Data just released by Statistics NZ show that despite a net loss of a record 45,000 Kiwis offshore in the past year, so many foreigners have come in that the overall net flow was a gain of 129,000 people. This represents a 2.5% boost to our population of just over 5.1 million people and we have to ask ourselves how this will affect the housing market?
We can’t put any numbers on the likely price, rents, and turnover impact as after three and a half decades doing this type of thing back in New Zealand, I can safely say no-one has a good model for predicting house prices. However, if you go back to your Economics 101 lessons hopefully you’ll remember this.
If both demand and supply are rising, we don’t know what the price will do. If they are both falling, again we don’t know. If demand falls however at the same time that supply rises, then prices will definitely fall. And, if demand rises while supply falls then prices definitely go higher than would otherwise have been the case.
We know demand for accommodation is soaring. Is supply? No. The number of consents issued for the construction of new dwellings in New Zealand has fallen by 21% over the past year with numbers in the three months to October 28% weaker than a year ago. The supply of new houses is falling.
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If we put these two facts together, we get rising prices. However, given that the flood of foreigners coming in cannot buy a house the pressure will mainly manifest itself in the rental sector. There is now rapid growth in demand for rental accommodation. This surge in demand comes after a period of years during which the Labour government put in place policies aimed at discouraging people from providing rental accommodation.
Rising demand yet falling supply means rents go higher. How high? Again, I’ve never seen a reliable model for predicting rents growth. But the risk is that increases become quite large as we move through 2024 because not only can landlords now pick and choose amongst potential tenants, but they can also more easily remove those unable to pay higher rents. They also have to pass on some hefty increases in costs like council rates, insurance, and maintenance.
Independent economist Tony Alexander: "Surging demand will see rents getting higher." Photo / Fiona Goodall
The relevance of a tightening rental market to house prices is that more people will run the numbers and decide they would be better off owning rather than renting. We in fact have already seen this factor in play with young people increasing their share of all house purchases from early this year.
What other big macro factors will be in play through 2024 beyond these two most basic components? At some stage interest rates will fall. As they do it will become more affordable for many people to make a property purchase and their extra demand will place additional upward pressure on prices.
Demand is also already rising from investors in response to the return of interest expense deductibility in full from April 1 2025 and 80% from April 1 next year – which is as good as 100%. I can see this rise in demand now showing through in my monthly survey of mortgage advisers. These are people a tad closer to the coalface of what is happening than the real estate agents I discussed last week.
Responding to my monthly survey a net 22% of the real estate agents recently said they are seeing more investors. The result three months earlier was a net 0%. Now, in my monthly survey of mortgage brokers with mortgages.co.nz, a net 42% have said they are seeing more investors coming in looking for advice on their financing options. This reading was 24% three months ago.
These four big fundamentals discussed here will likely comfortably swamp the impact of a rising unemployment rate and see prices on average rise much more than has been the case for calendar 2023.
- Tony Alexander is an independent economist with additional commentary available at www.tonyalexander.nz
