Landlords in denial as deflation beckons
Economists warn double digit house price inflation is about to turn into double digit house price deflation, almost overnight. Some landlords are even being advised to get out as population growth stops and spiralling unemployment pressures rents lower
Economists have predicted a world of pain for property owners: house prices dropping by double digit percentages and a rental market that doesn't look much better.
Treasury has developed scenarios of double-digit unemployment. Some investors believe if rents don't fall to match the reduced incomes of tenants the conversion of unneeded office blocks to residential apartments or a flood of Airbnbs might do the job.
New Zealand Property Investors' Federation President Sharon Cullwick said she had also given this stark warning to fellow investors:
"Make a decision now on whether you can afford to keep your investments," Cullwick said.
"And stick with it. If it means you've got to get out of the market then get out of the market, but know that you can get back in later," she said.
Kiwibank economist Jarrod Kerr has predicted house prices could fall by up to 10 percent this year. Or almost 20 percent in a "downside" scenario.
Infometrics economist Paul Barkle had a similar prediction of a 5-10 percent decline. He said an oversupply of housing was on the cards with border closures leading to a "massive" slowdown in population growth. ANZ has forecast house price deflation of 10-15 percent, although that would only take prices back to where they were 12 to 18 months ago.
Rents could be on their way down too, Barkle said.
Two factors could contribute to this. More offices would likely be converted into residential space, but those conversions would take more than a year to come into play, he said. A larger factor in the short term was former Airbnb properties that would be put onto the open rental market.
"This increase in rental properties is primarily due to houses shifting from short-term holiday rentals to longer-term rentals due to the collapse in tourism," Barkle said.
"The increase in supply coupled with tenants' limited ability to pay rent will push rents down," he said.
Landlords in denial
Real iQ property manager David Faulkner, who trains property managers around the country, is a landlord and property manager himself. He used to watch The Big Short every once in a while just to remind himself that house prices could go both down and up.
"Queenstown literally became like Greymouth overnight. You know, it was that bad."
Faulkner said many landlords were in denial about the extent to which incomes, rents, Airbnb demand, and house prices would be affected by Covid-19. Some had even suggested domestic tourism demand would take the place of international demand.
"I won't say they're delusional but they haven't grasped what's happening yet," Faulkner said.
"A lot of New Zealanders are going to be unemployed ... they're going to be saving money," he said.
"They're not going to go to Queenstown. They're going to go to Foxton."
Faulkner started hearing about how bad that pain could get after borders closed and businesses started shutting up shop.
In Queenstown, one company experienced a steady stream of tenants coming into its office the day after the borders closed. They handed in their keys and walked out.
"Queenstown literally became like Greymouth overnight. You know, it was that bad," Faulkner said.
Rent pressure already being felt
Faulkner has run a fortnightly survey of property managers since the crisis hit the headlines.
Property managers surveyed expected rent defaults to rise to hit 20 percent during the pandemic. Within the first week of lockdown they reported that the rate of people falling behind on their rent had doubled from 3 percent to over 6 percent.
Sense Partners economist Shamubeel Eaqub was reluctant to make predictions about the housing market, but believed homeowners who bought into the market over the past few years would be most at risk of suffering financial pain.
However, Eaqub said when property prices fell, people tended to hold onto their properties even in situations of "negative equity" where the value of the debt they'd been saddled with exceeded the price of the house they bought.
"If you're a young professional with a very good job you might go from earning six figures down to the benefit," Eaqub said.
"Would you be able to afford your mortgage payments and other things? Probably not," he said.
Cullwick said landlords were already being approached with requests to give their tenants rent holidays or reductions in rent.
Some now asked for evidence of financial hardship, she said.
"Landlords are everyday people and they've got the same pressures that everybody else does," Cullwick said.
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