Price and immigration, is the model a bit off?

[McDuck]

Why is it that immigration levels continue to increase, yet prices for houses seem to be going flat?

[flyernzl]

Overcrowding.

[Don't believe the Hype]

Thread finished

[McDuck]

Overcrowding.

I'm not sure how to understand that idea.
Using a basic supply and demand model, would you call "overcrowding" a reduction in desirability of the good, causing a reduction in demand, causing a reduction in price?
I do have several friends who have shifted out of Auckland for exactly that reason.



Ps: I've noticed other curves behaving unusually. Rents to House price, Term Deposit to Mortgage price, Wages to Skills price..etc

[Don't believe the Hype]

overcrowding results in a decrease in demand.

if the norm prior to dramatic cost of housing (rent) was 2 ppl per house paying $100/wk each then demand was x. Driven by higher costs rent now $400/ wk for same house people attitudes towards cohabitation change resulting in 4 ppl per house paying same $100/wk each demand is now 1/2x.

This is could mean that even with immigration continuing to run demand for housing could stagnate or decline.

[cube]

Reduction in domestic demand by investors no longer able to get finance.

Less demand, same supply = flattening prices

Net immigration will support prices, but without investors/speculators, some of the froth will come off.

Anyone and idea how many domestic 'new households' there are a year? - i.e. people leaving home or a flating situation, generating need for an extra dwelling (not new immigrants or renting family wanting to buy). That number will also be elastic with price, but if more homes are being built than domestic demand requires, we better hope the immigration figures stay positive.

[Lighthouse]

McDuck, It seems to me that explanations that use supply and demand are only good for story telling after the fact (post hoc).
These stories have no predictive accuracy so are not really much practical use.

[Davo36]

Less money coming from overseas = lower prices even with increasing immigration?

[McDuck]

Reduction in domestic demand by investors no longer able to get finance.

Less demand, same supply = flattening prices
....

That's a good point.
We're talking averages.

There may be several different types of demand hidden in the big average overall demand idea.
Possibly Rich folk (with offshore gained money) are one type of demand, while (bank loan funded) local buyers are another.
First home buyers another and established locals (upgrading their homes) yet another.

Averages seem to be swaying the supply side of the equation too.
It can be broken down into cheaper homes and more expensive homes.
You can see that the cheap end of the market is slowing, while the pricy end is still mostly clear.

[McDuck]

After a bit of thinking, it seems a river or some sort of water model would be a good way to picture the money flowing into the housing market.
with streams coming in from:

Rich overseas individual families from China, India, Africa, America etc, escaping some political or practical issue.

Another stream coming in from Bank Loans, sourced through Large Overseas Financial Institutions.

Another coming in from local Skills and Labour swapping their time for Wages and saving what they can.

Another from historical savings put aside by previous Generations.. and so on.


The interesting thing is the little ditches that have been cut across the tributaries.
Where a Rich overseas family will buy a house, putting money into the hands of a multi generational New Zealand worker family.

I suppose it wouldn't be an overly complicated diagram to figure out the flows.

[McDuck]

McDuck, It seems to me that explanations that use supply and demand are only good for story telling after the fact (post hoc).
These stories have no predictive accuracy so are not really much practical use.

One Practical use I can see for the above mentioned "River" model, or "Water" model, (Fluid dynamic model to use the right name), is it's ability to help plan.

And to predict.

You can see what flow will get reduced by say the Chinese Govt trying to stop exiting capital for example, and how that will reduce other flows that feed from it.

You can see how mass immigration of low skilled or medium skilled workers will reduce wages and training and therefore the flow of money to first home buyers.

You can also figure out what flow you want to pinch so that the cash flows to productive parts of the economy.

You could also see what money was competing with first home buyers or workers wages for homes, and if it was sustainable over time, or just a single flash in the pan type dump.

