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Tony Alexander - February 2022 Property Market Insights

We are pleased to share the first property insights article for 2022 from economics expert, Tony Alexander. In Tony’s series with us he discusses the property market, trending patterns and economic insights. Sign up to our newsletter to get his next article straight to your inbox.

Record highs

Housing markets move in cycles, usually driven by interest rate changes, but sometimes with special factors having an impact. This is the case now, with a mix of strong factors accounting for annual dwelling consent numbers hitting a record 48,900 in the year ending December 2021.

The previous record was about 1.3% (as a proportion of our population) in 1975 compared with just below 1% now. So, we have had a bigger construction boom in the past. Although consent numbers will probably rise a bit further to soon exceed 50,000, we are unlikely to reach the modern equivalent of 1.3% of the population, which would be around 66,000 consents.

Behind the building boom

There are already some factors in play which will cause peak issuance to be reached this year. Before discussing them it is useful to consider how we have reached this high level of consents in just over a decade – only 13,500 consents were issued in mid-2011.

Back then people abandoned the idea of getting a new house built following the housing-related Global Financial Crisis (GFC), misplaced predictions that house prices would collapse in New Zealand (they only fell 11%, largely before the GFC), and the hesitancy of banks to lend to the property development sector. Come 2015, this weakest level of house building since the 1960s, ran into an acceleration in population growth.

Over 2007 – 2014 our population grew on average by 1% per annum. But over 2015 – 2020 growth was exactly double that. The low level of new house building preceding this doubling of population growth quickly produced upward pressure on house prices.

The pressure was felt first in Auckland, with prices escalating from 2012. Then the rest of the country joined in from 2015, while Auckland had a three-year rest from the end of 2016 – before the entire country soared from 2020.

Assisting the surge in house prices from 2012-2015 was the decline in interest rates over 2008-2009 which was not reversed post-GFC, despite a strong recovery in the NZ economy. Inflation failed to appear as widely as expected here and overseas, and this led the Reserve Bank to eventually cut interest rates to record lows in 2019. Further cuts came in 2020.

The pandemic, from early-2020, is the fourth substantial factor in play. Unable to travel overseas people diverted spending towards domestic goods and services including improving their home and getting a new one built. Young people unable to travel switched their spending around from travelling and then buying their first house, to buying the house first with intentions to travel once the borders eventually reopened.

We also have seen older people bringing forward their retirement plans. This has boosted internal migration to retirement destinations throughout Northland, Hawkes Bay, and the Bay of Plenty in particular.

Tax changes and buyer FOMO

Add all four factors together – catching up on insufficient house building from 2009 – 2014, the migration-driven population surge from 2015, record low borrowing costs, and pandemic-induced behavioural changes – and we get the boom in construction now underway. But there are perhaps two other elements in play which now become relevant to where we are headed.

First, the house buying frenzy from August 2020 to February 2021 involved extreme levels of buyer FOMO – fear of missing out. This encouraged those unable to find a property to snap up land and build themselves, or to contract with a developer to get a dwelling built.

Second, the tax changes announced by the government on March 23 last year have given investors an incentive to sell their existing properties – out of the rental stock to owner-occupiers, and contract to purchase a newly built dwelling.

So, where do things go now?

First, interest rates are well off record lows with further rises to come. Central banks around the world are having to admit that inflation looks to be driven by more than temporary factors and persistent rate rises are now widely expected for 2022 and 2023. Our own monetary policy is set to tighten further and come 12 months from now the likes of the one-year fixed mortgage rate is likely to be more than 1% above current levels.

Second, even though the minimum deposit rules do not apply to new-builds, the newly strengthened Credit Contracts and Consumer Finance Act (CCCFA) does. This is ruling out mortgages for a great swathe of people both young and old. Financing pre-approvals are being cancelled and borrowers are having to start a multi-month period of spending restraint to prove they can adjust spending once they have a mortgage to service.

Third, reopening of the borders is likely to lead to a brain drain of Kiwis across to Australia to take advantage of higher pay rates and a lower cost of living. This will cause population growth to remain low, maybe akin to the 0.6% of the year to June 2021.

Fourth, reopening of the borders will also allow people to switch back to the more traditional spending approach of travelling a lot and then buying a house.

Fifth, FOMO has gone and according to the monthly survey of real estate agents which I run with REINZ, we have entered a buyer’s market.

Sixth, the boom in new dwelling supply means that at some point the popular discussion will shift away from shortages of social and rental accommodation towards worries about an over-supply in some regions. We are still well away from such thoughts having validity given the low building levels of a decade or so ago and the need to provide a lot more social housing in New Zealand.

There is also the tax incentive for investors to buy new which remains in place. Plus, changes to town planning rules in our five biggest cities mean that a lot more land is now able to be intensified without having to go through a resource consent process.

There is also a backlog of buyers who opted out of the housing market this past year because of the intensity of the buying frenzy. As things become calmer they will re-enter the market looking to make a purchase.

These are large factors all in play and none of us has a decent model for predicting exactly how they will interact to affect construction levels in the near future. But it seems safe to say that we are probably near the peak in issuance of dwelling consents and buyers overall are not just going to feel more relaxed but will take their time to decide on which housing product suits them best of all.

This then becomes the environment in which the best operators will rise to the top. Those of us in the building industry know that construction moves in cycles. We know that booms attract some over-optimistic and often under-capitalised newbies. We know that banks prefer long-term lending relationships with established operators, substantially because those operators have learnt to closely monitor construction-related risks including supply chain interruptions and staff shortages.

For people contemplating purchasing a new build, conduct due diligence, not just on the dwelling itself and the financing you will require, but the developer as well. Experience will count for a lot once we shift to the easing leg of the construction cycle over 2023.

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Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz