ANALYSIS: Last week I wrote about the results of my monthly real estate agent survey showing a strong return of buyers to the market but without upward pressure on prices as yet. This week it is worth also noting the survey of mortgage brokers I undertake with mortgages.co.nz which shows similar strength.
A net 51% of brokers report that they are seeing more first-home buyers looking for advice while a net 33% say there are more investors in the market. Two months ago these results were -7% and +9%, which tells us that in response to the change in the interest rates outlook, it is young buyers who feel more greatly motivated to consider a home purchase.
For investors, the lowering of interest rates over time will clearly help. But we have to remember that the heydays of easily growing wealth or even easily getting a good running yield from running a residential rental business have long gone. Credit is much harder to get from lenders, costs like rates and insurance are a lot higher, tenant legislation is much stronger, and property prices also are a lot higher.
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When prices do start rising, we are certain to see more investors as that is the nature of all asset price cycles. But a repeat of one of the frenzies in place since credit rules were freed up in the mid-1980s is very unlikely. There is a structural shift underway in the role of investors in the housing market and that is both good and bad.
It is good in that extra space will be provided for owner-occupiers and the ratio of average house prices to average household incomes won’t climb as high this time around. It is bad in that when the rental market comes through its current period of temporary oversupply, the situation for renters will become quite difficult. But that is a story for perhaps a couple of years from now once developers who currently have placed unsold properties in the rental market have offloaded them to buyers.
Another element that will restrain price gains this cycle will be the rule changes allowing greater densification around the country and requiring the zoning of more residential land ready for development. These are good things. But given the hikes in construction costs, it is unlikely that we will ever see a serious decline in the ratio of house prices to incomes back remotely to the three ratio, which used to apply until the 1990s.
Independent economist Tony Alexander: "The ratio of average house prices to average household incomes won’t climb as high this time around." Photo / Fiona Goodall
On another note, I’ve just had a look at how the NZ dollar moved once our economy went into recession in the three cycles before this one. Back in 1991 our economy shrank 1.3% but rebounded to 6.6% growth within two and a half years assisted by an 11-cent fall in the NZD. Back in 1997/98 the economy grew 0.4% at its weakest point (two quarters in a row GDP shrank so the technical recession definition was met) then rebounded to 6% within a year and a half helped by a 20-cent NZD decline.
After the 1.8% GFC shrinkage over 2008/09 growth did not exceed 4% until 2015. Although the NZD fell from 80 cents to below 51 cents it quickly jumped back up to 73 so the currency-induced bounces in the export sectors and the regions were muted.
This time around with the annual average growth measure looking like reaching -0.5% or so, has the NZD declined at all? No, we sit near US 62 cents from 59 cents a year ago and two years back. With interest rates falling offshore or set to fall, the chances of NZD depreciation against the US dollar this cycle look very low. In fact, since the August 14 easing of NZ monetary policy the Kiwi dollar has actually risen almost two cents.
The lack of a very strong cyclical surge in exporting will constrain the income-driven extent of average house price gains over the next few years.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
