ANALYSIS: Many years ago, one of the experienced economists above my lowly grade gave the following advice: When confused about what is going on, just sit down, draw demand and supply curves, and figure out how they will move in response to the various factors in play. Doing so would give some broad insight into what might happen with the volume of activity in a sector and where prices could be headed.
If I do that for housing, here’s what you get.
On the demand side, interest rates are no longer at growth-suppressing levels (although they are not at outright stimulatory levels either). First-home buyers face relatively little competition in the market, and time is on their side.
Net migration hit 21,000 in the last 12 months, but with a net loss of near 45,000 Kiwi citizens, the overall net gain is less than half the 10-year average and well down on the 135,000 flow in late 2023.
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Investor interest in the market is weak because maintenance costs, including meeting Healthy Homes standards, rates and insurance, are high. Tenants are also perceived to be in short supply, and the ability to raise rents to recoup higher costs is limited.
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Standing back and thinking about what to do with a housing demand curve, I’d be only moving it slightly outward for partial recovery from the earlier effects of tight monetary policy.
On the supply side, we have property listings at their highest level nationwide in 10 years. Developers are sitting on unsold townhouses, and many vendors have yet to capitulate on price.
The number of consents issued for the construction of new dwellings has only retreated as a percentage of the population (just above 0.6%) to what the average such ratio has been since 1972. New proposed supply is unusually high considering the recent period of tight monetary policy.
In ANZ’s monthly Business Survey, a net 45% of builders said that they expect to be busier in the coming year. This is well above the 10-year average of -1%.
Independent economist Tony Alexander: "Once the economy is stronger, the upper half of the market could show some surprising strength next year." Photo / Fiona Goodall
Add the continuing efforts by the Government to boost supply, including overriding council rules, and we get an outlook of good supply growth. That means a shift outward also of the supply curve, but also a shift upward as costs continue to increase.
Add it all up, move the curves, and what you get is higher turnover and house construction, but no clear signal on where prices are heading.
We know that prices have in fact fallen for each of the past three months to May, and my latest survey of real estate agents around the country shows a net 26% feel that prices face downward pressure in the locations they work in.
Given the many comments from agents about vendors who are hung up on 2021 prices, expect the buyer’s market to continue until well into next year.
Having said that, it pays to be aware that the high supply of property exists at the lower to mid-priced part of the market. Once the economy is stronger, business profits better, job security higher, and salary increases larger, the upper half of the market could show some surprising strength next year.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
