HOUSING MARKET UPDATE
Nothing much new this week – downside risks continue for
sales, prices and construction. But buyers should be careful
about thinking the market will stay in their favour for a
couple of years. A dwelling shortage is likely come late-
2009.
We haven’t really learnt anything new about the state of or outlook for the housing market over the past
week. The monthly migration numbers showed net inflows stable just below 5,000 p.a. which is half the ten
year average. This is neither here nor there and is certainly not a driving force behind the current state of the
real estate sector. That is because these numbers have been moving in a range broadly between 5,000 and
15,000 p.a. for over three years.
We remain confident of interest rates falling possibly rapidly later this year but there is a key thing people
need to remember with regard to coming interest rate falls The Reserve Bank will not cut interest rates
because they want to stimulate the economy and create new inflationary pressures to prevent annual
inflation going below 1%. They will cut them because they no longer need very tight monetary policy to stop
inflation consolidating above 3%.
The distinction is very important. We do not envisage a scenario in the next two years akin to that in 1999,
2001, or 2003 when the benchmark two year fixed housing rate fell near or below 6.5%. We see scope for
the two year fixed rate to get close to 8% either very late this year or in the March quarter of 2009. After that
we can see it getting to the current five year average of 7.8%. But to go lower than that could require
monetary policy easing beyond what we are currently projecting.
So our interest rate scenario is supportive of a flattening in the real estate market, but not a fresh upturn
about which one might get excited. For investors this means the focus has to remain very strongly on yield
and positioning perhaps based on one’s belief about developments affecting particular suburbs.
Having said that, come the second half of 2009 we see scope for improvement based on
• heightened worries about the supply of properties in New Zealand as construction falls sharply as we
discuss earlier in this week’s Overview,
• the strengthening upturn in the export sector,
• the current excess supply of properties on the market getting soaked up,
• plus tax cuts, wage rises, and less weakness in the labour market than some might fear.
If you want to get your own feel for what is happening on the ground in the area of interest to you at the
moment these are the things you should be focussing on.
1. The extent to which vendors are taking their properties off the market. The more that do the less the
downward pressure on prices.
2. The extent to which vendors cut prices to sell their properties. The more they do the quicker turnover
levels will recover and the range available to buyers will shrink.
3. The extent to which buyers start coming out of the woodwork perhaps encouraged by falling interest
rates (watch this one). The quicker they do the less the downward pressure on prices and the sooner
activity levels improve.
For the record, this week the quarterly ASB Housing Intentions Survey was released. It merely confirms
what we already know rather than adding predictive elements. A net 34% of respondents around the country
said they expect house prices to fall over the coming year. This is down from a net 1% expecting falls last
quarter. As the first graph below shows there is a close correlation between this result and what prices
actually do in the relevant quarter with only a slight hint of predictive insight.
Key Forecasts
• Dwelling consent numbers to fall from 24,500 in the year to March 2008 to below 18,000 in the year to
March 2009 with a slight recovery to March 2010 then above average activity after that as attention turns
to a shortage of dwellings late in 2009.
• Real estate sales falling from 77,130 in the year to April 2008 to between 55,000 and 65,000 come the
end of this year then recovering back over 65,000 in calendar 2009 with further growth over 2010.
• House prices down 5%-10% by the end of 2008, flat over 2009, rising slightly over 2010, possibly earlier.
If I Were a Borrower What Would I Do?
Fixed lending rates have been creeping down in the past few weeks and we expect that come the end of the year one could see the likes of the two year fixed rate near though almost certainly
above 8% - probably close to 8.25%.
While most people continue to have a clear preference for the certainty that the two year rate offers in a time of major uncertainty about so much else, I personally would not fix longer than one
year. I am not quite prepared to fix just six months but could opt for that choice a few weeks from now if we get some extra horrible weak data on the economy making more certain a period of speedy interest rate cuts from the Reserve Bank later this year.
Nothing much new this week – downside risks continue for
sales, prices and construction. But buyers should be careful
about thinking the market will stay in their favour for a
couple of years. A dwelling shortage is likely come late-
2009.
We haven’t really learnt anything new about the state of or outlook for the housing market over the past
week. The monthly migration numbers showed net inflows stable just below 5,000 p.a. which is half the ten
year average. This is neither here nor there and is certainly not a driving force behind the current state of the
real estate sector. That is because these numbers have been moving in a range broadly between 5,000 and
15,000 p.a. for over three years.
We remain confident of interest rates falling possibly rapidly later this year but there is a key thing people
need to remember with regard to coming interest rate falls The Reserve Bank will not cut interest rates
because they want to stimulate the economy and create new inflationary pressures to prevent annual
inflation going below 1%. They will cut them because they no longer need very tight monetary policy to stop
inflation consolidating above 3%.
The distinction is very important. We do not envisage a scenario in the next two years akin to that in 1999,
2001, or 2003 when the benchmark two year fixed housing rate fell near or below 6.5%. We see scope for
the two year fixed rate to get close to 8% either very late this year or in the March quarter of 2009. After that
we can see it getting to the current five year average of 7.8%. But to go lower than that could require
monetary policy easing beyond what we are currently projecting.
So our interest rate scenario is supportive of a flattening in the real estate market, but not a fresh upturn
about which one might get excited. For investors this means the focus has to remain very strongly on yield
and positioning perhaps based on one’s belief about developments affecting particular suburbs.
Having said that, come the second half of 2009 we see scope for improvement based on
• heightened worries about the supply of properties in New Zealand as construction falls sharply as we
discuss earlier in this week’s Overview,
• the strengthening upturn in the export sector,
• the current excess supply of properties on the market getting soaked up,
• plus tax cuts, wage rises, and less weakness in the labour market than some might fear.
If you want to get your own feel for what is happening on the ground in the area of interest to you at the
moment these are the things you should be focussing on.
1. The extent to which vendors are taking their properties off the market. The more that do the less the
downward pressure on prices.
2. The extent to which vendors cut prices to sell their properties. The more they do the quicker turnover
levels will recover and the range available to buyers will shrink.
3. The extent to which buyers start coming out of the woodwork perhaps encouraged by falling interest
rates (watch this one). The quicker they do the less the downward pressure on prices and the sooner
activity levels improve.
For the record, this week the quarterly ASB Housing Intentions Survey was released. It merely confirms
what we already know rather than adding predictive elements. A net 34% of respondents around the country
said they expect house prices to fall over the coming year. This is down from a net 1% expecting falls last
quarter. As the first graph below shows there is a close correlation between this result and what prices
actually do in the relevant quarter with only a slight hint of predictive insight.
Key Forecasts
• Dwelling consent numbers to fall from 24,500 in the year to March 2008 to below 18,000 in the year to
March 2009 with a slight recovery to March 2010 then above average activity after that as attention turns
to a shortage of dwellings late in 2009.
• Real estate sales falling from 77,130 in the year to April 2008 to between 55,000 and 65,000 come the
end of this year then recovering back over 65,000 in calendar 2009 with further growth over 2010.
• House prices down 5%-10% by the end of 2008, flat over 2009, rising slightly over 2010, possibly earlier.
If I Were a Borrower What Would I Do?
Fixed lending rates have been creeping down in the past few weeks and we expect that come the end of the year one could see the likes of the two year fixed rate near though almost certainly
above 8% - probably close to 8.25%.
While most people continue to have a clear preference for the certainty that the two year rate offers in a time of major uncertainty about so much else, I personally would not fix longer than one
year. I am not quite prepared to fix just six months but could opt for that choice a few weeks from now if we get some extra horrible weak data on the economy making more certain a period of speedy interest rate cuts from the Reserve Bank later this year.