Supply just one market driver

BNZ chief economist Tony Alexander

Few would deny the country is suffering from a shortage of housing, with new Treasury papers released to the Labour Party showing a nationwide shortage of 60,000 houses, which is growing by 40 a day.

Labour Party leader Andrew Little said this has resulted in out of control prices, speculators, and skyrocketing rents.

“The solution is simple: build more houses… When there’s been housing crises in the past, governments have stepped in and built, or helped to build, good, basic homes to get families on the property ladder and stabilise prices.”

But anyone trying to establish what might happen to the housing market over the coming year needs to look at factors beyond supply and the efforts to boost it.

For BNZ chief economist Tony Alexander, the things that drive the housing market are interest rates, then credit controls, then migration, then economic/jobs growth, then housing supply growth.

Looking at interest rates, he expects the OCR to be on hold at its record low of 1.75% till next year but he said that fixed and some floating rates have already risen due to increased funding costs.

When it comes to credit controls, the new 40% LVR limit for investors has helped curtail investor demand in Auckland but investors have simply flocked to the regions, he said.

“If Auckland rebounds then the 40% will probably rise to 50%. We’ll see. The chances of that happening continue to get smaller and smaller but are not yet zero.”

As to the other factors noted, migration might ease a little and economic/jobs growth is likely to slow although it will remain strong.

But while supply is likely to grow – although not rapidly given the shortage of builders, materials and, now, finance for developers – the shortage will continue.

In Alexander’s view, if you add all these factors up you get a strong market for 2017.

This is because there will still be firm support from strong migration flows, a strong economy, continuing shortages of houses in Auckland and investors snapping up what they can in the regions.

He said that, assuming societies in the US and Europe do not tear themselves apart, rate rises over 2018 will make that year more challenging.

“This is especially as investors belatedly look at rising supply in the regions and then look at regional population growth projections.

“That is where the risks of price corrections lie – not in Auckland.”

New Zealand’s housing market cycles are all about the link between interest rates, migration and Reserve Bank monetary policy, according to Strategic Risk Analysis managing director Rodney Dickens.

The housing market is in the latter stages of benefiting from the combination of low interest rates and high net migration, with the boom fuelled further by increased investor activity, he said.

“It is inevitable that the latest boom like all past booms will be followed by a major downturn in the housing market, including for residential building.

“This is in part because in time interest rates will need to be increased to the extent it generates a hard landing for the economy, meaning much lower employment growth and reduced demand for immigrant workers. “

Dickens said that while the two main cyclical drivers are currently still being positive factors for the housing market, they will end up turning against it and this will, in turn, drive reduced activity by investors.

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