ANALYSIS: When we talk about housing market drivers, we are essentially talking about three things: job security, mortgage interest rates and migration.
Let’s deal with job security first. If householders feel worried about their ability to retain their current job or easily get a new one if laid off, they will naturally feel disinclined to take the risk of buying a property and taking on a bigger mortgage.
Half of the respondents of my most recent survey of real estate agents said buyers were showing concerns about their income prospects. That’s slightly down from a peak of 56% of respondents expressing the same in June last year, and well above the 14% in January 2024, before the economic rot really set in. Job confidence is not there yet.
But from my monthly survey of businesses with MintHC we can see that employers are getting ready to raise their staff numbers, and when people see that happening, job confidence will rise and willingness to make a housing purchase will increase.
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When I asked businesses this month what they planned to spend more money on, 12% said recruitment, up from last month’s reading of 9%. It’s also the strongest reading since June 2023 and firmly suggests hiring plans are gathering pace.
The second biggest influence on the housing market is mortgage interest rates. Two years ago, the popular one-year fixed mortgage rate was around 7.4%, and a year ago, it was 5.8%. Now the rate is around 4.5%.
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Interest rates are now in stimulatory territory, and the Reserve Bank will probably cut the cash rate by 0.25 percentage points next week, pushing the one-year fixed rate down even more. Financing costs are now a source of stimulus for the housing market.
Rounding out our trio of factors is net migration flows. Over the past decade, the average net inflow each year has been 50,000 people. Back in October 2023, the annual net inflow was 135,000, and now it is just 12,400.
Population growth is below average, hence the restraint in the housing market. However, just as the labour market is at the start of a cyclical upturn, so too is the migration cycle. The net annual gain bottomed out at 10,300 in May. More than that, if we add up the flows over the past three months and multiply by four to get the annualised equivalent, the flow is 35,000 compared with -13,000 annualised in the three months to May and 27,000 a year ago.
Independent economist Tony Alexander: "The Reserve Bank will probably cut the cash rate by 0.25 percentage points next week, pushing the one-year fixed rate down even more." Photo / Fiona Goodall
What we have then are stimulatory interest rates and job confidence, plus population growth at the start of their cyclical upturns. How long will it be before the improvements in the latter two factors are strong enough to cause noticeably greater strength in the residential real estate sector?
I’d say towards the end of summer and start of autumn, with assistance from the overall economy improving and small to medium-sized business owners anticipating better profits, which is important for the middle to upper parts of the market.
First-home buyers are likely to be as actively engaged in a year as they are now and have been since early 2023. More investors are likely to make a purchase as the months advance. But worries about a capital gains tax will stay the hands of those who have yet to make the switch to yield. Plus, selling by older investors who have held investment property for a long time is likely to remain strong as the cost of living and the advancing of years bring a desire to free up cash to fund their retirement.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
