Is NZ’s housing market a ‘canary in the coalmine’ for the rest of the world?

1. Canary in the coalmine?

I’ve been called up by international journalists a few times in recent weeks (including London’s Financial Times) to discuss the idea that NZ might be turning into a case study about how effective monetary policy tightening will really be in fighting inflation in these Covid times, but also the knock-on effects for the economy and in particular the housing market.

Are we now the “canary in the coalmine” for global property? To some extent I think we are, and for once the world is watching little ol’ NZ! But there are always local factors that will mean NZ’s housing path could turn out different to other countries. For example, most borrowers here are on fixed rates, whereas many Australian loans are on floating terms – meaning early pass-through from their cash rate increases to borrowers’ pockets. Plenty to keep an eye on anyway.

2. Cash is king

CoreLogic’s Buyer Classification data for May showed some fairly stable patterns for first home buyers (FHBs) and mortgaged multiple property owners (MPOs), and a slight dip for movers. But perhaps the most striking change in recent months has been for multiple property owners buying with cash - their market share rose from as low as 9% in October last year to 14% across April/May this year.

Admittedly, some of these purchases may not really be cash, instead just made using the funds freed up by reshuffling (increasing) debt on other properties in a portfolio. And of course, the number of purchases being made by cash MPOs has actually fallen, it’s just that other groups have declined faster, meaning cash MPOs’ market share has risen.

Even so, in an environment where credit is harder to secure and mortgage rates have risen sharply, as well as some potential “bargains” starting to emerge, it stands to reason that some people with larger equity bases and/or buying with cash would be enjoying the current conditions.

3. Net migration firmly in the red

The latest Stats NZ figures showed a net migration loss of around 8700 people in the year to April, driven by a loss 8,900 non-citizens, but offset by a net gain of 200 Kiwis. The concerning part is that tiny NZ citizen balance – a year ago it was closer to 16,000, and with the brain drain clearly underway, it’s likely that number will turn negative in the coming months. That may put extra downwards pressure on the housing market, but perhaps the bigger worry is that it’ll reinforce skills shortages across the economy.

CoreLogic chief economist Kelvin Davidson: “It stands to reason that some people buying with cash would be enjoying the current conditions.” Photo / Peter Meecham

4. Slower rental growth cold comfort for tenants

Last week’s Stats NZ data showed that rental growth eased a bit from 6.9% in the year to April to 5.3% in the year to May. However, that’s still well above the long-term average of about 3%, signalling that tenants’ budgets remain under strain. As tenants increasingly hit their affordability limits, this will naturally rein in the pace of rental change. But for now, the strains are still there.

5. Keep watching those recession risks

The first three months of the year seems like ages ago already, but even so, last week’s data showed that our economy was weak over that period, with GDP falling by 0.2% from the fourth quarter of last year. That disappointing result will certainly ramp up the speculation about possible recession risks (i.e. two consecutive quarters of falling GDP), especially since some economic data for Q2 so far has been a bit soft – e.g. confidence measures. This week’s NZ Activity Index for May, due Wednesday, will tell us more about that too.

- Kelvin Davidson is chief economist at property insights firm CoreLogic

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