And if all the hopes of rich immigrants creating companies, productivity and jobs for locals was working, or if somehow a bunch of slightly skilled individuals were just playing the system, only to add on-going infrastructure, education, health costs at a later point.

Mostly you might look at the "made in china" sticker on the label of every bit of imported clothing, eating utensil and electronic gadget, and
realise that's how the money flows out of New Zealand.

So you might think of a flow of money away from workers, and through the hands of importers, each time a shop purchase is made.
Some money flows to say China, some flows into importer's stream.

And its only logical that the Chinese would want buy stuff back with those NZ dollars.
Stuff like houses, and business and all those really useful long term sustainable things.

It's a very nice model.

[Chris W]

Does population growth result in higher house buying demand?

Many property market commentators commonly cite population growth (or net migration) as a reason that there is increased house buying demand and property prices will go higher. Here is why demographics of population growth don't necessarily translate into higher property prices by owner occupiers.


The key is house valuations and house prices :

1) if they are too expensive, then population growth and new households will not necessarily add to house buying demand as they are unable to get the minimum 20% deposit to buy the house, and if they are able to do this, then they might not meet the bank's lending criteria to get a mortgage (such as mortgage payment serviceability). As they are unable to buy, they then go into the rental market, and if there is a large demand, rental prices will increase. When houses are expensive, home ownership rates are likely to fall. Remember that there are two markets for residential real estate, house buyers and house renters - if they are unable to buy, then they will enter the house renters market. As house valuations and house prices become higher, then they become unaffordable, especially for first home buyers and become priced out of the house buying market. In terms of immigrants, only those who have the minimum deposit and are able to get financing, or cash buyers are potential home buyers.


2) If the house valuations and house prices are cheap and affordable, then these new households will add to house buying demand, and potentially result in an increase in house prices as lower deposits are required (in terms of dollars, even though the deposit percentage remains unchanged at 20% - it is easier to get a deposit of 50,000 on a 250,000 house, than 200,000 on a 1,000,000 house). Also when houses are cheaper, those households that could not previously afford to buy a house and were renting, now become potential house buyers. When houses are cheap and affordable, home ownership rates are likely to start rising. If house valuations and house prices are cheap and affordable, house buying demand will likely be increased by first home buyers.

Also note that buyer confidence also plays a factor, even if they have the deposit down payment and can meet the bank loan criteria. If potential buyers lack confidence then they may choose not to buy, and to take a wait and see approach - some reasons for reduced confidence are uncertainty with elections, uncertainty about property prices (think GFC 2008 ), expectations that future property prices will fall (so they wait until prices are lower before buying), and uncertainty about future job security.

The other key variable that goes into house buying demand and impacts house prices are property traders, long term investors and speculators - recall that investors and non owner occupier buyers were 40-50% of buyers in property transactions in Auckland in 2016 - that has to have had a significant influence on property transaction volumes and house prices.

[flyernzl]

There is another factor to consider in there Chris.

For most items, if demand increases then we get price increases and so that item becomes more profitable to supply to the market. Hence, given time, in a free market the supply of that item also increases as more marginal suppliers are able to profit by fulfilling that demand.

However, in the case of the Auckland housing market, an increase in demand that has resulted in price increases without substantially increasing the number of new houses entering the market.

Why?
Where are the Universal Homes/Beazley Homes type builders that we had back in the 1960s, when demand was also high?

To me, it seems that there can only be two reasons:
- either even at today's high prices it is not possible to make a profit by building mass-market homes
- or there is some artificial constraint preventing the supply increase.

Also, to go off on a tangent, if it is not possible to make a business profit supplying new homes at todays (high) prices, a price drop of 30% or so would presumably mean a complete cessation of new builds as they would sell at a price less than their cost.

[Chris W]

There is another factor to consider in there Chris.

For most items, if demand increases then we get price increases and so that item becomes more profitable to supply to the market. Hence, given time, in a free market the supply of that item also increases as more marginal suppliers are able to profit by fulfilling that demand.

