Covid-19 has created the perfect storm for Queenstown’s economy, and the usually buoyant property market is not immune, writes Paul Taylor
Three months ago, Queenstown Lakes District’s property market was on a high after a decade of rampant growth.
Median house prices had more than doubled from $480,000 in 2010 to $1,055,000 in January 2020, making it the second most expensive district in the country behind Auckland’s North Shore.
There were few houses listed below the $700,000 mark.
The growth was built on a seemingly endless stampede of three million visitors per year, creating tourism jobs and, in turn, demand for housing, which created more jobs in construction and real estate.
Such was the demand for visitor accommodation, and the projections of future income from it, there were more than 4000 hotel rooms under development or awaiting consent, across more than a dozen hotel projects.
And the shortage of hotel rooms had a major knock-on effect for the housing market.
Landlords could get high nightly returns from Airbnb, pushing prices higher, and reducing the amount of long-term rental stock. Up to a fifth of the district’s housing stock was used as short-term holiday lets.
As a result, minimum wage workers paid exorbitant rents and some construction projects even built their own worker accommodation to encourage tradies to come to town.
More than 600 low-to-moderate income households were registered on the Queenstown Lakes Community Housing Trust register, waiting for help into affordable accommodation.
But the tourism tap has been turned off by Covid-19, and now the tables have turned.
Within hours of the borders closing, dozens of properties were popping up like daisies on various rental accommodation websites, while landlords were offering 20 percent-plus rent reductions to keep existing tenants.
Thousands of redundancies are expected in the tourism sector and beyond. The district’s mayor Jim Boult says unemployment could reach 30 percent, especially when the Government’s 12-week wage subsidy ends.
So what does that mean for the property market?
ASB Bank is predicting nationally a 6 percent dip in house prices, and with the local economy so dependent on tourism, Queenstown could be the worst affected.
Colliers International Otago managing director James O’Hagan says there is likely to be “a level of re-calibration in residential pricing locally as the market responds”, and how much depends on how the wider Queenstown economy recovers.
“If we find that the changing job market leads to people leaving the district and a significant oversupply of properties that can’t be tenanted, then we would expect a larger correction in pricing.”
He expects the hotel and managed apartment sectors will feel the effect earliest, while commercial landlords will also be significantly impacted as so many tenants are tourism businesses.
Infometrics data from 2019 indicates the accommodation and hospitality sector make up 17.3 percent of Queenstown’s GDP.
“Economic impact on that sector alone is going to have a major effect on employment, with a flow-on effect on the broader real estate market.”
O’Hagan says lending has been carefully managed over the past decade after the Global Financial Crisis (GFC), but many people rely on short-term letting of rooms or whole properties to help pay their mortgages, “enabling people to live and work in Queenstown who may not otherwise be able to afford to.”
Fewer tourists will create financial pressure on those people, although flexibility from the banks, lower interest rates and higher equity will help those who are not over leveraged.
Mark Pullar, chief executive and principal advisor at Roost mortgage brokers, based in Arrowtown, says: “We will undoubtedly see changes, but they may not necessarily be catastrophic.”
Pullar has been in the business since the GFC and says measures put in place as a result will cushion the blow for Queenstown, with six-month mortgage breaks, supportive banks, low interest rates and the 12 week-wage subsidy.
Before the GFC, banks were loaning at more than 100 percent of the purchase price, lending criteria was far less stringent and interest rates were between 9 and 10 percent, he says, whereas the LVR restrictions have seen banks generally require a 20 percent deposit from borrowers.
“This has meant that it has become very difficult to obtain a loan that might become unaffordable in the future.
“Add to this a far lower interest rate (circa 3-4 percent) than they were back then, so there is a greater buffer for adversity.”
Pullar says borrowers will not have been able to rely on forecast Airbnb income to obtain a mortgage, but instead would have had to present on 70-75 percent of standard long term rent.
“The affect it might have, is the property just isn’t as profitable as it was, so they might sell the property, which might mean an increase in supply of rental properties that just don’t perform as they used to.
“I see this as more likely than a high number of cases of people ending up in mortgagee sale territory.”
He says there are a relatively small number of business people who have created businesses 100 percent reliant on short-stay income.
Both O’Hagan and Pullar expect the volume of sales to decrease as those homeowners who can afford to hold out for the tourists to return and the market to recover, but others who lose jobs, or relied on holiday let or rental income could be forced to sell.
One saving grace is many homeowners in Queenstown have, in fact, built the properties over the past decade, such as those in the 900-plus Shotover Country subdivision. This has given them more equity than the 20 percent deposit alone.
Queenstown Lakes Community Housing Trust executive officer Julie Scott says it’s too early to say what the impact could be for its 600-strong waiting list.
“On one hand, rents have definitely come back already, and that’s a huge bonus,” she says.
“Obviously it’s not good for property investors who purchased the property based on high rents, but for the community aspect, Lakes District was far too high and needed a reset, so that’s a positive outcome.”
While lower house prices might seem also to be a positive for those on a low to moderate income, it will likely mean the economy as a whole is suffering.
“So there are other things to take into consideration such as income level, job security and therefore the ability to borrow, and how much is in their Kiwi Saver.”
Still, Scott says the Trust will continue with its 65-home mixed-tenure Tewa Banks development in Arrowtown.
And the construction and infrastructure industry is the hope for Queenstown in the short-term.
As builders, plumbers, electricians and tradies returned to work on Tuesday morning, the sound of hammers and drills could again be heard in the suburbs, finishing half-built homes.
Hotel developers part-way through projects have indicated they intend to finish their builds.
And Queenstown Lakes District Council has already applied for $68 million of government funding for ‘shovel-ready’ projects, which it says will unlock about half a billion dollars in council and NZTA spending on infrastructure, to provide employment for people who have lost their jobs in the tourism industry.
The other hope is the domestic visitor market, which makes up 36 percent of Queenstown Lakes District’s visitors and usually spends $4 billion a year on now-unlikely overseas trips. They’re likely to get such good deals from currently empty hotels however, that they will not prop up the peer-to-peer holiday let market.
* Made with the support of NZ on Air *