That was up from $825,000 at the same time last year. Likewise, Barfoot & Thompson’s latest data had sales up to 1,095 in July, an increase of 33.5% on June and of 24.6% on July 2019. It also recorded solid year-on-year price increases. Further, the agency noted a much-needed rise in new listings, as did Realestate.co.nz which had new listings up by 39.7% year-on-year.

These strong market trends, which were common to markets around the country, had commentators revising their earlier predictions, but also urging caution.

Even as the REINZ data was released, Kiwibank senior economist Jeremy Couchman pointed out that Auckland’s new Covid-19 cases threw up another cloud of uncertainty.

“Another lengthy lockdown, if it eventuates, will disrupt market activity and deliver another blow to future demand.”

The Economic Hit

Lockdown 2.0 affects not just the Auckland economy, but the national one. ASB chief economist Nick Tuffley estimates the lost economic activity from the lockdown will be around $440 million each week that Auckland is at level three and the rest of the country is at level two.

“Hopefully, the economic hit from this latest outbreak will prove short-lived, but the short answer at present is that we don’t know,” he says. “We have sketched out some rough estimates which point to a 0.15% to 0.5% hit to GDP (per week of lockdown), but this could get much larger if the outbreak has more enduring impacts.”

Tuffley says the more stringent restrictions in Auckland mean that perhaps 20% of its regional economy will be off-line during level three as opposed to around 8% for the rest of the country. Given Auckland’s significant economic weight that will have noticeable flow-on effects.

However, the economic impact this time around won’t be as severe as that from the country’s first lockdown. That’s because there is no new impact on international tourism or export education, independent economist Tony Alexander says.

“There is no new shock to the world economy and downside export price risk. There will be no new tightening of bank lending policies as they already reflect the risk of this happening. This is not a level four shutdown and most office located businesses can switch to working from home immediately with minimal, if any, business flow interruption.”

Going into lockdown 2.0, Auckland’s market was booming, with both sales and prices up in July. Two recent sales demonstrate the strength of the city’s prices. (Left) Ridge Road, Howick, Auckland - $1,130,000 (Above) Matikao Way, Pukekohe - $785,000

Real Estate At Level Three

The fact that Auckland is at level three as opposed to level four is critical for the residential property market. Level three means the real estate industry can continue to function effectively, albeit with some restrictions.

Auctions can take place online or via phone bidding, private property viewings (for both sales and rentals) can happen by appointment with restrictions, as can pre-settlement inspections, settlements and moving house, for example.

Property appraisals can happen with protocols in place or remotely, while discussions with agents on agreements, marketing and the listing process can occur via teleconference or over the phone. Virtual tours, floor plans, video and drone footage can all be used to facilitate these activities.

‘Property buyers are out there and buying, that demand continues to be huge – and I don’t see it changing’ DON HA

Barfoot & Thompson managing director Peter Thompson says the impact on the market will depend on how long Auckland stays at level three and whether it moves to level four, which would have a big impact.

“If it is only short-term, it will not be a major. We have ways to conduct viewings virtually and sales will continue. We have heard that some listings have already been withdrawn due to the virus, which is a cause for concern. But it depends on the length of time we are in lockdown.”

Re/Max New Zealand chief executive Don Ha is more optimistic. He says property buyers are out there and buying, that demand continues to be huge – and he doesn’t see it changing.

That’s in large part due to Auckland’s ongoing supply shortage, which is not being helped by a lack of new listings, and historically low interest rates. “These factors drive up demand and keep the market going. They also place upward pressure on prices.”

Following the first lockdown, the Auckland market went crazy and the industry is still working through that, Ha says. “When lockdown 2.0 ends, I think we’ll see something similar. Plus we are coming up to spring which, traditionally, is a good time for the market. The combination of the two means we’re expecting a record spring market.”

