There was a lot of excitement recently when data appeared showing that in Auckland in July the number of dwellings sold was slightly higher than a year earlier. Apart from a surge in buying before restrictions came in on foreign purchasers late last year, and an earlier surge in 2015 ahead of tightened loan to valuation rules, this is the first annual rise since 2013. Is this the start of an upward trend?
It is hard to answer this question with high confidence one way or the other because of the extremely divergent factors in play and where they are headed. Those interpreting the change to mean things are heading up will be focussing on these things:
1. The Reserve Bank has cut its official cash rate from 1.5 percent to 1.0 percent and bank mortgage rates have declined, with a high probability that further reductions will come later this year. Buying a house is becoming more affordable and investors facing newly low deposit rates may be encouraged to once again pursue property.
2. Four months ago, we learnt that a capital gains tax is not going to be introduced and the brightline test is not being extended beyond five years.
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3. Net inward migration continues near 50,000 per annum.
4. Builders continue to report deep shortages of staff.
5. Data appears to show how Auckland’s housing shortage has worsened in recent years despite a quadrupling of annual house construction since 2011.
6. Job numbers nationwide surged 0.8 percent in the June quarter and the unemployment rate has fallen to only 3.9 percent.
7. Some banks may soon reduce the test rates they use to gauge the ability of borrowers to service a mortgage.
8. The Reserve Bank is highly likely to ease LVR rules come November’s Financial Stability Report.
But those who think there are still price falls to come following the 3.5 percent average decline this past year with sales likely to stay flat, focus on these factors:
1. Business pessimism is almost back to the levels of the global financial crisis ten years ago.
2. If the Reserve Bank is sufficiently worried to undertake an “emergency” rate cut of 0.5 percent rather than the normal 0.25 percent, then maybe we should be worried also.
3. The global economic, trade, and political environment has deteriorated substantially recently. Pressure points include the US-China trade war, unrest in Hong Kong, India’s move in Kashmir, Brexit, populism returning in Argentina, slowing Chinese economic growth, slowing European Union growth, and tensions in the Persian Gulf.
4. Net migration inflows may be high, but they are dropping away.
5. Average house prices are still high and few people would consider there are bargains demanding to be snapped up.
6. Auckland tends to sit flat for about five years between cyclical surges, and the current flat period has barely lasted three years as yet.
7. Owning an investment property has become more difficult following recent legislation changes, and with Baby Boomers aging there is likely to be a trend developing toward selling of housing assets.
8. Consumer confidence has just slipped to below average levels.
The stronger factors seem to lie on the positive side. But chances are this is not the start of a new period of firm price gains, and here is why.
First, as already mentioned, the quiet period of the housing cycle usually lasts near five years and barely three have yet passed. Second, the usual cyclical factors which help drive the housing market upward have not been triggered these past three years. Namely, interest rates have not soared then been slashed. The economy has not slipped into recession and is now accelerating away. Net migration flows have not collapsed and are now recovering.
Third, the underlying pace of economic growth and jobs growth is slowing. Over 2014-18 our economy and employment grew on average 3.5 percent each year. Jobs growth has now slowed to an underlying pace of 1 percent while the pace of economic growth is closer to 2 percent and set to slow further amidst increasingly worrying international developments.
The longer-term factors of supply failing to keep up with demand growth imply a new period of firm annual price rises will return again. But slowing growth suggests that time is not at hand. That might not be good news for those hoping for a return of the “excitement” of earlier years but it is for first home buyers. Low mortgage rates, low ratios of sales to stock levels imply this is a good period to be seeking out a property.
- Tony Alexander is chief economist for BNZ
