HOUSING MARKET UPDATE
Slowing Signs Apparent
Recent data on New Zealand housing market have tended to be firm. Sales in the three months to May
were up by 4.2% from a year earlier and on average in May it took 30 days to sell a dwelling which was nine
days faster than the average for that month over the past 10 years.
This improvement over the average time
taken to sell was the same as in April and similar to the 8.8 days in March and 10.3 days better than average
in February. House prices are also continuing to rise with the median dwelling sale price in May of $350,000
up by 14.8% from a year earlier.
But if we look really deeply we can see some signs that this burst of activity is now waning. One sign of
weakness is the fact that in May sales were down by 3.7% from a year earlier. More significantly, in rough
seasonally adjusted terms sales in the three months to May where down by 3.8% from the three months to
February.
But perhaps more significant than this is what we are seeing right now in our own contacts with the housing
market. Investors are again stepping back from making purchases as they did in the first half of 2006.
There are major concerns about cash flows as a result of the relatively sharp jump recently in fixed interest
rates. These rate rises are highlighting the way in which rents have not kept up with house prices. In
addition perhaps some investors are getting concerned about what is happening with the net migration
numbers. In seasonally adjusted terms the inflow is now running at about 5000 per annum compared with
an average over the past 10 years of 10,000. Below average population growth means below average
growth in housing demand.
There are also concerns about the policy attacks being made on housing investment with the Reserve Bank
recommending a change in the tax regime and the Minister of Finance suggesting ring fencing residential
investment property losses.
For the past few months our warning has been that people should not blindly extrapolate the recent strong
housing market numbers and expect continued price rises over 10% over the next couple of years.
Our interpretation of the market surge late last year has been that it was driven by
• the Reserve Bank failing to back up their warnings of tightening monetary policy with any further rate
increases until March this year,
• a rebound in a net migration inflows numbers over calendar 2006, and
• investors jumping back into the market from the middle of last year when they realised owner occupier
demand was still very strong and assisted by things like the Working for Families package, strong wages
growth, and a continued very tight low market.
In that regard we are not surprised by the easing signs we are starting to pick up. But the question now
becomes will the market become quite weak perhaps with falling prices on average?
We don't think so. The market is still going to remain very well supported by good wages growth, a tight labour market, what we believe is a backlog of owner occupier buyers, a perceived structural shortage of dwellings in New Zealand, continuing increases in construction costs, and a government focus on improving home affordability by boosting demand from low income buyers rather than improving supply.
In addition, just as there have been many older farmers hoping for better returns so that land prices would
fall and they could pick up the some cheap extra assets, we also believe there are many well-heeled
investors hoping the market becomes exceptionally weak so that they can make some cheap purchases and
build up a strong long-term focused portfolio. And we are not concerned by the bleating noises from lobby
groups and some current investors warning that if the government takes away their distortionary tax
advantages they will fight back by aggressively raising rents.
If the market was able to tolerate higher rents
they would already be in place. And a few people seem not to realise that their threat of selling their
tenanted properties is not a threat at all. It is in fact the very thing many of us want to see as a result of
removing the tax bias in favour of residential property.
For every house a disgruntled investor sells an owner
occupier will be able to make a purchase and start smiling.
For political reasons however it seems very unlikely that we are going to see the tax advantages of
residential property investment removed. This is a huge pity because it would be good in terms of diverging
investment toward productive assets, reducing inflation slightly, improving home affordability, and causing
interest rates and the exchange rate to sit at slightly lower levels than would otherwise be the case.
Perspective
When you read commentary on the housing market it pays to keep in mind the employer and motives of the
person making the comments. For instance there are at least two people employed as economists working
for managed funds firms and the line they have taken on housing has been unerringly negative over the past
couple of years and remains that way even in the face of strong evidence that their forecasts are off the
mark.
In particular one person produced a piece of very poor “research” last year purporting to show a large
excess supply of houses in the market with the implication that prices would flatten off or fall. Instead they shot upward again.
Another commentator has apparently suggested fixed interest rates may rise to 12%.
That is blatantly ridiculous but a nice story to scare the youngsters with if they won't go to bed early.
So just keep this in mind if you are an investor in the property market or somebody contemplating making a
purchase.
There are plenty of people with a vested interest in talking the market lower - not least one or two trying to flog books on the basis that a major slump is coming and if you buy their book you'll make money out of. The world loves a trier.
As a final point, what is our vested interest? On the face of it you would think we would be biased towards
talking the housing market up so people would borrow more money. But in case you haven't noticed we
bank economists are in the fortunate position where influence on what we say by our bosses while present is
not dominant.
We have all at times warned that house prices would fall, or that a recession is coming up, or that some important commodity price is going to fall away.
At the BNZ we have also stridently warned about
the upside risk to interest rates. None of these things would be positive for the lending side of our business
but we are free to say them. Interestingly we get most of these dire predictions wrong (apart from the
interest rates one)! This really is a dismal science.
