Economist explains why the pandemic hasn't hit house prices

An economist has a theory on why house prices have continued going up, despite the economic turmoil caused by COVID-19. 

Wealthy boomers are giving the money they would have spent on overseas holidays to "little Johnny or little Jenny and it's helping them get on the property ladder", Cameron Bagrie told The AM Show on Tuesday.

"Mum and dad are not going to Europe, they're not going up to the United States, they've got a bit of spare coin around," he said, explaining how luxury industries like spa pools and motor homes are "off to the races", with overseas travel a distant dream as the COVID-19 pandemic rages. 

Earlier this year there were predictions house prices could fall 10 percent or more, but despite the biggest drop in quarterly GDP in history, nothing happened in the property market.

"Like it never happened," Kiwibank senior economist Jeremy Couchman said earlier this month. Real Estate Institute of New Zealand data released last week found yields for property investors had hardly budged either, even as rents were frozen. 

"Initial fears that yields would be significantly impacted by rising unemployment as a result of COVID-19 have been unfounded," said chief executive Bindi Norwell. 

"Every single person who has adopted the philosophy of waiting for a price fall has got it wrong," economist Tony Alexander told Stuff

In September, a survey Alexander conducted of real estate agents found 62 of them were noticing more first-home buyers showing up to viewings - up from just 4 percent in May. 

Cameron Bagrie.
Cameron Bagrie. Photo credit: The AM Show

In addition to boosting the housing market, Bagrie says the inability to spend overseas is fuelling a 'K-shaped' economic recovery. 

"When you go through an economic shock, you've got less money in your pocket so you spend a bit less across the broader economy. But there's also the substitution effect - normally the substitution effect involves trading down - buying a different product that costs a little bit less. 

"But we're seeing a ramped-up version of the substitution effect across this economy right here and now - you can't spend money overseas, so that money is now burning a hole in your pocket, so what are you doing? You're substituting it for something else. 

"It's not just about travel-related products domestically - you're buying something different. You're buying spa pools, people are looking at motor homes, reinvesting in their house. If you can't buy the coffee in the CBD and you're out in the suburbs working from home, suddenly that local cafe is booming. 

"What it's doing, it's accentuating the K-shaped cycle. Economists talk in alphabet soup. One of the recovery prospects is a K. Now, you want to be in the top part of the K - that's the part where you bounce up on the other side. Of course there is the other side of the K where you come back down on the lower-half. I guess the modern-day example of that is the shift towards online retaliation versus traditional retail. Online's on the up side, traditional retail is on the other side."

In other words, the pandemic is helping some local industries thrive, while starving others. Bagrie estimates most of the $8 or $9 billion Kiwis spend overseas each year will now be staying here.