I took a walk the other night. You know things are not normal when across the bay, reflecting on the harbour, is an iridescent-blue Sky Tower.
And things may never be normal again. The economy we find post-lockdown may be quite a different one.
When I get home, I google the blue tower. The blue glow is in ‘support of frontline workers and their tireless efforts in the fight against COVID-19’.
Source: Sky Tower, Facebook
I’m not an easy city dweller. A country boy at heart, crossing paths with lots of people wears on me. Then I’m itching to fill the big silver SUV with diesel and drive hours downcountry. Empty roads, beaches, and golf courses.
As I look at all the lights on in the multimillion-dollar villas during my walk, I wonder how the property market will fare post-COVID.
Will high-priced areas suffer more than others? Or will the rich — at least those with available cash — once again use this crisis to become even richer?
What of the whole property market? What about commercial? How will the high street look when we get out the other side? And what about businesses who are being priced daily in the financial markets?
After listening to sector experts, here is my take on our post-COVID economy. And where the opportunities may be.
Impact of government cash during this lockdown
Did your business get a wage subsidy? This month, almost 400,000 companies and sole traders applied for government cash.
Typical Kiwi business with six staff? Revenue down 30%? The bank account may just have got fattened with around $40,000.
This is to try and stop unemployment and compensate for forced closure. But what will the real impact be of such a large cash dump? And where is this money coming from?
Last month the Reserve Bank announced a $30 billion quantitative easing (QE) programme. At around 15% of GDP, this is pretty significant.
The Reserve Bank buys government bonds. Those assets move on to its balance sheet. New money gets into the hands of third parties. It works to keep the bond price low (and interest rates low). So, as the government continues to issue bonds to pay for wage subsidies and the like, banks know there is always a buyer for them.
This enables both the banks and the government to access plenty of cheap money at a time of need.
Crucially, it works to increase the supply of money.
What happens when you increase the supply of anything? Its price goes down.
But, equally, if there’s more money in the system, it could chase assets like stocks and property, pushing their price up.
Right now, there’s no inflation to speak of. Except perhaps in supermarkets. But once the lockdown ends, a dam of demand could break, driving a new inflationary spiral.
Crushed stocks now on the rise
In the beginning of the crisis, there was a terrible wave of panic-selling across share markets. It felt like the sky was falling in.
That seems to have dissipated. And we’re even seeing strong rises in some sectors.
Yet, with significant areas of the global economy closed, there is not a day that goes by when my Tweet deck is not ringing with tales of derailing businesses.
Investing in this market comes with heightened risk.
Here in New Zealand, the aggressive nature of our lockdown on a small economy is even more threatening.
I don’t know about your local high street, but over the years, mine has filled with cafes and restaurants as retail moved online and to megamalls.
They are all closed. We must make our own cappuccinos now.
Some estimates suggest half of these businesses in tourist hot spots may not be around the other side of COVID-19.
This has flow-on effects on unemployment, banking, retail property, and utilities.
Comparing the last recession with this one
What has happened in New Zealand mirrors the sudden drawdown in the S&P 500 in the US. If we look at which GICS (Global Industry Classification Standard) sectors got hit there, we see big sell-off in financial stocks (like banks), real estate, and utilities (e.g. power generators).
We can then look for businesses in these areas that have been oversold but present a margin of safety.
Listed real-estate investment businesses are attractive to me, providing they’re not carrying too much debt. The underlying properties should still be worth something post-COVID.
The lesson from the GFC (Global Financial Crisis) is that when there is more money in the system — following bouts of QE — these assets may start a run.
In this case, that’s dependent on the lockdown ending so this money can start flowing through the economy again.
Of course, what we also saw post-GFC is that the rich were best placed to take advantage of this. While many others got knocked back.
What about the property market?
The residential property market in New Zealand has some different demand drivers to the stock market. It’s much more supported by debt, employment, and immigration.
Experienced investors buy stocks based on where they see business potential in 6 or 12 months’ time.
People buy houses in overheated markets — some beyond which they can afford — blowing up the bubble.
In Auckland, the bubble is tough. Like a watermelon. Hard on the outside due to those demand drivers. But soft within. Smash the hard exterior and you could crush it.
There are two forces at play.
First — the demand v. supply imbalance that thrust New Zealand homes to severely unaffordable income medians. That imbalance likely hasn’t changed too much.
But second — the new post-COVID economic condition of unemployment that could well be over 10%. Immigration stopped at the border. And banks preoccupied with supporting existing mortgage holidays as opposed to aggressive new lending.
Who’s losing jobs during this lockdown?
Now, you may be thinking many of the job losses will hit those on lower wages. Hospitality and tourism workers who may be renting, for example.
What we’re seeing in this crisis is redundancy and pay cuts for even high-income people. Air New Zealand alone is looking to lay off around 3,500 staff.
The average salary at Air New Zealand is over $76,000.
Assuming half of these people have a home with a mortgage, this event alone could put 1,000+ households into severe property stress. While they attempt to find new jobs in a battered employment market.
OK, flying is being grounded everywhere right now. But stopping production and services — even non-people-facing roles across the entire economy — seems draconian. Especially when the real risk was always at a border they failed to quarantine.
Is this playing into the hands of the Left’s desire to control the populace? And then ‘generously’ hand them a little survival cash and time?
The road forward
In fairness, there is no perfect response to a pandemic. Arguably, ours’ has been better than many. The real questions will get raised when we must unlock the economy but still face contagion risks.
If the property market lags the share market by several months — and, in fact, is awaiting the end of the lockdown to even open — we could well see some of the drawdown in prices we’ve seen in stocks.
But with more bitter effects.
Of course, this country does have a safety switch. When the economy cannot hold itself up, we import people in large numbers per capita. Those wanting to leave more crowded corners of the globe. Corners with more virulent worries than our own.
There are enough of them to move the market in a small country like this. And given past experience, there’ll be no shortage when the Kiwi dollar sinks and borders reopen.
That’s the trouble when you’ve built a bubble. You’ve got to keep blowing.
Unlike 1987, many shares don’t seem to be trading at desperately unworkable P/E multiples.
The income multiples — at least on Auckland property pre-lockdown — now look shaky. The money will have to come from outside.
But this time outside is in trouble too.