Opinion: Why house building will defy the gloomsters and grow this year

Posted in News April 10, 2009 - 12:21pm, Rodney Dickens

By Rodney Dickens The 10 economic forecasters surveyed by NZIER in March on average estimated that the volume of residential building activity including alterations and additions fell 22.8% in the 2008/09 March year and predicted it to fall a further 15.1% in the 2009/10 March years before experiencing a modest recovery of 7.9% in the 2010/11 March year. Even the most optimistic of the forecasters predicted that residential building activity in the 2009/10 March year would be down 2.1%. No wonder economics is known as the dismal science! The forecasters surveyed in March were: ANZ National, ASB, BERL, BNZ, Deutsche Bank, NZIER, RBNZ, Treasury, UBS and Westpac. This link will take you to the part of NZIER's website where the reports presenting the consensus economic forecasts are stored. By contrasts in the latest Building Barometer report we are predicting that the number of consents for new dwellings in the 2009/10 March year will be up around 8% based on our analysis of the likely impact of the likes of interest rates, net migration, section prices and bank lending behaviour.

Maybe banks are slower to resume lending growth than we are assuming, maybe the global crisis delivers another shock, maybe the sizeable improvement in net migration we expect doesn't unfold and maybe developers are slower than we expect to cut asking prices for sections which is required to improve the competitiveness of building new houses relative to buying an existing house. These are uncertain times and it would be arrogant of us to suggest we knew all the answers. But equally the shot that Governor Bollard fired across the market's bow on 1 April should give plenty of insight into his thinking about what he wants to see happen (i.e. by hell or high water he is going to deliver a recovery!). It is not unusual for the economists to be either slow at predicting an upturn or unduly pessimistic about the scale of an upturn. We had a look at the range of predictions by the economic forecasters when surveyed by NZIER in September 2001 when the last upturn had already commenced. The consensus view was that residential building activity in the 2002/03 March year would increase a moderate 7% while it actually increased 23.7%. Even the most optimistic of the forecasters was only predicting a 14% increase which is interesting because when the September 2001 survey was conducted the number of building consents had already increased 16% from the trough levels on a seasonally adjusted basis. The seeming inability of the economic forecasters to pick the timing and/or magnitude of upturns in residential building in part reflects an underlying conservatism and is partly because they don't have the tools required to pick turning points. By comparison a major advantage we have is the leading indicator framework we have developed and successfully used over a number of years that is designed to pick turning points in residential building activity among other things. The case for being more optimistic about residential building prospects The strength of our year-ahead forecasts for residential building activity is that they are based on leading indicator analysis of how the key drivers will impact including interest rates, net migration/population growth, new housing affordability (i.e. how does the cost of new housing stack up relative to existing house prices), and the impact of changes in banks' lending criteria. See here for the analysis in our Building Barometer reports to justify our view that the upturn in residential building activity will start much earlier than the economists are predicting (with the full analysis reserved for paying clients). We looked at the number of house sales reported by REINZ each month as a leading indicator of the number of consents for building new dwellings (excluding apartments "“ our reports include separate analysis of the outlook for apartments among other things). Other than when changes in the consenting requirements/documentation had an adverse impact on the number of consents in 2005, our research shows that it would be rare for consents not to follow the lead of REINZ house sales with around a three month lag. But it isn't unusual for consents to either rise or fall more than REINZ house sales. We also looked at the impact of mortgage interest rates on the number of REINZ house sales with the interest rate component shifted to the right by three months reflecting how long changes in interest rates on average take to impact on house sales. (See 2nd chart here on pg 3) The green line shows the sort of increase in the number of house sales there should have been in response to the massive fall in mortgage interest rates if these were normal times. With banks tightening lending criteria after the financial crisis escalated last September the upturn in house sales was delayed and may have been significantly watered down. But the upturn has finally arrived and feedback from the market place, including Tony Alexander's latest monthly survey of real estate agents, suggests that the upturn has got a head of steam up. Follow this link for Tony's weekly reports. Some further significant increase in the number of REINZ house sales seems likely over the next few months which, based on the left chart on page three in this link, implies further upside potential in the number of residential building consents over the next six months or so. But these are uncertain times and one of the challenges still faced by the residential building industry, as discussed in the Building Barometer reports, is the economics of building a new house relative to buying an existing house. A challenge faced by residential building The February 2009 Raving titled The economics of the section market provided insights into the relative attractiveness of building a new house versus buying an existing house. It pointed to the need for developers to drop section prices if they wanted to compete with existing properties for which prices were falling. Since February we have seen signs that some developers realise that the game has changed and as a result they are cutting section prices, but as discussed in the Building Barometer and Housing Prospects reports the downward pressure on section prices is only starting to warm-up. A law of economics most appropriate in the current situation is that market participants can't control both prices and volumes (i.e. developers who don't cut their prices can in general look forward to selling few sections while those that move early can expect to benefit most from the prospective increase in demand). If few developers recognise the new competitive reality the upturn in new house building will be significantly weaker than the upturn in REINZ house sales. But even then we would expect higher net migration/population growth to play a part in driving an upturn in residential building. So even if developers in general stick to the peak asking prices for sections there will still be some recovery in residential building activity because it won't take too long to soak up the pockets of unsold spec houses. However, we expect enough developers to realise that to sell a significant number of sections will require new, lower benchmark section prices, so maybe the upturn in residential building consents could be surprisingly strong over the next year or so. _________________ * Rodney Dickens is the Managing Director and Chief Research Officer for Strategic Risk Analysis (SRA), which is a boutique economic, industry and property research company. Rodney produces regular free reports on topical issues and on specific property markets. Find out more about SRA here and sign up to SRA's free reports here.