Slowing Signs Apparent
Recent data on New Zealand housing market have tended to be firm. Sales in the three months to May
were up by 4.2% from a year earlier and on average in May it took 30 days to sell a dwelling which was nine
days faster than the average for that month over the past 10 years.
This improvement over the average time
taken to sell was the same as in April and similar to the 8.8 days in March and 10.3 days better than average
in February. House prices are also continuing to rise with the median dwelling sale price in May of $350,000
up by 14.8% from a year earlier.
But if we look really deeply we can see some signs that this burst of activity is now waning. One sign of
weakness is the fact that in May sales were down by 3.7% from a year earlier. More significantly, in rough
seasonally adjusted terms sales in the three months to May where down by 3.8% from the three months to
February.
But perhaps more significant than this is what we are seeing right now in our own contacts with the housing
market. Investors are again stepping back from making purchases as they did in the first half of 2006.
There are major concerns about cash flows as a result of the relatively sharp jump recently in fixed interest
rates. These rate rises are highlighting the way in which rents have not kept up with house prices. In
addition perhaps some investors are getting concerned about what is happening with the net migration
numbers. In seasonally adjusted terms the inflow is now running at about 5000 per annum compared with
an average over the past 10 years of 10,000. Below average population growth means below average
growth in housing demand.
There are also concerns about the policy attacks being made on housing investment with the Reserve Bank
recommending a change in the tax regime and the Minister of Finance suggesting ring fencing residential
investment property losses.
For the past few months our warning has been that people should not blindly extrapolate the recent strong
housing market numbers and expect continued price rises over 10% over the next couple of years.
Our interpretation of the market surge late last year has been that it was driven by
• the Reserve Bank failing to back up their warnings of tightening monetary policy with any further rate
increases until March this year,
• a rebound in a net migration inflows numbers over calendar 2006, and
• investors jumping back into the market from the middle of last year when they realised owner occupier
demand was still very strong and assisted by things like the Working for Families package, strong wages
growth, and a continued very tight low market.
In that regard we are not surprised by the easing signs we are starting to pick up. But the question now
becomes will the market become quite weak perhaps with falling prices on average?
We don't think so. The market is still going to remain very well supported by good wages growth, a tight labour market, what we believe is a backlog of owner occupier buyers, a perceived structural shortage of dwellings in New Zealand, continuing increases in construction costs, and a government focus on improving home affordability by boosting demand from low income buyers rather than improving supply.
In addition, just as there have been many older farmers hoping for better returns so that land prices would
fall and they could pick up the some cheap extra assets, we also believe there are many well-heeled
investors hoping the market becomes exceptionally weak so that they can make some cheap purchases and
build up a strong long-term focused portfolio. And we are not concerned by the bleating noises from lobby
groups and some current investors warning that if the government takes away their distortionary tax
advantages they will fight back by aggressively raising rents.
If the market was able to tolerate higher rents
they would already be in place. And a few people seem not to realise that their threat of selling their
tenanted properties is not a threat at all. It is in fact the very thing many of us want to see as a result of
removing the tax bias in favour of residential property.
For every house a disgruntled investor sells an owner
occupier will be able to make a purchase and start smiling.
For political reasons however it seems very unlikely that we are going to see the tax advantages of
residential property investment removed. This is a huge pity because it would be good in terms of diverging
investment toward productive assets, reducing inflation slightly, improving home affordability, and causing
interest rates and the exchange rate to sit at slightly lower levels than would otherwise be the case.
Perspective
When you read commentary on the housing market it pays to keep in mind the employer and motives of the
person making the comments. For instance there are at least two people employed as economists working
for managed funds firms and the line they have taken on housing has been unerringly negative over the past
couple of years and remains that way even in the face of strong evidence that their forecasts are off the
mark.
In particular one person produced a piece of very poor “research” last year purporting to show a large
excess supply of houses in the market with the implication that prices would flatten off or fall. Instead they shot upward again.
Another commentator has apparently suggested fixed interest rates may rise to 12%.
That is blatantly ridiculous but a nice story to scare the youngsters with if they won't go to bed early.
So just keep this in mind if you are an investor in the property market or somebody contemplating making a
purchase.
There are plenty of people with a vested interest in talking the market lower - not least one or two trying to flog books on the basis that a major slump is coming and if you buy their book you'll make money out of. The world loves a trier.
As a final point, what is our vested interest? On the face of it you would think we would be biased towards
talking the housing market up so people would borrow more money. But in case you haven't noticed we
bank economists are in the fortunate position where influence on what we say by our bosses while present is
not dominant.
We have all at times warned that house prices would fall, or that a recession is coming up, or that some important commodity price is going to fall away.
At the BNZ we have also stridently warned about
the upside risk to interest rates. None of these things would be positive for the lending side of our business
but we are free to say them. Interestingly we get most of these dire predictions wrong (apart from the
interest rates one)! This really is a dismal science.
Comment