'One more buyer in an already constrained market'

The number of people moving to settle in New Zealand is slowing, although the number of arrivals is still at historical highs.

The net inflow of 67,000 people in the year to April was the lowest it’s been in two years, and the economists at Westpac expect that net migration will continue to slow as many of those who arrived in recent years on temporary visas prepare to leave.

Westpac says the heat is coming off the housing market, but that may be a reflection of fewer people arriving and more people leaving the country.

“After a brief resurgence, house prices have started to fall again in Auckland and Christchurch, and the pace of increase has slowed sharply in Wellington,” say the bank’s economists.

“With a range of significant government policy changes targeting the housing market being introduced (such as the extension of the ‘bright line’ test for taxing capital gains which came into effect at the end of March), we expect house prices will lose further ground over the remainder of this year.

“With the housing market cooling, we could see the Reserve Bank easing lending restrictions again later this year.”

The construction sector is also taking a breather, says Westpac in its weekly report, with activity set to rise only gradually despite strong demand.

“After large increases in recent years, the sector is encountering some strong headwinds, including rising costs and shortages of skilled labour. That means the KiwiBuild program will be one more buyer in an already constrained market.

"Even allowing for an increase in the size of the labour force over the coming years and a shift to smaller, higher density homes, the building sector is going to be wrestling with constrained capacity for some time yet.

“This means that, even if KiwiBuild related construction does pick up (and we have our doubts), this would likely result in private sector construction being crowded out.”

The bank expects KiwiBuild will help to offset some of the financial headwinds in the construction sector over the next few years (as banks become increasingly cautious on lending). And longer term, KiwiBuild related efforts to increase construction sector capacity could also increase building activity.

Nevertheless, says the bank’s economists, it will be a slow grind higher, and more gradual than even the Treasury’s forecasts assume.

Bottom line: pressure for housing is cooling slightly, there’s a huge underlying demand still to be met, the banks are being cautious, so it’s down to Government to close the gaps in any way it can. Time is not on its side.