They will have to cut

They will have to cut more than just the section prices!

by Iain Parker | 10 Apr 09, 1:09pm

Whew, that was a longy

Whew, that was a longy Rodney
This is the pertinent and most debatable point for mine;
"A law of economics most appropriate in the current situation is that market participants can't control both prices and volumes"

That statement I put to you is utterly refutable. The biggest participant of all can do exactly that. The majority stakeholders of all levels of the banking system and controllers of the Credit Creation Mechanism are also the majority stakeholders of every major multinational corporation, atleast when it benefits them to be, in created crisis they leave the depreciating freshair to worlds "savers". 97% of the money supply enters circulation as interest bearing debt. Money=Credit. The majority stakeholders of the banking system can control both price and demand by increasing or reducing the money/credit supply. There will certainly be many false bottoms as many people try and pick the bottom, but the true upturn will not come until the bankers decide just when they are going to cover their short and use the subsidiaries to buy back in at cents on the dollar. Leaving all those that brought in the bubble or where fooled by the false bottoms with residual debt.

by Kieran | 10 Apr 09, 2:11pm

You are right saying these

You are right saying these are uncertian times, what is happening in the housing market is unprecedented. House prices have never fallen like they are now, they have only ever increased so its all a bit new for most people. Alot of economists predictions are based on past trends which I believe can't be applied in the current unique situation.
It would be interesting if you did an analysis on the total stock of sections currently available in Auckland like you did in Whitianga to get an idea of what the situation is really like. I don't believe the building industry will ever get back to 25-30,000 dwellings/year during 02-05 that was an abboration caused by the swell of immigrants after 9/11 attack in 2001 so unless there is another shock like that, it will go back down to between 15-25,000/year depending on the population growth.

by Ray | 10 Apr 09, 2:41pm

realistically the only thing holding

realistically the only thing holding the housing market back now is bank lending policies,they have their cake and eat it as well, once they decide to ease off,the cycle will accelerate but they are so retarded they will worsen the problem as they always do

by wally | 10 Apr 09, 4:08pm

Ray Says, well what does

Ray Says, well what does Ray say? He expects the banks to stop being stingy and create the credit at low cost and without deposits etc etc. But Ray forgets the fact that these very same "know it all"newbee bank bosses replaced a generation who learned to be stingy for good reason.
It is therefore very likely that the newbees will be more concerned about keeping their bonus fattened bums on bank boss seats, than they might be about porking the economy with credit.
The thing holding the housing market back Ray, is the downside of several years of uncontrolled stupendously stupid credit fuelled bubble blowing madness by all involved, helped along by a bunch of fatheads in the Beehive who were more concerned about staying in power than being careful.

by Ray | 10 Apr 09, 5:38pm

exactly,to stay in power, do

exactly,to stay in power, do not upset the banks, the status quo is the banks, the banks the banks, they give easy credit until the citizens are hooked then tighten their fist squeezing the life out of them until their cronies take over, then release the grip for the next suckers [like a venus fly trap].

if you are in the trap, survive and learn the lesson and live to fight another day but under the present system you cant win until the 'fractional banking system' is destroyed.

