ANALYSIS: For the New Zealand housing market through 2024, there are going to be three major forces in play and a few minor factors. First there is a reduction in the supply of new houses coming to the market. The 12-month number of consents issued for the construction of new dwellings has fallen about 21% over the past year from 50,300 to 39,900. The way things are going we may see only around 30,000 consents issued this year.
The actual increase in our house supply will be much less than that because these days a smaller proportion of consents lead to actual construction than in the past. Also, much new construction these days involves demolition of one or two existing houses. Plus, every year a number of houses become uninhabitable. The net gain to our housing stock might be only about 1%.
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The problem for those hoping that housing affordability might be on a long-term path to improvement is that at the same time that supply growth is falling, demand levels are rising.
A key driver of demand is the record net migration surge of 129,000 people in the past year. This 2.5% boost to our population has already increased the difficulties potential tenants are facing in securing accommodation and it is likely that rents growth will hold up even as overall inflation slows.
Rising rents will encourage people to purchase houses as investments, and some people who were planning to rent for the year will instead look to make a purchase.
The second major factor is that interest rates will drop this year. We cannot be sure about the magnitude of declines or even when they will properly start. But we can see that inflationary pressures are easing off and increasingly it is looking like the Reserve Bank has kept the Official Cash Rate too high for too long. This follows a period when they kept it too low for too long. At least it’s consistent.
As mortgage rates fall at an uncertain pace, we can expect new home buyers to enter the market. It pays to note that this coming boost to demand will follow a period when house prices have already been rising on average 0.8% a month since June.
Independent economist Tony Alexander: "It is looking like the Reserve Bank has kept the Official Cash Rate too high for too long." Photo / Fiona Goodall
The third major factor is that from April 1 investors will be able to deduct 80% of their interest costs from rental income when assessing tax obligations. This is close enough to the 100% deductibility returning a year later to be able to say that through 2024 we should anticipate a slow reversal of the withdrawal of investors buyers in 2021 after the rules were changed and deductibility ceased for new purchases.
A couple of other demand factors worth mentioning are the removal of some properties from the rental pool to accommodate returning foreign students and tourists. But some demand will be contained by a likely rise in the unemployment rate from the current 3.9% to perhaps 5% a year from now.
Job numbers are still likely to increase. But general discussion about rising joblessness is likely to cause some people to hold back from the property market.
The upshot is that the average pace of growth in house prices is likely to be higher through 2024 than was the case through 2023 and maybe even the period since June. Gains are likely to be greatest in the cities because of pressure from net migration flows. But history shows us that even if the cities or Auckland alone leads, the rest of the country eventually enjoys firmly rising prices also as people including investors seek better purchase prices elsewhere.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
