Despite the global COVID-19 pandemic, the New Zealand property market is reaching new heights. Real estate prices have hit a five-year high, and more residential properties were sold this year compared to the last.

The first case of COVID-19 was reported in February, and since then our lives have been affected in many different ways. Like other nations around the world, New Zealand went into full lockdown in an attempt to control the spread of the coronavirus. The first lockdown was announced in March, and the country closed its borders. Because of the restrictions imposed as a result of this, many industries have experienced an economic slowdown.

However, this has not stopped the property market from defying all expectations. Property prices have been steadily on the rise and this trend is only set to continue. Let’s turn the spotlight on some of the reasons why the property market has experienced this unprecedented growth.

Low Interest Rates

The lowering of interest rates by the Reserve Bank of New Zealand has been one of the primary factors driving this growth. In March 2020, the Official Cash Rate (OCR) was lowered to offset the negative economic implications of the pandemic. This step was taken in order to maintain price stability and minimize unemployment.

The OCR is the lowest it has ever been since the year 1999. This dramatic reduction has resulted in low mortgage interest rates, prompting a corresponding rise in property prices. There is an increase in the demand for property due to cheaper borrowing costs, driving continued growth in the property market.

Changes to Overseas Investment Policies

In the past, New Zealand had an open housing market, which meant that foreigners could buy residential property in the country. This drove up real estate prices as wealthy people from around the world began buying homes, resulting in public outcry. In order to nip this crisis in the bud, the government put forth the Overseas Investment Act, banning the ownership of residential properties by foreigners.

Recently, in a bid to recover from the impact of the pandemic and boost economic growth, some vital changes have been made to the Overseas Investment Act. Overseas investors now have fewer regulatory burdens to contend with when it comes to the origin of loans and the purchase of certain types of land. This relaxation of the rules may encourage foreign buyers to start investing their money in property again.

Migration Gain

New Zealand has been applauded by the rest of the world for its success in responding to COVID-19 and fighting community transmission. It is being perceived internationally as a safe place to live. While the country closed its borders to international visitors in March, New Zealanders visiting or living in other parts were allowed to return. As a result, the number of people returning to live in the country hit an all-time high.

This migration gain may be attributed to the country’s success at combating the pandemic or the uncertainties of the overseas job market. The sudden population increase has driven up the demand for real estate even more. This imbalance of supply and demand has resulted in high real estate prices. Affordable properties are becoming increasingly hard to come by in all parts of the country.

Low Barriers To Entry 

Thanks to low mortgage rates, more investors are entering the real estate market. Additionally, loan-to-value ratio (LVR) restrictions were removed in the beginning of May. The lower interest rates are linked to low term deposit rates, motivating people to rethink the way they invest their savings. Real estate prices have gone up considerably in the last few years, promising high returns in the future.

These factors are giving potential buyers the push they need to invest in property. It is perceived as a low risk, high returns investment avenue during this period of uncertainty.

Increasing Financial Instability

The upward trend in the real estate market could be a fleeting one. The full impact of the coronavirus on the property industry is still to be seen. In order to prevent large rates of unemployment, the government introduced a 12-week wage subsidy scheme in March. As the pandemic continued, this scheme was extended and re-implemented at various points of the year.

The various wage subsidies have supported thousands of jobs by allowing businesses to retain their employees despite being hit by the economic slowdown. However, the country may face the brunt of the impact from the pandemic once these wage subsidies are withdrawn. Business will then need to start letting go of some of their staff. This could lead to a high level of unemployment across different industries. The travel and hospitality sectors are likely to be hit the worst. This increased financial instability may indirectly impact the real estate industry, and the current high demand for properties will slow down.

Impact On The Country’s Economic Well Being

If house prices continue to soar, experts believe that this could have a negative impact on the long-term economic wellbeing of the country. The rising cost of housing will widen the social divide and increase homelessness.

While factors like low interest rates and loose lending requirements have attracted investors, people from lower income groups are being left behind. The high prices also dissuade first time buyers looking to invest their savings into a home. New Zealand has one of the most expensive housing markets in the world and the rate of homelessness is higher than ever before.

To add to these issues, the waiting list for state housing has hit a record high. It’s clear that the current policies may have a negative impact on the economic growth of the country in the long run. According to experts, house prices will continue to go up rapidly in the next one year. The government may need to implement measures such as providing low-cost housing, and changes in the tax system to bring down excessively high real estate prices.

Leonard Ross is an established property developer in Auckland, New Zealand.