Property is your only defense

by Steptoe (Steps) | 10 Apr 09, 6:45pm

Going back to early 70s,

Going back to early 70s, the choice of the new home owner was, cost of a current house or cost of a new home..
or the choice of a current home with garage, paths etc or new home without paths drive ....
Sure the best choice was a current but no one could afford ..
Today I believe a similar situation exists, except a new home these days , comes with drive, paths garage etc, plus a heap of other extras that could be added later, plus the bureaucracy as a % of building is way over the top.
During the boom and over inflated current homes, the new home building still remained competitive, now real house prices have dropped some 15+%...with many of the new homes from that period being sold below cost, just to free up a builders money.
If the building industry is to be stimulated it is not from banks etc but being able to build at prices the market can now afford...bureaucracy is a huge proportion of these costs.

We have plans made up ready to submit for a couple 3 bed homes 2x garage etc on our backyard...without the bureaucratic costs...or if reasonable, the builder would have the go ahead...but the costs to sell or even keep as rental just doesnt work out
So we are left enjoying the gardens, ponds, fruit trees...

by wally | 11 Apr 09, 10:16am

Ray, if 3 million adults

Ray, if 3 million adults were not blinded by the belief that come hell or high water they MUST own property, we would not be in the mess we are now in. So the best thing that can happen now is for property prices to follow the Japanese path into constant decline for the next 15 years. We need to burn off the insane investment madness.

Of course the banks and govt will and are doing everything they can to prevent Kiwis from "waking up". Because people are stupid and lazy and greedy, the banks will win.

Sad but funny isn't it? As you say, "survive and learn".

I wonder what political reaction there would be to the Armish people moving to NZ.
Probably the govt would say no way, on the grounds that a self help community presented a threat to "our way of life". Anyone for a Barn Raising shindig and a celebration of being debt free.

by Ray | 12 Apr 09, 3:50pm

wally, you can either own

wally,
you can either own it or rent it, your choice, from my point of view the more renters the better or maybe I would like more people trying to buy so that they increase my capital gain, my o my what a dilemma,heads I win, Tails I win.

oh well, beautiful day on the deck, I will have to refresh my G and T and contemplate to whole issue

Have a good life

by John Kelly | 12 Apr 09, 4:56pm

Immigration is unlikely to happen

Immigration is unlikely to happen at the numbers forecast unless the skill level requirements, and hence socio-economic levels, are substantially reduced. The immigrant market of a well-qualified European family, who sell their house, buy a couple of cars, a house on the coast in NZ, and still have some savings, has just disappeared.

The banks are playing things close to their chests, reasonably so. If things continue as they are, there just will not be the funds available to them to lend, at prices NZers consider acceptable. But even if they believe that, it is in their interests to talk as if the housing market is buoyant. Can you envisage a bank employee saying 'We think house prices will decline by another 10%, so don't come to us for a loan!'?

Whatever the cause of the March surge in housing sales, it is far too little data to base a forecast on.

One thing which few commentators seem to mention, but which does affect our family and many of our friends, is that there is a lot of money held by parents, who may start lending or gifting it to their kids to help fund the first home purchase.

Just off for one of those G'n'Ts.

by Iain Parker | 13 Apr 09, 7:05am

Wally - you say; Ray,

Wally - you say;
Ray, if 3 million adults were not blinded by the belief that come hell or high water they MUST own property, we would not be in the mess we are now in.

