ANALYSIS: When it comes to writing articles about the housing market and its various sub-components there is a type of songbook from which we economists sing. When an economy is just coming out of a downturn we talk about the advantages for a buyer of compliant vendors, low fixed interest rates, banks wanting to grow their books after a weak period, probably some easing in Reserve Bank mortgage restrictions, and extra demand from others likely to soon come along.
When the economy is chugging along strongly we note that demand is high and capital gains seem to be easily occurring, plenty of people have jobs, but clouds are gathering. We’ll warn about eventually rising inflation, rising interest rates, the cheap prices having been and gone, and the need for greater thought to be given to potential income loss if and when the economy turns down.
Then when the economy is turning down (now) we talk about the uncertainties as to when interest rates top out and at what levels, how far house prices might fall (pure guesswork experience tells us), when lending controls might ease, and try our best to give an answer when people ask when the market will start rising again.
The trouble with such an approach this time around is that our economy is experiencing some unique aspects never seen before during a downturn and that makes forecasting extremely fraught. The big difference is the labour market. The unemployment rate has sat at 3.3% all year, businesses are highly pessimistic yet plan hiring many more people, and the feeling of job security which people have is unusually strong.
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This is important in terms of supporting the housing market overall even as prices pull back from the absurd levels of 2022. It is also important in terms of supporting the holiday homes market. Were the unemployment rate rising firmly as we have seen in the past when interest rates jump up and sentiment is very negative then there would be falling demand for holiday homes. Many people would be looking to sell in fact to free up cash for either their businesses or to support their home mortgage in case of redundancy.
This time around the strong expectation people have of keeping their job and securing a decent wage rise to offset the higher cost of living means interest in purchasing a holiday home is likely to stay strong through the period of economic challenge in 2023.
But there is a second non-traditional factor to take into account. The pandemic has made people reassess their lifestyles, their life goals, and the timing of securing goals such as an extended offshore break (revenge travel) or the purchase of a holiday home. Many of us see the opportunity to spend a lot more time in a holiday home than previously envisioned because of the greater scope for working from home.
In fact, the old equations of length of time to drive to a weekend home on a Friday night then back on a Sunday night get radically altered when you can make the trip at your leisure on a Wednesday or Thursday and come back maybe on a Monday – though still with the usual limitations for households with children at school.
Independent economics speaker Tony Alexander: "The unexpected hike in wealth is encouraging many people to make purchases." Photo / Fiona Goodall
There has been a structural shift upward in the feasibility of owning and getting good use out of a holiday home for tens of thousands of people.
We can add in a third factor. The population is aging, and the pandemic has seen many older people sell up out of the main cities to shift to the regions. This has already produced unusual upward pressure on not just regional house prices in general but prices for holiday homes. Because some of this buying was a shifting forward in time of purchases this could mean a bit less than expected Baby Boomer demand for holiday homes in the next couple of years.
But offsetting this factor is the extent of the wealth gain on assets experienced by many people over the past few years. The unexpected hike in wealth from higher prices for shares and property is encouraging many people to make purchases they might otherwise not have considered wise.
For many this has meant purchasing a spa or engaging in home renovations. But for others it has meant paying a lot less attention to the costs of owning a holiday home than would normally be the case. People may still run the spreadsheet of maintenance costs, travel costs, bank interest sacrificed etc. But when set against the unexpected wealth surge of recent years, especially for people in the traditional holiday home buying age group, the costs get discounted fairly quickly.
Or in simpler terms, instead of comparing holiday home running costs with expected income people compare them with accrued wealth and the costs then than pale into insignificance.
There are other factors to consider such as rising interest rates, recently slow population growth, getting insurance on properties near water in future years, and a profitability crunch for many small to medium-sized business owners due to rising costs. But all up, the mild nature of the slowing in NZ growth expected next year, the firm labour market, the wealth gains, working from home, and an aging population, all suggest a continuing strong level of underlying support for the holiday homes market in the coming few years.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
