TONY’S VIEW

Tony Alexander

New Zealand’s Housing Markets
25 Reasons Why House Prices Are Rising – and Counting
Treasury warns that house prices might fall 7% from
their current levels. But chances are they are much
too pessimistic and the recent rise in prices will
continue, though at a slightly slower pace because
there will be some bounce-back effect in price gains
these past three months. Average NZ house prices
now sit 1.5% above levels in March.
Here are 25 reasons why house prices have
surprised us with their strength. Many (not all) of
these factors will continue to apply over the coming
year and beyond.

  1. Interest rates
    The Reserve Bank cut the official cash rate 0.75% in
    March and since then floating mortgage rates have
    fallen to near 4.5% from 5.3%. The two-year fixed
    rate has fallen to 2.65% from 3.55%. Term deposit
    rates have also fallen, with the six-month rate going
    to 1.3% from 2.3%.
    Lower interest rates have made purchasing a home
    more affordable, and encouraged investors seeking
    higher yield than now offered in bank term deposits
    to look at other assets including property.
  2. Interest rate expectations
    It is not just that interest rates are low. The Reserve
    Bank have made it clear that they intend to keep
    rates low for many years, with assistance from the
    US Federal Reserve which has just shifted their
    policy stance toward multiple years of low rates to try
    and generate inflation above 2% for a number of
    years. Also, our central bank has indicated it may
    introduce a negative official cash rate next year.
    Expectations that interest rates will stay low are
    encouraging people to expect that other people in
    the future will be seeking higher yielding assets
    including property. So, they are buying before this
    expected extra demand comes along.
  3. Migration boom
    Even before we had heard of Covid-19, from the
    middle of last year a change was occurring in the net
    flow of Kiwis across our borders from negative to
    positive 2,800 come the end of 2019. By March this
    year the net Kiwi flow was +13,000, contributing to a
    record net inflow for all countries of 90,000 from
    50,000 a year earlier.
    We already have in the country the net migration
    gain we expected would be recorded by just after the
    middle of 2021. This means extra pressure on rental
    accommodation, allowing investors to (now) raise
    rents, whilst discouraging them from selling and
    encouraging more purchasing.
  4. Migration expectations
    Most Kiwis expect that when the borders reopen, we
    will see a great number of our expats coming home
    – along with many foreigners wanting to shift here.
    Expectations of a coming horde which will purchase
    property is encouraging extra purchasing now –
    especially with people swapping stories of expats
    buying property unseen whilst still offshore. The
    numbers doing so are however probably very low.
  5. Migration Data
    And third in the migration spot, it is entirely possible
    that despite our borders being closed, in a few
    months our monthly net migration numbers will be
    back above 1,000. Why? Because the chances are
    high that inflows into NZ through quarantine will stay
    firm (though easing) ahead of the borders one day
    reopening. But outflows will peter off as the
    government makes it easier for visa holders to
    remain here, and long-term foreign visitors will have
    already departed.
    This possible yet-to-arrive factor will add to
    expectations of a return to high annual net migration
    inflows when the borders open.
  6. LVR Removal
    In March the Reserve Bank announced that it was
    removing Loan to Value Ratio requirements. First
    home buyers have read this to mean that banks will
    accept much smaller deposits, and they have
    entered the housing market in high numbers.
  7. Cash Build-ups
    During seven weeks of lockdown, young people built
    up cash savings through wage income continuing,
    but spending on bars, clothes etc. no longer being
    possible. They also now have spare cash which had
    been allocated for overseas travel. For some this will
    have encouraged efforts to build a deposit now
    rather than later, and in seeing their deposit grow
    they have entered the housing market.
    Tony’s View
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  8. Travel and Housing Switch
    Unable to travel, but still wanting to, it is likely that
    some young people have decided to switch their
    planned spending timing between travel and
    housing. They have changed from planning to travel
    then look to buy a house, toward buying a house
    first, then later on travelling.
  9. Expected Reduced Construction
    Although monthly dwelling consents have yet to
    trend downward, the expectation of most people is
    that the Covid-19 shock and tightening of bank
    lending criteria will lead to a reduction in house
    construction over the next couple of years. Reduced
    supply will tend to place upward pressure on prices
    unless demand also declines.
  10. Unemployment of Non-home Owners
    The bulk (not all) of the people losing employment
    as a result of the Covid-19 shock are in the retail,
    hospitality, tourism, entertainment, and
    accommodation sectors. They tend to be young,
    earning below average wages, and not home
    owners. The Household Labour Force Survey says
    90% are females, but I have found the belowheadline
    numbers in the HLFS to be quite volatile in
    the past, with changes that don’t seem to line up with
    reality. So, chances are, it is not true that 90% of the
    job loss burden is being borne by females.
    Unlike previous recessions, we are not seeing many
    distressed sellers in the property market.
  11. A Focus on Home
    Around the world people have turned their attention
    to their immediate living arrangements. This has
    produced a boom for the home renovation sector.
    Focussing on improving one’s nest is easier if one
    owns the property and can change it around at will,
    as compared with renting. Therefore, the Covid-19
    shock has probably produced a desire to shift from
    renting to owning.
  12. Listings Shortage
    We went into the Covid-19 shock in March with the
    stock of property listings around New Zealand down
    27% from March 2019 and 64% from March 2010. At
    the end of August, listings were still 13% down from
    a year earlier. By comparison, in March 2019 listings
    were ahead 3% from March 2018. So, we entered
    the shock with a rapidly growing shortage of listings.
  13. Hidden Buyers
    It is likely that over the past four years a high number
    of people wanting to buy a property had given up in
    the face of rising prices and insufficient listings.
    Seeing the Covid-19 shock come along, some of
    these buyers not active in the market are likely to
    have become incentivised to re-engage amidst
    hopes of distress bringing many new vendors to the
    market.
  14. Fear of Not Being Able to Repurchase
    There is now so much awareness of a shortage of
    stock that agents are reporting vendors as being
    unwilling to sell because they do not want to run the
    risk of bit being unable to quickly purchase a new
    suitable property. The listings shortage has started
    to feed on itself in a self-perpetuating manner.
  15. Fear of Missing Out
    This is known as FOMO. It has been around forever,
    but in past periods of strong house price growth in
    New Zealand is not a term which has been in
    common usage. It means, in the current context,
    people have become concerned that if they do not
    make a purchase now, they will miss out on a likely
    capital gain or on the opportunity to buy something
    at all.
    This fear of missing out is encouraging people to
    make a purchase as early as possible – dragging
    future purchasers into the market now, before their
    intended purchase timing of perhaps next year or
    2022.
  16. High Household Wealth
    It is not true that Kiwi households are poor, even
    though the common message is that we are. We are
    meant to believe that we all live with high levels of
    debt which will one day cripple us, house prices, and
    our country’s future.
    In truth, household debt amounts to some $300bn.
    But household housing assets amount to near
    $900bn, and financial assets like shares, managed
    funds, company ownership, bank deposits etc.,
    amount to $1 trillion. Net worth is around $1.6tn.
    Some 43% of owner occupiers do not have a
    mortgage.
    Not everyone passively manages their net worth.
    Sensing a need to gain a decent return and perhaps
    an opportunity in the housing market, plenty of
    people are able to become property investors.
    Tony’s View
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  17. Giving up on Travel Dreams
    Many people have assumed international travel may
    not be possible for a number of years. Some of these
    people have decided to purchase a second property
    to use for holiday purposes in New Zealand, and this
    probably helps explain the limited decline which has
    occurred in Queenstown Lakes District property
    prices (down only 1.9% in the three months to
    August from a year earlier, versus a nationwide rise
    of 1.3%, and Dunedin City fall of 3.1%).
  18. Money Printing
    This is something new for New Zealand. Overseas
    experience shows that central bank buying of bonds
    and conversion of bond investors’ bond asset into a
    bank cash deposit places upward pressure on asset
    prices including shares and property. The Reserve
    Bank admitted in May that there is a risk their bond
    buying pushes up asset prices, and it is now
    commonly discussed that their actions are
    contributing to higher house prices – often in the
    context of a debate about their contribution to a
    widening of the wealth gap in our country.
    Growing awareness of the impact of the RB’s actions
    is likely to be contributing to a desire by people to
    buy before the RB causes prices to rise further.
  19. Mortgage Deferrals
    The introduction of this scheme and its extension to
    March next year will have taken away the immediate
    pressure on many people to sell their house through
    inability to meet mortgage payments. The scheme
    has reduced current seller numbers.
  20. Good Financials Leading into the
    Covid-19 Shock