When including the place of residence os property investors and their multiple investment properties they own in excess of 52% approx 65% of the 1.5 odd million residential properties in NZ. Many of those owners are absenteee foreigners also.
It is hardly the cause of the average Kiwi battler seeking is freehold(freedom) before retirement. The so-called sofisticated investors that have monopolised the money supply of this nation and are setting about monopolising our necessities of live hope that the Kiwi battler remain serfs in a feifdom.

by rod | 13 Apr 09, 5:33pm

Wally- of the 1.5 million

Wally- of the 1.5 million residential properties in NZ only 35% have a mortgage on it, and you can asume that some of it is small business credit lines, I think you will find there are other reasons as to the credit crunch in Gods-zone, not peoples obsession with investment property, sure some are getting burnt (the minority) but let me tell you there are plenty of people like Ray and myself that will win heads or tails.

by nickk | 12 May 09, 10:46pm

I aqree with Ray, if

I aqree with Ray, if the banks took their foot off abit the market would surely kick back into gear, there are plenty of people who are ready willing and able to buy property and who can easily service a loan based on a 5 year rate. It cost me $26k to break some loans a few months back and now my cost monthly to hold all of my properties is under $1000 yet its getting very hard to put more deals together because of the very tight criteria. It's silly I had a deal not long ago at 20% below valuation the bank said no unless I put a 20% deposit in on the 80% figure yet if the same deal was 100% of the value and I secured 20% vendor finance on it they would be more than happy to do it so if effect I was being penalised for shopping well for a good deal-which deal is better?.
The Banks need to take some responsibility for giving out easy loan's and then pulling them out from under people.

by Steve Netwriter | 13 May 09, 12:18am

"Opinion: Why house building will

"Opinion: Why house building will defy the gloomsters and grow this year"

If we are going to sling mud with words like "gloomsters", then it's only fair to sling some back.

More "green shoots" from the rose tinted delusionists who keep posting this biased stuff.

Wouldn't it be good to read an article on here not full of words like gloomsters, scaremongers, and alarmists etc.
Do you know there is more than one point of view, and dismissing a point of view you disagree with with words like that does nothing but ruin your own credibility.

I think I might start a credibility count. Rodney and Nigel get to go on first.

"It is not unusual for the economists to be either slow at predicting an upturn or unduly pessimistic about the scale of an upturn."

Yes, and for them to completely miss the start of the downturn or to keep predicting "green shoots" just before it gets a lot lot worse.

Presumably if this article turns out to be completely wrong we'll get a retraction and an apology posted.

by Gibber | 13 May 09, 10:18pm

Pity that those "gloomsters" put

Pity that those "gloomsters" put out articles that get ignored by the "pollyannas" because they are so busy holding hands and singing "Kum ba Yah".

I took a break from my singing and have managed to find some links that may be of interest to other people.

http://www.moneyandmarkets.com/five-economic-storms-raging-now-2-33662?

and
http://www.ritholtz.com/blog/2009/05/financials-is-the-tailwind-becoming...
"Not so fast, say the railroad analysts at Credit Suisse, however (see above). Rather than review the entire 24 pages about rail car loadings, these opening paragraphs amount to a real time glimpse of U.S. economic activity:

"Bottom Line: Last week proved no different than the last 4: railroad carloads were down more than 20%. Week 17 saw a year-over-year volume shortfall of 21.6% - which is slightly worse than the 20.4% drop in Week 16.

"¢ The weakness is broad based - whether it be industrial, bulk or consumer related - every segment has shown precipitous declines in each passing week. Worse, we are one-third of the way through the second quarter and volumes are well below even the substantial declines seen in the first quarter (recall that 1Q09 industry carloads were down more than 16% year-over-year).

"¢ The railroad carload data are telling a very different story about the economy than one might surmise by looking at the S&P 500. Our concern is that the carload data are ahead of the curve; the light at the end of the tunnel that seems to be boosting stock prices may just be an oncoming freight train.