Longer-Term Outlook

Looking further down the track, the picture is somewhat more uncertain. For CoreLogic senior economist Kelvin Davidson, one impact factor will be the length of time Auckland remains at alert level three. In the short-term, August’s market will be weaker because of the dislocation of lockdown 2.0, he says. “Prices may carry on though because Auckland listings are tight. We’re hearing that appraisals have fallen away a bit, which could see new listings decline further.

“That will keep the supply pressure on. A couple of weeks of lockdown and then there’s likely to be some pentup demand emerging. So the supply and demand equation is tightening up again. It means we could see the market emerge from lockdown pretty strongly.”

But, going forward, the bigger issue for the market is the recession and rising unemployment. The Government has now extended its wage subsidies, while the Reserve Bank has extended the mortgage deferral scheme till March.

These moves will defer the expected economic hit for a few more months. Davidson says this has created an artificial situation where the economy is being propped up by financial assistance. “Until that ends, it’s likely the market will just continue on. It’s hard to gauge what might happen. But the true effect of all this on the market might not be felt till late this year, or even early next year.”

Most commentators expect to see some property price falls nationwide over the next few quarters. Kiwibank and ASB both recently picked 6% by early 2021. But what that might involve for Auckland prices is still open for debate.

Rental Market Trends

It’s not just the sale and purchase market that may see some impact from lockdown 2.0, Auckland’s rental market could feel the effects too. Davidson says rental growth in Auckland was slowing anyway, although it hadn’t fallen off the cliff like the rental market in Queenstown.

“That rental growth might slow further. But if you look at the Auckland CBD apartment market it’s been hit already by the lack of overseas tourists and foreign students. This lockdown is not likely to have another impact like that.”

In Queenstown they are hearing about tenants leaving or people having to lower the rent to keep tenants and that could happen in Auckland too, he says. “But it depends on the unemployment situation. So, again, the bigger theme going forward is the recession and rising unemployment.”

Auckland Property Investors’ Association president Andrew Bruce agrees that rents, particularly in the apartment sector, have already been affected by Covid-19.

“We’ve had to drop some of our rents to re-let the properties. In fact, I haven’t tried to put up my rents this year. I’d prefer to have someone in there rather than trying to squeak out an extra $10 a week and ending up with a period of vacancy. That’s a few people’s philosophy these days.”

However, prominent Auckland investor David Whitburn has a different outlook. He thinks the broader Auckland rental market is tightening because some investors are starting to sell up due to a combination of Covid-19 and the tenancy law reforms.

“That makes for less rental stock and it does increase the pressure on the rental market. I think rents are likely to rise by about 5% over the next 12 months. But there’s some changing trends coming into the mix too. For example, extra bedrooms and fibre are becoming more of a priority for people (due to the working from home factor).”

The Investor Perspective

Meanwhile, both Bruce and Whitburn point to the long-term value of property as an investment – despite the current Covid-19 prompted situation.

Bruce says that in terms of a three, six- or 12-month outlook, he has no idea what the market might do. “But, although the lockdown is disruptive, I don’t see any massive, long-term effects coming out of it and, in the medium to long term, there will be some form of asset inflation.

“It’s the people who are trading and struggling to get something over the line who will be affected, because every day counts for them. It’s different for investors like me who are in it for the long haul and have a focus on cashflow.”

There are some issues that he’s noticed though, Bruce adds. For a start, he’s been looking for property and there isn’t much product on the market. Also, getting finance in certain areas is now a lot harder.

“We were looking at investing in something commercial, but the banks put the screws on that. We’re in a good, solid position, but they threw up so many hurdles that the residential route seemed easier. So if you are in a precarious financial position you won’t get far these days.”

For Whitburn, there are a range of factors that will continue to support Auckland’s residential property market.

These include record low interest rates, limited supply, returning ex-pat Kiwis who will boost demand, and the ongoing attraction of the Super City as an employment hub.

“Commercial property is different: there are some problems there – especially in the retail and office sectors. But I’m positive on the outlook for Auckland’s residential market, especially for properties in the more affordable brackets.

“And, given the investment alternatives, I don’t think many people are likely to overlook property as a good option.”