However, in the case of the Auckland housing market, an increase in demand that has resulted in price increases without substantially increasing the number of new houses entering the market.

Why?
Where are the Universal Homes/Beazley Homes type builders that we had back in the 1960s, when demand was also high?

To me, it seems that there can only be two reasons:
- either even at today's high prices it is not possible to make a profit by building mass-market homes
- or there is some artificial constraint preventing the supply increase.

Also, to go off on a tangent, if it is not possible to make a business profit supplying new homes at todays (high) prices, a price drop of 30% or so would presumably mean a complete cessation of new builds as they would sell at a price less than their cost.

FlyerNZL

Looking at the supply side.

Yes you are correct, when economic theory suggests that when prices increase, then it becomes more profitable to supply to the market, and there is an increase in supply to the market - there is one key assumption embedded in here. That is that the cost of production remains unchanged.

Construction costs have increased from what I can determine - from tradies, to construction materials (possibly due to project delays which means overtime rates, etc, FX moves, commodity price increases, labour cost increases, financing costs, etc). Or that original estimate for the cost of production was incorrect, and they had cost blowouts. Fletcher Building's recent announcement on loss estimates on 2 projects would seem to confirm this www.stuff.co.nz/nelson-mail/nz-business/94919953/Fletcher-Building-chief-executive-leaves-NZX-makes-enquiries).

I also recall the Rose Garden apartment project in Albany asking for higher prices to those who bought off plan due to construction cost increases and delays (http://www.nzherald.co.nz/business/n...ectid=11743472).

If construction costs have increased more than the selling price and buyers are not willing to pay higher prices, then it may no longer be economically feasible to continue with the project altogether. If property market prices drop, then you might find that land costs drop also, which would lower the construction cost in the next construction cycle. Also as building construction work slows down, tradies without work are willing to lower their prices due to price competition amongst tradies / labourers without work.

Also if property developers are no longer confident that they can sell the project at current price points (due to expectation of a property market price drop), then they may choose not to go ahead with the development.

Other potential constraints to supply:
1) shortage of skilled labour / workers - I remember last year trying to do a renovation, it was difficult to find tradesman and even then you had to pay a premium rate if you wanted the job done quickly. Also note that some tradies are going out of business further limiting the skilled labour shortage. https://www.noted.co.nz/money/proper...t-of-business/)

2) council approvals can be slow, require plan changes and delay a project.

3) financing - bank financing for developers has really slowed down - I recall the St James development in Auckland Central City which was cancelled due to financing issues. (http://www.nzherald.co.nz/business/n...ectid=11748861)


Many people might disagree with me here as they look at different metrics, however the current property market in Auckland seems to have more than adequate market supply of houses for sale over market demand from house buyers at current price levels - the indicators that suggest that to me are:

1) large percentage increase in property listings for sale in Auckland on Trademe, etc compared to the same month in the prior year. (50% - content.professionals.co.nz/blog/may-statistics-show-its-a-buyers-market-out-there). The fact that people talk about a "buyers" market suggest that potential buyers are fewer (and therefore have less buying competition) and have a large selection of choice of properties that they can look at with reduced buying competition. There are more properties available (house inventory listed for sale) for every potential buyer currently actively looking to buy in the market (Also http://www.nzherald.co.nz/business/n...ectid=11887512)

2) reports of open homes with no visitor viewings

3) properties being auctioned with no bidders

4) lower property auction clearance rates

5) properties taking longer to sell

6) increasing number of occurrences of property vendors reducing their asking prices for their property, thereby resulting in lower property market transaction prices.

[McDuck]

I'm thinking that when those early Economists (like Adam Smith) started talking about the Supply and Demand aspects of goods, they didn't account for speculation.

And with the greater mobility of people (jet aircraft and cars), and the grater mobility of money (Banking and electronic accounting), it's possible for things to get out of sync really quickly.