- The Bug
- The economy
- The effect on property
- Future bugs a certainty
- Future economic changes
You are reading my fifth attempt to write this newsletter. Every 24 hours I have gone back and edited it again because the changes are happening so fast. The day you get this I’ll be having regrets as something will have changed, or been clarified since writing. But as they say “Fools rush in where Angels fear to tread”. So true to form: – Below are a selection of facts, alternative facts and opinions on the virus and its effect on the property market. Keeping in mind we have never had this strain of bug before and in my 35 years of selling Real Estate I have never dealt with this before, so its all new ground.
This strain of bug before and in my 35 years of selling Real Estate I have never dealt with this before, so its all new ground.
- We have had many previous out of control bugs:- Polio, measles, chicken pox, Mumps, Influenza, Colds ,Ebola and many more. As humans we survived them all and will do so again. But Covid 19 is only a precursor and forewarning of more bugs to come.
- The Chinese contagion looks like it has been controlled and is currently in decline. It is a military state, so enforcement of restrictions may be easier than in the west. Many of the previously closed highways, cities and factories are re-opening. This is just 3 months after the first reported illness at the end of December. Around 70% of the people who were hospitalised in China are now recovered. Spain and Italy are showing signs of the infection rate declining , so this will have an end.
- Our lock-down will isolate and localize infections. I have no doubt it is the right thing to do, even though I share the frustration of many at the self-righteous and often ignorant human beings who will flout the rules.
- In times of War, necessity means that technology leaps forward at a much faster pace than in times of peace. Covid 19 is a viral war against humanity and as such vaccines will be developed much quicker than in times of peace. Especially as China now has around 80,000-100,000 recovered people with effective antibodies to study. The timeline to develop an effective vaccine will be shorter than the 18 months being touted and most likely 3-4 months.
- Old fashioned Quinine (anti Malaria treatment) has been touted as a preventative measure. The sales of Gin will increase as people test this for themselves. Meanwhile a man has died in the USA after listening to Trump and self-medicating with Chloro-quinine. In fairness Trump was right, he won’t be getting Covid 19.
- We are an Island nation with easily protected borders and as of today only have a minor semi-controlled community outbreak, unlike China, Italy, Spain, the rest of Europe and the USA. We have been very lucky so far and we can stop this thing. But we need the majority of the population to obey the lockdown rules. We need to have confidence in our health system that they can track the virus spread and conduct the right tests on the right people at the right time. It is unfortunate that out only death to date was misdiagnosed as Flu. There is a big gap between talking pretty words in parliament and the actual implementation of the legislation.
- If there is going to be a rebel group, it will be the young. They usually have symptoms milder than a cold and let’s face it, they have the most to gain by a shift in power from the old to the young. Let’s hope they remember they have parents and grandparents and remain glued to their screens in what must be a continuation of a type of self-isolation they are practiced at already.
- Let’s look at what this virus is actually going to do. It’s basically going to leave our youngest kids alone. It will hurt some of our millennials, but most will be fine. By the time you are hitting fifty your personal risk factor will be increasing. Sixty and you have to be extra careful, seventy your chances of dying are about 7-8% IF YOU GET HOSPITALISED!! Remember about 87% of people who get it will recover at home without hospitalisation. 80 plus and your chances after hospitalization are about 15% of dying. If you have a chronic illness and have a weakened body or immune system you have a greater chance of dying. (in China a 100-year-old man has fully recovered from the virus)
- So, while the personal picture is very scary, the actual impact on the planetary population of 7 billion will be small.
- The virus will have a devastating effect on the economy in the short term, because of the necessary actions required to control it, but it may be short lived 3-4 months.
- The real issue is the recovery time. How much has the economy been damaged and how long will it take to get back to where we were. Factories don’t just push a button and start again. Transport requires a lot of logistics and supplies to operate; how long will it take to get these moving again. Tourism may never fully recover. Confidence is a big driver and until that returns the economy will stagnate. The recovery could happen quickly or take a decade.
- While the effects will be global, this is not a financial meltdown. The global economy could recover very quickly after the virus is either contained or sufficient people have been exposed to it and recovered with immunity. The “herd effect” where enough people have immunity to stop the spread. So, imagine if it was all over by August, September and October. In New Zealand this could be the end of April or May. It is conceivable that we could be fully trading with China by August.
