Hi Guys
Comment from Tony Alexander's weekly newsletter on the housing market:
Regards
Comment from Tony Alexander's weekly newsletter on the housing market:
HOUSING MARKET UPDATE
No-one should be surprised by the coverage given by the media to falling rents and prices in the Auckland
inner city apartment market. It has been very clear for the past two years that an over-supply situation is
developing with a surge in construction yet falling demand as the export education sector went backwards.
Many months ago we commented on how desperate developers appeared to be getting to sell their product.
In particular we noted the full page ads being run in Wellington saying you could lay down as little as $1,000
to get an apartment in Auckland with great views – with those views including not just the harbour but fir
trees, mountains and a lake! There may have been some snow in the background as well but we’d have to
find the ad again to verify that. We should have laminated it to drag out at seminars for the next seven years.
The housing market has been rising on average nationwide for a year longer than we thought it would. We put that down to low fixed interest rates, high job security, a rebound in rural incomes courtesy of strong
commodity prices, and anticipation of easing fiscal policy.
But what has happened is that average prices
have moved even further away from fundamental levels and their vulnerability to shocks has increased. Like
other economists in recent months we have pulled back from forecasting outright falls in prices. Frankly that
was mainly to avoid sounding like a broken record. There remains a strong chance that average prices will
decline – and that chance gets higher the quicker the NZD declines. This arises because a falling currency
boosts inflationary pressures and the RB will respond with higher short term interest rates that will move far
enough up to affect fixed interest rates to some extent as well.
We have yet to be convinced that the NZD is on the cusp of a large fall – simply because our interest rates
are currently high by world standards and set to go higher. So we don’t think the housing market is about to
tank. But all we can do is remind people that the housing market moves in cycles. The upward leg of this
cycle has gone higher for longer than we expected. But that does not mean the cycle is destroyed or that it
will flatten out and everything goes smooth, we all stay happy, and then a nice pleasant wealth-boosting
upturn starts three years from now.
There are many people who have over-invested in property in comparison with their incomes and capital and as interest rates rise while rents decline they will have no choice other than to put one or two of their properties on the market.
This probably will not be a widespread thing but enough people will be in this position in all probability that there will be a period of a few quarters when prices pull back a tad. We struggle to forecast average prices falling more than 5% however because that usually requires not just high interest rates (and the higher the debt the lower interest rates have to be to be considered “high”), but a strong hike in the unemployment rate as well. We think that the labour market will remain tight and this will help insulate the housing market.
So just as we were saying over a year ago with regard to the housing cycle turning – we don’t think any form of panic is justified, but a more cautious attitude toward rents, tenanted periods and capital gain is required.
No-one should be surprised by the coverage given by the media to falling rents and prices in the Auckland
inner city apartment market. It has been very clear for the past two years that an over-supply situation is
developing with a surge in construction yet falling demand as the export education sector went backwards.
Many months ago we commented on how desperate developers appeared to be getting to sell their product.
In particular we noted the full page ads being run in Wellington saying you could lay down as little as $1,000
to get an apartment in Auckland with great views – with those views including not just the harbour but fir
trees, mountains and a lake! There may have been some snow in the background as well but we’d have to
find the ad again to verify that. We should have laminated it to drag out at seminars for the next seven years.
The housing market has been rising on average nationwide for a year longer than we thought it would. We put that down to low fixed interest rates, high job security, a rebound in rural incomes courtesy of strong
commodity prices, and anticipation of easing fiscal policy.
But what has happened is that average prices
have moved even further away from fundamental levels and their vulnerability to shocks has increased. Like
other economists in recent months we have pulled back from forecasting outright falls in prices. Frankly that
was mainly to avoid sounding like a broken record. There remains a strong chance that average prices will
decline – and that chance gets higher the quicker the NZD declines. This arises because a falling currency
boosts inflationary pressures and the RB will respond with higher short term interest rates that will move far
enough up to affect fixed interest rates to some extent as well.
We have yet to be convinced that the NZD is on the cusp of a large fall – simply because our interest rates
are currently high by world standards and set to go higher. So we don’t think the housing market is about to
tank. But all we can do is remind people that the housing market moves in cycles. The upward leg of this
cycle has gone higher for longer than we expected. But that does not mean the cycle is destroyed or that it
will flatten out and everything goes smooth, we all stay happy, and then a nice pleasant wealth-boosting
upturn starts three years from now.
There are many people who have over-invested in property in comparison with their incomes and capital and as interest rates rise while rents decline they will have no choice other than to put one or two of their properties on the market.
This probably will not be a widespread thing but enough people will be in this position in all probability that there will be a period of a few quarters when prices pull back a tad. We struggle to forecast average prices falling more than 5% however because that usually requires not just high interest rates (and the higher the debt the lower interest rates have to be to be considered “high”), but a strong hike in the unemployment rate as well. We think that the labour market will remain tight and this will help insulate the housing market.
So just as we were saying over a year ago with regard to the housing cycle turning – we don’t think any form of panic is justified, but a more cautious attitude toward rents, tenanted periods and capital gain is required.