Independent economist, Tony Alexander, discusses the 20 reasons why you should continue to pursue listings. In the latest edition of Tony View, Alexander suggests that keeping an eye on the rapidly rising housing stock and making improvements to purchase prices would be a good idea.
Rising construction costs
It is getting more and more expensive to build a house in New Zealand. As construction costs go up more people will switch towards looking for existing property rather than building new homes. This process will be enhanced by the increasing media coverage of construction projects falling through.
Social housing demand
The Government agency, Homes & Communities, is looking to expand the number of social houses in New Zealand. It’s likely that as developers increasingly face financial stress they will pick up some extra stock.
The OECD average proportion of housing stock which is social housing is about 8%. NZ is around 4%. If house prices were to fall 20% our proportion would still be 4%. If they fell right back to where they were before the pandemic, the proportion of our housing stock which would be social housing would still be 4%.
Falling house prices will not lead to better outcomes for social housing. The pressure on the government to purchase and arrange construction of extra social housing will run for decades.
We have had a building boom driven by record-low interest rates, a mistaken belief that shortages of property exist all throughout New Zealand, encouragement by every man and his dog for as much construction as possible to be done, and a non-lasting surge in net migration inflows from 2015 leading to incorrect predictions of future population growth.
Many inexperienced, under-capitalised and over-optimistic developers have been drawn into the sector. They have paid too much for land and have no experience in how to professionally handle working with consenting authorities let alone the biggest shortage of materials and staff that we have ever seen.
A story about to begin is a large falling away of new consent issuance. Initially, the negative factors driving this big decline in consent numbers will dominate sentiment. Eventually, realisation will dawn that the boom is nowhere near the magnitude implied by the 50,000+ consents issued last year.
We have yet to get through the phase when people ask themselves if there might be an oversupply of property. But after that will follow an eventual focus again on a deficiency of construction.
Migrants getting back into NZ
With the borders reopening we will see migrants able to make their way into New Zealand. People over-estimate the number who will come our way given the strong demand for labour in higher-paying countries. But the rising flow will nonetheless slowly introduce a new source of housing demand over time.
200,000 special residency visas
The government has granted migrants in NZ on temporary work visas the ability to apply for a residency permit. It was envisaged that 165,000 might do so but it looks like the number will exceed 200,000. Not all of these people will immediately purchase a property now that they are legally able to. But at some point, the granted residencies will be cited as a reason why prices will move back up again.
Property as an inflation hedge
Inflation is running at 6.9%. Forecasters offshore are revising upward their inflation predictions, oil prices climb higher, and there’s open talk of stagflation.
The necessary forces are in play to suppress inflation back below 3% but we don’t know how long it’ll take. No one has a model for predicting such things. With this much uncertainty and risk, it would not be surprising if people who would typically be cautious of falling prices decide to hold them as an eventual hedge against inflation. In fact, the more the generalised rises in consumer goods prices the greater the simple nominal support for house prices.
Homes going back to Airbnb use
Articles are appearing in the media about properties being placed back in the pool of short-term rentals for foreign visitors. As the pool of
rentals dry up, rents will rise and additional encouragement will be provided to people to buy property.
National would restore old tax rules
The National Party have stated that when they get re-elected (2023 or 2026) they will take the bright-line test down from ten years to the original two years, and fully restore the ability of investors to deduct interest expenses against rental income when calculating tax obligations.
Rents are rising
People often make a big thing about renting sometimes being a better option than buying. This strategy has failed for virtually all those who have followed it. Often, on the advice of analysts not understanding the factors causing prices to jump compared with incomes. I tend to steer well clear of comparisons of renting versus buying because they are two very different things – one short-term and the other a multi-year or decade commitment.
There is some evidence that a few investors are placing properties on the market to rent now that they cannot sell them easily for a profit. But it pays to keep in mind that only 4% of properties sold this past year were purchased less than two years earlier. So, the numbers involved here are likely to be very small.
Bank deposit rates won’t rise much
Banks are flush with deposits courtesy largely of the Reserve Bank’s excessive money printing operations over the past two years. Our central bank over-reacted to the pandemic and banks have little need to offer high deposit rates in order to attract the funds needed to back domestic lending to you and me.
Lack of attractive interest rates acts as a disincentive for investors to sell their properties and place the gained funds in a bank. They might sell and invest in a diversified portfolio of equities. But sharemarkets are wobbly and my monthly Spending Plans Survey shows people’s general plans for buying shares have declined.
The long-term price trend is up
People like to believe that we’ll return to the old days when average house prices were three times incomes. They won’t for a large number of reasons which I have been citing since late 2008. On average NZ house prices have risen 7% a year since 1992. Going forward the average is likely to be closer to 5% due to loosened building regulations. The surge in prices associated with the pandemic is an aberration which is currently unwinding. Once this process is complete the trend will reestablish itself and the difficulties of raising a deposit will return.
Wages growth is accelerating
Wages may not be keeping up with inflation, but their rate of rise is lifting. The long-term average rate of increase in NZ wages is about 2% above
the inflation rate and that dynamic is likely to return within two years’ time.
The current pressures on budgets from soaring inflation exceeding inflation will pass. And when that happens, many people will return to the housing market.
Job security is high
The unemployment rate is 3.2% and is likely to fall further. The difficulty in finding skilled and unskilled labour are at record or near-record levels.
High test mortgage rates used
Many who borrowed money last year will see their weekly repayments more than double as mortgage rate rises from below 2.5% to over 5%. But banks tested almost everyone on their ability to pay a mortgage rate above 6%.
Meaning there will be only a few in the situation of paying more than they already proved they could service. This does not mean there won’t be an impact, however. In their efforts to keep servicing their mortgage, large cutbacks are likely to be made in other areas of spending. Alexander’s monthly Survey shows a rise in the proportion of people saying they plan to spend less in order to try and get their debt levels down.
Listings becoming plentiful
The biggest concern that buyers have long expressed is that there are not enough listings. Now housing stocks are running 80% ahead of a year earlier and this concern has faded away to virtually nothing.
The range of choice facing buyers now means that for many this is exactly the time they should be advancing their home hunting plans rather than shelving them until they think prices hit their lows. Good luck picking that – I can’t.