In the last three months there have been some important developments that have affected the underlying level of strength in housing markets around New Zealand. First, interest rates are falling anew.
Back in February two-year fixed mortgage rates were typically near 4.3 per cent and three-year rates 4.5 per cent.
Now both are just below 4 per cent.
Why the rate declines? Since late last year world economic data releases have tended to be on the weaker-than-expected side. Inflation numbers in particular have been relatively soft, and this has caused investors to strip away their earlier expectations that central banks would soon be raising interest rates.
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In Australia, the United States, United Kingdom, European Union, and here in New Zealand virtually no one now expects interest rates to rise this year. Talk is of cuts, including maybe one more in New Zealand to follow the May 8 reduction. Expectations
of such reductions have pushed bank funding costs lower and this has caused mortgage rates to be cut.
Second, net migration flows for New Zealand have reversed. These flows are hugely important for Auckland but less so for the rest of the country. In the year to mid-2016, net annual flows peaked at 64,000. They then fell away to 50,000 in the first half of last year. Now the flow is back to 62,000 (subject to revisions, which have been large in recent months). This is not a migration boom, but it does strip away earlier expectations of housing market restraint from slowing population growth.
Third, not only has a capital gains tax been ruled out but also there has been no extension of the bright-line test from five years, which is what we and many others expected would happen at a minimum should a CGT not be imposed.
These three factors are all positive for housing market turnover and house price prospects.
However, it would be unwise to expect new upturns in markets to commence. Rules affecting landlords have been tightening and ring fencing of cash losses on rental incomes is coming. Jobs growth around the country has also slowed down to 1.5 per cent this past year from 3.1 per cent the year before. And all cycles eventually turn.
Turning now to market measures, we can see from monthly sales data that turnover is falling in virtually all regions — and that includes Auckland.
Nationwide, annual dwelling sales peaked at 95,000 early in 2016, fell to 74,000 late in 2017, then rose back to 76,000 late last year as Auckland continued to slow but the regions strengthened.
Now Auckland’s continued decline in turnover is occurring almost everywhere else around New Zealand. Annual turnover has fallen back to 74,000 and a decline to 65,000 within a year is highly likely.
Prices are edging lower at about a 2 per cent pace in Auckland, but the pace of price rises has yet to slow in most other regions except Northland, Waikato, Canterbury and Otago. But history tells us that slowing sales tend to precede slowing price rises and within a year price rises are likely to have petered out in most locations around New Zealand.
A key indicator supporting this view of prices flattening is that the extent to which listings are below average in almost all regions is easing.
That is, listings remain short everywhere except Auckland but the extent of listings shortages in the regions is pulling back.
In the absence of expectations of either rising interest rates, falling immigration, radically slowing economic growth, rising unemployment, or substantial tightening of bank lending policies, it is virtually impossible to generate a scenario of sustained house price falls in all regions.
Of course, were the global economy to take a substantial hit from trade wars, another SARs or similar disease outbreak, or the unexpected return of inflation, then this outlook would change.
But barring the unseeable the chances are that over this coming year Auckland will continue to produce very mild average price declines while prices slowly flatten out in the regions.
After that, the fundamentals suggest a return to annual price rises exceeding 5 percent a year for a period in perhaps two or four years’ time in Auckland. Why? Because not enough houses can be built in an economy short of all types of tradespeople and construction experts, and because underlying demand coming from population growth looks like it’s holding strong.
- Tony Alexander is chief economist at BNZ