- The virus shutdown will not be fully over until an effective vaccine is developed. Until then we will have two separate worlds. One where countries have controlled the spread of the virus through social isolation, and one where the virus spread out of control and the population have immunity through having survived it. It looks like this divide will be rich nations versus poor nations. The continents of South America and Africa look like they will head the out of control route. Thereafter the only way the “isolation” nations can keep the virus out of its protected, yet vulnerable people, is to keep the inhabitants of the “immunity” nations out. Therefore tourism in New Zealand will be a dead duck until the vaccine is developed. The development of the vaccine will be the start of normalisation.
- We will see jobs go, but New Zealand is probably in the best position it has ever been in regarding employment. We have around 4% unemployed, with many industries unable to find NZ workers. We currently have thousands of imported workers in the agricultural and horticulture sector, the building sector, and the transport sector. We have a lot of available jobs in the country simply by sending the imported workers home. (Many employers will resist this as they have found their imports are way better than the locals.) . New Zealand has some fat in the employment market. We can absorb several thousand job losses.
- This recession is different from any other. It is not being driven by bad economic circumstances, nor an ailing economy. For a great comparison of the major differences have a look at Tony Alexanders newsletter.
The Effect on Property
- In times of crisis there are two major fall backs. Gold and Property!.
- In every financial or global crisis we see the gloss disappear off Shares. Prices drop as they are doing now. Shares in a time of crisis are a poor investment Shares are your slice of other companies and as such are subject to global disasters.
- They rely on a growing economy. People won’t pull their money out of shares as its too late, but they won’t be heavily investing in shares for a while either.
- Gold has to be rising in value for you to make money and at $2631 per ounce it is just about as high as it can go. Gold has averaged around $1,500 NZ for the last 3 years, so it would take a bold person to buy now expecting further significant increases. Meanwhile it doesn’t earn any income for you. It has to go up in value to make money and gold is notoriously fickle. You have to pick the up cycle and sell before the down cycle. Gold is basically gambling.
- Property is more stable and has historically had a steady capital increase. It’s something people simply can’t do without, unless they have a large livable boat, so its’ value remains high as long as there are people in this world. It has value while you hold it, be that rents or your personal ability to utilise it for food or other resources.
- There is no long term financial comparison to property. and there is nothing like a world-wide crisis to illustrate this.
- Interest rates are at an all-time low, so housing is more affordable than ever. In previous recessions we have had high interest rates so when people have lost their incomes, they have been forced to sell their property, often at a bargain price and rent. Today a $500,000 mortgage will cost you about $517 per week to repay. A three-bedroom home to rent will cost you about $500 pw. The figures to own as to rent are nearly the same. This time we are not going to see the mass of mortgage sales that we have seen in previous recessions.
- There is no incentive for people to keep money in the bank. Over the last three years we have seen a growing trend of people pulling money out of banks and putting it into rental investments. This will accelerate as interest rates drop.
- Lots of people with NZ passports are going to return home. We see this in every major crisis, be that war, pestilence or financial crisis, … Kiwis come home. Some to raise their kids in a safer environment along with their foreign-born partners. These people will be financially better off than the average Kiwi and they will buy property. They will be a major driver in the dearer price range.
- Australia hasn’t treated the 650,000 New Zealanders living in their country very well. They are second class citizens in a country they may have lived in for 20 or more years. We will see a lot of these people either having to return due to financial hardship or choosing to return because they realise they are expendable non citizens, who are being treated very poorly.
- Rural and country living will grow in popularity. People will want the safety of greater isolation and a greater ability to grow their own food. Lifestyle blocks will have a resurgence in popularity. Think of the people who have had to self -isolate in a 40-60m2 high-rise Auckland apartment. The first 24 hours are going to feel like a week, the next like a month, and after 4 weeks they will literally be climbing the walls. That urban, coffee and wine culture lifestyle is going to look a little bleak!. People are going to want to be live in an environment that allows enjoyment of the outdoors and space to roam. Animals to talk to and fruit and vegetables to grow.
- People will want to get out of the big Cities and their hotbeds of disease. There will be increased migration out of Auckland, Wellington, Hamilton, and Christchurch, places with high populations and international airports. This movement won’t impact places like Auckland with its 1.5 million people, in fact they will hardly notice it , but if just 2% of these people decide to move to smaller rural places that will be 30,0000 people, over half of Whangareis’ current population.
- Property prices will at worst stay steady during this crisis and most likely will accelerate after it is over. Places like New Zealand, surrounded by water and easily protected, will have huge appeal to all people, Kiwis and foreigners alike.
- This demand will further accelerate if there is another viral outbreak, and as I have said earlier, this is just a matter of time.
