Tony's View... https://forms.gle/qW9avCbaSiKcTnBQA New Zealand’s Housing Markets 25 Reasons Why House PricesAre Rising – and CountingTreasury warn that house prices might fall 7% fromtheir current levels. But chances are they are muchtoo pessimistic and the recent rise in prices willcontinue, though at a slightly slower pace becausethere will be some bounce-back effect in price gainsthese past three months. Average NZ house pricesnow sit 1.5% above levels in March.Here are 25 reasons why house prices havesurprised us with their strength. Many (not all) ofthese factors will continue to apply over the comingyear and beyond. 1. Interest ratesThe Reserve Bank cut the official cash rate 0.75% inMarch and since then floating mortgage rates havefallen to near 4.5% from 5.3%. The two-year fixedrate has fallen to 2.65% from 3.55%. Term depositrates have also fallen, with the six-month rate goingto 1.3% from 2.3%.Lower interest rates have made purchasing a homemore affordable, and encouraged investors seekinghigher yield than now offered in bank term depositsto look at other assets including property. 2. Interest rate expectationsIt is not just that interest rates are low. The ReserveBank have made it clear that they intend to keeprates low for many years, with assistance from theUS Federal Reserve which has just shifted theirpolicy stance toward multiple years of low rates to tryand generate inflation above 2% for a number ofyears. Also, our central bank has indicated it mayintroduce a negative official cash rate next year.Expectations that interest rates will stay low areencouraging people to expect that other people inthe future will be seeking higher yielding assetsincluding property. So, they are buying before thisexpected extra demand comes along. 3. Migration boomEven before we had heard of Covid-19, from themiddle of last year a change was occurring in the netflow of Kiwis across our borders from negative topositive 2,800 come the end of 2019. By March thisyear the net Kiwi flow was +13,000, contributing to a record net inflow for all countries of 90,000 from50,000 a year earlier.We already have in the country the net migrationgain we expected would be recorded by just after themiddle of 2021. This means extra pressure on rentalaccommodation, allowing investors to (now) raiserents, whilst discouraging them from selling andencouraging more purchasing. 4. Migration expectationsMost Kiwis expect that when the borders reopen, wewill see a great number of our expats coming home– along with many foreigners wanting to shift here.Expectations of a coming horde which will purchaseproperty is encouraging extra purchasing now –especially with people swapping stories of expatsbuying property unseen whilst still offshore. Thenumbers doing so are however probably very low. 5. Migration DataAnd third in the migration spot, it is entirely possiblethat despite our borders being closed, in a fewmonths our monthly net migration numbers will beback above 1,000. Why? Because the chances arehigh that inflows into NZ through quarantine will stayfirm (though easing) ahead of the borders one dayreopening. But outflows will peter off as thegovernment makes it easier for visa holders toremain here, and long-term foreign visitors will havealready departed.This possible yet-to-arrive factor will add toexpectations of a return to high annual net migrationinflows when the borders open. 6. LVR RemovalIn March the Reserve Bank announced that it wasremoving Loan to Value Ratio requirements. Firsthome buyers have read this to mean that banks willaccept much smaller deposits, and they haveentered the housing market in high numbers. 7. Cash Build-upsDuring seven weeks of lockdown, young people builtup cash savings through wage income continuing,but spending on bars, clothes etc. no longer beingpossible. They also now have spare cash which hadbeen allocated for overseas travel. For some this willhave encouraged efforts to build a deposit nowrather than later, and in seeing their deposit growthey have entered the housing market. 8. Travel and Housing SwitchUnable to travel, but still wanting to, it is likely thatsome young people have decided to switch theirplanned spending timing between travel andhousing. They have changed from planning to travelthen look to buy a house, toward buying a housefirst, then later on travelling. 9. Expected Reduced ConstructionAlthough monthly dwelling consents have yet totrend downward, the expectation of most people isthat the Covid-19 shock and tightening of banklending criteria will lead to a reduction in houseconstruction over the next couple of years. Reducedsupply will tend to place upward pressure on pricesunless demand also declines. 10. Unemployment of Non-home OwnersThe bulk (not all) of the people losing employmentas a result of the Covid-19 shock are in the retail,hospitality, tourism, entertainment, andaccommodation sectors. They tend to be young,earning below average wages, and not homeowners. The Household Labour Force Survey says90% are females, but I have found the below-headline numbers in the HLFS to be quite volatile inthe past, with changes that don’t seem to line up withreality. So, chances are, it is not true that 90% of thejob loss burden is being borne by females.Unlike previous recessions, we are not seeing manydistressed sellers in the property market. 11. A Focus on HomeAround the world people have turned their attentionto their immediate living arrangements. This hasproduced a boom for the home renovation sector.Focussing on improving one’s nest is easier if oneowns the property and can change it around at will,as compared with renting. Therefore, the Covid-19shock has probably produced a desire to shift fromrenting to owning. 