ANALYSIS: On average since house prices started falling in December 2021 the monthly decline has been 1.1% in seasonally adjusted terms. That is the amount by which prices fell on average in February, but this week REINZ released data showing that prices only fell 0.2% in March after we make adjustments for seasonal factors. Given that this is the best monthly result since November 2021 can we yet safely say that house prices on average have stopped falling?
That would be unwise because the last time we seemed to be on track for prices at least flattening out was just before the September quarter inflation number came out on October 18 last year. That number was a lot worse than expected and that told us all that the inflation problem in New Zealand was proving to be more difficult to combat than initially hoped.
The signs, however, are positive. My monthly surveys of both real estate agents and mortgage brokers show that first home buyers have been back in the market for about three months now. There is no sign of investors following them however, especially not with the worsening tax regime they face. But that is where things start to get a bit interesting.
There is no evidence of a wave of investors looking to sell their properties since the tax changes were announced in March 2021. But we have overwhelming evidence of investors pulling back from making new purchases be they of existing dwellings or new ones where the tax rules remained unchanged.
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The supply of rental property in New Zealand may be falling and this is happening at the same time as we are in a new migration boom. This past week we have learned that whereas a year ago New Zealand had a net annual migration loss of 20,000 people we now have an annual gain of 52,000 people. That is a 1% boost to our population requiring some 19,000 extra houses.
Independent economist Tony Alexander: “We face the biggest downturn in residential construction in New Zealand since the global financial crisis.” Photo / Fiona Goodall
Yet at the same time as our population growth is experiencing a new surge forward, we face the biggest downturn in residential construction in New Zealand since the global financial crisis. The number of consents issued for new dwellings to be built was 18% lower in the three months to February than a year earlier. The overwhelming anecdotal feedback from my monthly survey of businesses around the country is that architects are laying off staff, contractors are becoming easier for builders to find, and the builders don't want to find them because orders flowing in for new dwellings to be built are falling away sharply.
In other words, at the same time as housing demand is newly rising, we are heading into a period of decreasing growth in housing supply and decreasing availability of rental accommodation because of the tax changes put in place by the Government.
The outcome is going to be some new upward pressure on rents perhaps from later on this year, extra growth in the waiting list for state housing, and eventually a turnaround in the direction of average house price changes.
How rapidly will house prices rise when the cycle turns? That is impossible to reliably say. There are simply too many uncertain factors in play. But that is why I have highlighted the coming divergent trends for housing demand and housing supply. They imply prices going up. But the speed will be determined by how quickly people learn about this new underlying reality and decide to act on it.
With literally tens of thousands of people having held back from buying a property since prices started falling at the end of 2021, the volume of people who may or may not step forward to start bidding at the slowly recovering auctions is large. All it will take is some signal that interest rates are set to fall away, and those delayed buyers will start stepping forward. That is perhaps why we should not expect such a signal to be given by the Reserve Bank for a long time. Of course, the longer it waits, the worse the house-building crunch, the greater the shortage, the greater the price catch-up.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
