Experts predicted a big fall in home spending following the Covid-19 outbreak. They were wrong. Economist Tony Alexander explains why they got it wrong and why the outlook is brighter than originally thought – especially for those whose profession is focused on improving homes
Earlier this year, when we could see our economy being thrown into recession by the fight against Covid-19, we economists ‘knew‘ what this would mean. We expected interest rates to fall, and they have. We expected the NZ dollar to decline and it did – by almost ten cents for a while. We expected retail spending to fall away and it most definitely did.
We also expected easing house prices, a sustained 40% fall in real estate sales, weak sales of furniture and home out-fittings, and rapidly falling numbers of consents being issued for new houses to be built. We got that completely wrong.
Sales of dwellings in the four-month period from April to July were only down 22% from a year before, and in July sales were 25% ahead of July 2019. Average sales prices in the four months to July were still 0.2% ahead of the four months to March, and in July average prices were still over 8% up from July 2019.
The number of consents issued by local authorities for new dwellings to be built in July was 2% above the monthly average for the past year, and in the three months to July numbers were 4% up from a year before. And, furniture stores have reported very robust sales.
Why is housing so strong? And do these reasons help explain why people are spending up large on home renovations and general upgrading of their living arrangements – something hugely relevant to demand for hardware, timber supplies, and landscaping services?
Yes, and sort of.
The global fight against Covid-19 has made people focus on their immediate home environments in the absence of ability to travel internationally, the need and desire to work from home, their families, and their long-term goals and plans. Around the world, people have diverted money meant to be spent on travelling offshore toward modernising and making more comfortable their home nests.
This is not what normally happens during a recession – but we now know it is what we should expect during times of global pandemic.
With regard to the surge in demand for housing, some of this we can put down to:
people wanting a solid base of their own in case of future lockdowns.
switching money towards a home deposit, which is not likely to be spent on offshore travel anytime soon.
seeking an asset expected to deliver a better return than the record low term deposit rates that banks are now paying, with further rate reductions expected over the coming year if not longer.
We’ve also seen the Reserve Bank remove rules requiring banks to impose minimum deposits for home loans, and ahead of lockdown we saw the biggest migration boom New Zealand has ever experienced. In the year to March, a net 86,000 boost to our population was received from net migration inflows. This was up from 50,000 a year earlier and represented 1.7% of our population.
More people means more pressure on housing and more demand for home improvements – as many of those people are returning Kiwis coming back for a lifestyle for their families better than they had in cramped cities overseas.
Can this strength continue? Not all of it, because some is one-off catch-up spending following the March-May lockdown, much is one-off spending of travel budgets, and the coming end to wage subsidies may produce a wave of unemployment not yet observable in labour market measures.
But that brings us to one of the most important characteristics of this recession. The bulk of people losing their jobs are young and on low and variable hours and incomes in the tourism, retail, accommodation, entertainment, and hospitality sectors. They tend not to be homeowners. That is why mortgagee sales are so low – very few people have to sell.
The outlook we face is one of: eventual vaccine development leading to opening of our borders (maybe early in 2022) and a tourism boost.banks eventually easing lending criteria as they become less worried about the economic outlook.strong underlying growth in many sectors, including farming, space, games development, healthcare and aged care, horticulture etc. low interest rates for the rest of this decade, driving more people to try to purchase or build a house, and making debt financed home upgrades the cheapest ever seen.
Prospects for sectors engaged in home improvement are likely to remain strong, until one day we once again embrace international travel and divert our spending back to airfares and offshore spending rather than our home nests.