- Off-setting this is the actual physical ability of people to look at properties. With the lockdown it’s impossible to physically inspect a property. The banks have shut down mortgage processing, the valuers and builders are locked down, LIMS are unavailable, and you can’t shift in or out of a house. Lawyers cant do the Anti money laundering requirements, so basically the market will stop for the length of time during the shutdown. But once the lockdown is finished there will be a flurry of activity.
- First home buyer Kiwi- saver investments have dropped along with the share market, so less first home buyers are able to meet the deposit requirements. This will have little impact on the first home buyer market, because there are so many of them. Kiwi saver was introduced in July 2007. You had to be in it for three years to qualify to use some of the money for a home deposit and the amount you could withdraw maxed out after 5 years. Subsequently for the last 10 years people have qualified and been using their Kiwi saver to help with the deposit. While many have been successful and are in their homes, there is a considerable backlog of qualified first home buyers who have been unable to find a suitable and affordable property. So much so, that the drop off in this market will not be felt. Instead of having fifteen suitably qualified first home buyers per property we may only have seven. The longer you are in the scheme the more deposit you have, so those desperate to buy a house may have wait a bit longer or drop their price bracket a bit, rather then drop out of the market.
- Investors will head back into the market in increasing numbers looking for properties below market value. They may have slim pickings. We recently sold a property in Otangarei for $390,000. When I arrived in Whangarei in 1991 you could pick up a property in this suburb for $20,000-$30,000.
- The Government has been at pains to protect all New Zealanders, both financially and economically. There will be considerable financial pain, but the effects of this are being minimised by the wage’s subsidy and the mortgage holidays and other accommodation.
FUTURE BUGS A CERTAINTY
The Covid 19 virus is only the precursor to other bugs that will develop and try to eat us. Humans are such a big untapped planetary food source. Viruses have been around for a lot longer than we have. It is inevitable that something is going to find a new way to harvest our nutrients. And what better adapted creature than a virus, which can reproduce thousands of times a day, and using our bodies, spread itself through our breathing and social processes. It can mutate faster than we can vaccinate against it. We will have more of these types of bugs coming.
But we will be better prepared for the next one. We know what to do now and how to contain it.
Most of the future bugs will be contained close to where they originated.
- This virus will have a long-term effect on peoples’ thinking about the way the global economy works. Economies today are dependent on being able to grow internationally. That means they need a growing market to sell into, a worldwide marketplace. We see the evidence of this with all the free trade agreements negotiated in the last 10 years. But are worldwide markets the best strategy for a country? This virus may be the beginning of a reset where countries look more inside their own borders for growth.
- Through necessity people have moved more towards home-based self-sufficiency. Old fashioned baking is back in vogue as are walks with the family and board games. The home environment has become more important. Isolation and avoiding people outside the family bubble has a new emphasis. People will dine out less and some values such as appearances may change. We will see less waste, such as that generated in the restaurant and dining industry. The green movement will flourish.
- People will holiday more in their safe havens (NZ) so we will see more internal tourism.
- NZ will still be seen as the clean green country that it is, and will still be seen as a tourist destination, but we will need protect our shores better than we have and may not want as many of these risky tourists, many of whom totally ignored the isolation requirements when entering the country.
- Tourism as an industry will probably decline and it would be foolish to rely on the tourist dollar like we have. We need to promote New Zealand to New Zealanders more. We will see the end of the reliance on the tourist dollar and the end of international global travel as we know it, certainly, to the extent it is now.
- This bug may be the beginning of the end for the current financial system based on economic growth. It is unlikely the existing financial global system, where countries export to each other, will last long term. There is likely to be a movement towards more ecologically sound self-sustaining economic systems. Economies are likely to head internally rather than externally. The export dollar will become less important as it brings so much potential risk with it. This will be short term initially but may gain a stronger foothold going forward, especially among the younger generations.
- It’s a time the world can reset and head in a slightly different and most likely greener direction.
- Countries will move towards nationalism rather than globalism. What happens in our back yard will be more important than the worlds backyard. We will want to be able to lock the gate at any time, with the right people on each side of the fence and have a strong enough internal economy that we can survive without the shocks.
- We as a country will have a lot of new debt. We will have to pay that back either through our money being worth less, or through taxes. The piper will have to be paid and from what we have heard a lot of this will be by “Quantitative Easing “. Printing money. This should result in some inflation, although it hasn’t yet in countries that have tried it. ( USA, Europe and Japan) , but never the less it should do! You print more of it and the value of what is there declines because there is more of it! Seems simple enough.
- Which brings us back to property, the only sure fire hedge against inflation.
Future Economic Changes
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