"¢ Volumes: All commodity types posted steep declines during Week 17. Specifically, we saw sharp drops in metallic ores and minerals (-52.6%), motor vehicles and equipment (-37.6%), non-metallic minerals (-26.4%) chemicals (-21.6%), coal (-18.0%) and intermodal (-17.0%)." (source: Credit Suisse)

As you can see, the type of rail activity that should be accompanying any improvement in economic activity is nowhere to be found. In fact, Credit Suisse indicates economic growth is stuck in reverse. Back before the Great Crash and Great Depression, legend has it that Jesse Livermore and his forward"“looking peers used rail car loadings to detect shifts in agricultural and industrial activity. Long before the Commerce and Labor Departments put out seasonally adjusted economic statistics, it was rail car loadings and even the Dow Transportation Average itself that were thought to be leading economic indicators. It's easy to see why, since lower shipments to intermediate and end users would eventually lead to lower orders for the manufacturers. The Credit Suisse team says the data they track shows shipment trends are weakening, not strengthening. "

and
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_FhoI2A4ZsM&refer=home
" Advanta Corp., the credit-card issuer for small businesses, may leave 1 million customers scrounging to find new lenders and debt holders facing losses of 35 percent after the company shut down accounts to preserve capital.

Advanta will cease lending June 10 after uncollectible debt reached 20 percent as of March 31, according to a statement and filings yesterday by the Spring House, Pennsylvania-based firm. The lender earmarked $1.4 billion to buy back securitized card loans with offers of 65 cents to 75 cents on the dollar. "

So looks like like small business credit is drying up.

The uncollectable debt rate standing at 20% is an interesting stat

by Steptoe (Steps) | 14 May 09, 12:10am

It was the gloomsters who

It was the gloomsters who predicted the crash...Oh they are the ones who also saw the boom, and cashed in early...sitting sipping a nice glass of red wine in front of the fire.
Is it not strange how those who are doing a little better than most are also the ones who are the recipients of -ve name tags...by those who have more reason to 'shout ' the loudest.
And it is the same "gloomsters" who are predicting "a GOOD time to buy in a couple yrs"...just not right now..
It is amazing how stupid the people are who shout the loudest, and have to resort to insults to those who disagree with them.....
Hmmm are these educated adults, or is the behaviour seen in school yards?

by Gibber | 14 May 09, 7:20am

Some more links http://www.bloomberg.com/apps/news?pid=20601087&

Some more links

http://www.bloomberg.com/apps/news?pid=20601087&sid=aAVTaAOx8t3g&refer=home

"May 13 (Bloomberg) -- Retail sales in the U.S. unexpectedly dropped in April for a second month, indicating that rising unemployment is prompting consumers to conserve cash. "

http://www.bloomberg.com/apps/news?pid=20601087&sid=aWODuis.QTU8&refer=home

" May 12 (Bloomberg) -- The U.S. reported the first budget deficit for April in 26 years, recording a shortfall in the month that usually sees a jump in individual tax paymentsbefore the Internal Revenue Service's mid-month deadline.

"When the government can't post a surplus in April, you know things are dire," said Richard Yamarone, director of economic research at Argus Research Corp. in New York. "It's going to take a very long time until we see anything close to a balanced budget."

The excess of spending over revenue climbed to $20.9 billion, compared with a surplus of $159.3 billion in the same month a year earlier, the Treasury said today in Washington. For the fiscal year to date, the shortfall totaled $802.3 billion, more than four times the year-to-date gap of $153.5 billion in April 2008.

The recession that started in December 2007 is choking off tax revenue

by SimonD | 14 May 09, 12:39pm

Well the "gloomsters" can put

Well the "gloomsters" can put their money where there mouth is now, at least as far as the aussie real estate market goes. Derivatives are being launched as we speak. I can ear the crys of go short from here...

http://www.stuff.co.nz/business/world/australia/2410314/Betting-on-the-h...

by Steve Netwriter | 14 May 09, 2:00pm

<blockquote>Pity that those â€œgloomstersâ€ put

Pity that those "gloomsters" put out articles that get ignored by the "pollyannas" because they are so busy holding hands and singing "Kum ba Yah".

I took a break from my singing and have managed to find some links that may be of interest to other people.

LOL :)

by andy hamilton | 14 May 09, 2:22pm

Perhaps someone forgot to tell

Perhaps someone forgot to tell the building companies concerned - they appear to still be going pop at a fair rate of knots:

http://www.nbr.co.nz/article/aucklands-mitchell-homes-liquidation-102293

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