OPINION: Back during the March to May lockdown and immediately ahead of it, most of the commentary on housing markets around New Zealand fell on the negative side. Expectations of soaring unemployment, collapsing migration and banks calling in loans and refusing to lend to new buyers, drove forecasts of big declines in house prices.
For a while the price forecasts were on track with average prices around the country retreating 3.0 per cent over the two-month period from April to May. But since then sales have soared to be 37 per cent stronger in September than a year earlier, the stock of listings has declined 18 per cent from a year ago and prices have risen 7 per cent in four months to now sit almost 4 per cent higher than March levels.
Why this astounding turnaround in such a short period of time? Some people place a heavy emphasis on returning Kiwis and it is true that the net annual Kiwi migration flow jumped to +22,000 in the year to August from a 3700 loss a year ago and average annual losses since 2002 of 20,000 of us. But when I asked real estate agents in the monthly survey I run with the Real Estate Institute of New Zealand whether they were seeing more inquiries from offshore, a net 2 per cent this month said such inquiries were down. In fact for five months this outcome has been fairly weak.
The anecdotes of expat buying are strong, but the true source of real estate market strength is domestic and it comes from factors such as these. First, low term deposit interest rates are driving investors to not sell properties they were planning to sell. Some are buying more properties and a net 38 per cent of agents in my monthly survey with REINZ say they are seeing more investors in the market.
A net 11 per cent of people in another survey I run looking at people’s spending plans, say they plan purchasing more investment property, up from 7 per cent in July.
And it is not just the current level of interest rates having an effect here. The Reserve Bank cut their cash rate 0.75 per cent over 2019 and, combined with confirmation of no Capital Gains tax and no obvious weakness following the ban on foreign buyers from late-2018, real estate markets were accelerating immediately prior to the Covid shock.
Moreover, interest rates are driving purchasers because they are expected to remain low for many years and because the Reserve Bank might push them lower again early in 2021.
Second, we experienced a net migration boom before the borders closed. On average over the past 10 years we have enjoyed a population boost from migration flows of 35,000 people per annum. That total was 91,000 in the year to March and still sat at 71,000 in August. Plus, it looks like the monthly numbers might be drifting back up from recent monthly outcomes near zero as more people are allowed into New Zealand and a lot of people who needed to leave have done so. The net population gain expected to accrue from migration flows out to September 2021.
Third, listings in recent times have been running about 65 per cent down from levels of a decade ago and it looks like a lot of hopeful buyers gave up on their searching before Covid came along. But hopes of distressed sellers and unemployed people putting purchasing plans on hold seems to have encouraged these people to jump into the market since April, hopeful of making a purchase. Removal of Loan to Value Ratio rules will also have encouraged their reappearance.
Tony Alexander: "The level of pent-up demand hidden from view looks to have been far greater than any of us imagined."
In particular, from my survey of agents with REINZ we can see that first home buyers plunged into the market in June while investors have been slower to appear. The level of pent-up demand hidden from view looks to have been far greater than any of us imagined.
Fourth, many people have rapidly grown their house deposits since March on the back of a lockdown during which they were unable to spend. No overseas visits has also freed up funds.
There are many other factors but these are the main ones, and there is virtually no sign that any reversal in recent market strength is likely.
Businesses are being reminded every day that both skilled and (willing) unskilled labour are in short supply in New Zealand, so expiration of the last wage subsidy scheme will likely produce few new lay-offs.
The ending of the extended mortgage deferral scheme in March will likely see very few distressed sales as banks will by now have lost almost all their fears of house prices falling.
Also, as each week goes by we get closer to the borders one day re-opening (though it is anyone’s guess when exactly). Each week brings us closer to banks easing lending criteria, and businesses starting to catch-up on suspended capital spending projects. Now add in consumers shifting to a net 32 per cent planning to spend more this month from just 13 per cent last month in the Spending Plans Survey and the underlying state of our economy will slowly become a new factor supporting regional housing markets.
Could anything go wrong? Always. The vaccines might not work, weak economies offshore could see our export prices fall and maybe many businesses have yet to pull the plug. But the chances of new weakness appearing look quite slim — and that means the probabilities favour higher average prices around all the country.
- Tony Alexander is an economics commentator and former chief economist for BNZ