12. Listings ShortageWe went into the Covid-19 shock in March with thestock of property listings around New Zealand down27% from March 2019 and 64% from March 2010. Atthe end of August, listings were still 13% down froma year earlier. By comparison, in March 2019 listingswere ahead 3% from March 2018. So, we enteredthe shock with a rapidly growing shortage of listings. 13. Hidden BuyersIt is likely that over the past four years a high numberof people wanting to buy a property had given up inthe face of rising prices and insufficient listings.Seeing the Covid-19 shock come along, some ofthese buyers not active in the market are likely tohave become incentivised to re-engage amidsthopes of distress bringing many new vendors to themarket. 14. Fear of Not Being Able to RepurchaseThere is now so much awareness of a shortage ofstock that agents are reporting vendors as beingunwilling to sell because they do not want to run therisk of bit being unable to quickly purchase a newsuitable property. The listings shortage has startedto feed on itself in a self-perpetuating manner. 15. Fear of Missing OutThis is known as FOMO. It has been around forever,but in past periods of strong house price growth inNew Zealand is not a term which has been incommon usage. It means, in the current context,people have become concerned that if they do notmake a purchase now, they will miss out on a likelycapital gain or on the opportunity to buy somethingat all.This fear of missing out is encouraging people tomake a purchase as early as possible – draggingfuture purchasers into the market now, before theirintended purchase timing of perhaps next year or2022. 16. High Household WealthIt is not true that Kiwi households are poor, eventhough the common message is that we are. We aremeant to believe that we all live with high levels ofdebt which will one day cripple us, house prices, andour country’s future.In truth, household debt amounts to some $300bn.But household housing assets amount to near$900bn, and financial assets like shares, managedfunds, company ownership, bank deposits etc.,amount to $1 trillion. Net worth is around $1.6tn.Some 43% of owner occupiers do not have amortgage.Not everyone passively manages their net worth.Sensing a need to gain a decent return and perhapsan opportunity in the housing market, plenty ofpeople are able to become property investors. 17. Giving up on Travel DreamsMany people have assumed international travel maynot be possible for a number of years. Some of thesepeople have decided to purchase a second propertyto use for holiday purposes in New Zealand, and thisprobably helps explain the limited decline which hasoccurred in Queenstown Lakes District propertyprices (down only 1.9% in the three months toAugust from a year earlier, versus a nationwide riseof 1.3%, and Dunedin City fall of 3.1%). 18. Money PrintingThis is something new for New Zealand. Overseasexperience shows that central bank buying of bondsand conversion of bond investors’ bond asset into abank cash deposit places upward pressure on assetprices including shares and property. The ReserveBank admitted in May that there is a risk their bondbuying pushes up asset prices, and it is nowcommonly discussed that their actions arecontributing to higher house prices – often in thecontext of a debate about their contribution to awidening of the wealth gap in our country.Growing awareness of the impact of the RB’s actionsis likely to be contributing to a desire by people tobuy before the RB causes prices to rise further. 19. Mortgage DeferralsThe introduction of this scheme and its extension toMarch next year will have taken away the immediatepressure on many people to sell their house throughinability to meet mortgage payments. The schemehas reduced current seller numbers. 20. Good Financials Leading into theCovid-19 ShockHousehold debt in the five years leading into thisshock grew near 40% compared with 80% in the fiveyears 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 interestrates for assessing debt servicing capacity ofborrowers, meant there was little high-risk housingdebt heading into the shock. This has limitedmortgage stress – as these measures weredesigned to do. 21. Lack of Bank StaffBanks have not had the staffing resources to handlemany mortgagee sales, with personnel run off theirfeet adjusting to working from home and processingcredit assistance applications from businesses andhome owners. 22. Soaring Share PricesShare prices rose very sharply from late-March andthis may have encouraged a positive view byinvestors of other, less rapidly repriced assets – likeproperty. 23. Job Losses for MigrantsJust as many job losses are hitting young peoplewho do not own homes, they are also hitting themany migrants on working visas who were presentin the accommodation and hospitality sectors inparticular. Heading into this downturn 8% of jobs inNew Zealand were held by migrants, compared with4% at the start of the GFC.To the extent migrants bear much of the burden ofunemployment, this does not produce a hike in thenumber of distressed property sellers, because theywill not be property owners. 24. Quiet GovernmentA key point I made many months ago was that callsby large bodies for house prices to decline in theinterests of social equity would disappear. I notedthat neither the Reserve Bank, banks, Treasury, orGovernment would want house prices to be fallingthis year. Falling prices would make the economicdownturn worse.It has come to pass that we rarely read of desiresthese days for house prices to fall, and lack of suchexpressions from senior government members inparticular has removed one factor which might havestayed the hand of many potential propertypurchasers, whilst also potentially encouragingsome sellers. Policy makers want house prices torise. 25. Wage subsidiesWere it not for the three rounds of wage subsidies toemployers to keep staff on there would be a lot morepeople unemployed currently. The absence of thisunique employment shock has reduced the numberof property sellers and kept many potential buyersengaged with the market.
