ANALYSIS: If we stripped the outlook for the housing market down to its bare bones, these are the key things we would find. There is rapidly rising demand for housing because of the boom in population growth caused by net migration flows running at a record 110,000 people in the past year. Signs of this flow easing have so far proved elusive and a fall back to the average gain of 55,000 which prevailed from 2014 to 2019 may not occur for over a year.
Demand for housing is also rising from first-home buyers wanting to get on with their lives post-pandemic and motivated by rising deposits courtesy of good wages growth exceeding cost of living increases, access to Kainga Ora funding assistance, plentiful listings, and lower prices.
More demand is now set to come from investors as the bright-line test goes back to two years from 10 and interest expense deductibility is restored. We might see extra demand at the upper end of the market if National gets partner agreement on their policy of opening the purchase of houses priced over $2 million to foreigners.
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Demand is further coming from buyers wary of signing up for a new-build because of the stories they have read regarding lost deposits and construction delays. Also, building costs have risen 35%-45% over the past three years while house prices are about where they were in March 2021.
There is a push factor for renters to buy created by rising rents, increasing competition for rental properties, and some shifting of tenant rules back in favour of landlords.
There is also a reduction in new house supply underway. The number of consents issued for new dwellings to be built was down by 20% in the year to September with the latest month’s total 37% lower than the year before.
Independent economist Tony Alexander: "The upshot is that we face an environment of rising demand yet falling supply." Photo / Fiona Goodall
This reduction in supply will probably start reversing from early 2025, but when that happens interest rates are highly likely to be falling and the additional rise in demand expected to come as banks lower test mortgage rates from 9% will further place upward pressure on prices.
The upshot is that we face an environment of rising demand yet falling supply. The price implications are obvious and all we can now focus on is how rapidly prices will escalate. Since early this year I’ve had an expectation that prices would rise up to 5% over 2023 and recently I’ve been indicating an expectation of 10% gains next year and 15% gains through 2025.
If these numbers roughly prove accurate, when will average prices reach their late 2021 peaks? Probably in the first half of 2025. The rises are being led by the three big cities and that will likely remain the case through next year because the migration boom is boosting their populations more smaller locations.
What are the main threats to this outlook? First, if the war in the Middle East leads to oil embargoes and soaring oil prices, the resulting world recession may cap price rises completely for some time even though interest rates would end up falling quite sharply.
Second, we are still learning about what happens with inflation after a global pandemic and excessive fiscal and monetary stimuli. It is possible that inflation refuses to fall away, and the Reserve Bank has to boost interest rates by another 1% next year. I don’t think this is likely – but to repeat a point stressed here many times, none of us knows what usually happens after a global pandemic ends.
Third, China’s property sector problems may develop into a much deeper economic malaise which aggressively saps demand for our exports and throws us into recession next year. Again, this probably won’t happen. But it is one of the things worth keeping an eye on.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