    Household debt in the five years leading into this
    shock grew near 40% compared with 80% in the five
    years ahead of the 2008-09 Global Financial Crisis.
    More than that, the introduction of LVRs in 2013,
    plus the application by banks of high test interest
    rates for assessing debt servicing capacity of
    borrowers, meant there was little high-risk housing
    debt heading into the shock. This has limited
    mortgage stress – as these measures were
    designed to do.
  21. Lack of Bank Staff
    Banks have not had the staffing resources to handle
    many mortgagee sales, with personnel run off their
    feet adjusting to working from home and processing
    credit assistance applications from businesses and
    home owners.
  22. Soaring Share Prices
    Share prices rose very sharply from late-March and
    this may have encouraged a positive view by
    investors of other, less rapidly repriced assets – like
    property.
  23. Job Losses for Migrants
    Just as many job losses are hitting young people
    who do not own homes, they are also hitting the
    many migrants on working visas who were present
    in the accommodation and hospitality sectors in
    particular. Heading into this downturn 8% of jobs in
    New Zealand were held by migrants, compared with
    4% at the start of the GFC.
    To the extent migrants bear much of the burden of
    unemployment, this does not produce a hike in the
    number of distressed property sellers, because they
    will not be property owners.
  24. Quiet Government
    A key point I made many months ago was that calls
    by large bodies for house prices to decline in the
    interests of social equity would disappear. I noted
    that neither the Reserve Bank, banks, Treasury, or
    Government would want house prices to be falling
    this year. Falling prices would make the economic
    downturn worse.
    It has come to pass that we rarely read of desires
    these days for house prices to fall, and lack of such
    expressions from senior government members in
    particular has removed one factor which might have
    stayed the hand of many potential property
    purchasers, whilst also potentially encouraging
    some sellers. Policy makers want house prices to
    rise.
  25. Wage subsidies
    Were it not for the three rounds of wage subsidies to
    employers to keep staff on there would be a lot more
    people unemployed currently. The absence of this
    unique employment shock has reduced the number
    of property sellers and kept many potential buyers
    engaged with the market.