Housing supply pressures, low rates of return for term deposits, share market volatility, and the prospect of house price gains have contributed to the latest pick-up in the housing market, ASB economists say.
The pick-up was likely to lead to a 4-5% rise in house prices over the coming 12 months, although future gains would be constrained by the still-high starting point of prices compared to incomes and rents, they said.
Rents also had room to rise, with the fundamentals pointing to a "moderate increase" in rents.
It's alive (again)
In ASB's latest quarterly economic forecasts, chief economist Nick Tuffley said recent evidence pointed to New Zealand's housing market coming back to life.
"Sales turnover is lifting as demand starts to rise, albeit from low levels. Low interest rates continue to improve the affordability of housing and several years of falling or stagnant prices may have created significant pent‐up demand," Tuffley said.
Signs that prices were heading upwards again were also sparking the appetite of investors; housing was reported to be the most preferred investment in the recent ASB investor confidence survey, he said.
However, demand would remain constrained by still‐high levels of household indebtedness and continued net migration outflows. In addition, employment growth had recently moderated outside of Canterbury.
Supply very low
The supply of housing on the market was now at a very low level, Tuffley said.
"New listings have been low, although we are seeing tentative evidence that listings are starting to respond to rising prices. Evidence also suggests that the drop in residential construction during the GFC has only exacerbated the supply problem. The Christchurch earthquakes have also significantly reduced the stock of habitable properties in that market," he said.
The result of the recent uptick in demand and historically very low levels of supply had been an appreciation in prices.
"Unsurprisingly, price increases have been largely confined to the regions where supply is most constrained, namely Auckland and Christchurch. We have seen a slow pickup in residential building consents recently, suggesting supply pressures will start to alleviate, particularly in Christchurch," Tuffley said.
"While increased rebuilding activity in Christchurch is undoubtedly a good thing to see, it will exert pressure on construction resources elsewhere in the country. Over the next few years we will see a massive construction effort in Christchurch that will soak up much of the industry’s capacity and therefore place upward pressure on costs. That may reduce the incentive to build in other regions, keeping supply constrained," he said.
Aversion to debt may dissipate
While lower interest rates had, over the last five years, increased the affordability of housing, at the same time households had become more cautious in their approach to debt and opted to deleverage, or pay down debt.
"Becoming net savers makes sense for households in a weak and uncertain economic environment and when capital gains in the housing market are limited," Tuffley said.
"Now, though, with house prices once again starting to head upwards (and expectations of higher prices becoming embedded), some of that aversion to debt may start to weaken. Debt levels and debt servicing costs could start to climb back towards their previous peaks, particularly given current low interest rates," he said.
In saying this, the RBNZ would likely forestall such a repeat. And banks do take into account the likelihood of higher interest rates in the future when assessing affordability."
Favourable tax system
"From the early 1990s through to 2007 there was a long‐term decline in rental yields. During the 1990s the decline was most likely driven by declining inflation expectations and falling trend interest rates. During the 2000s, of course, we saw higher interest rates and higher inflation expectations, but rental yields fell further," Tuffley said.
"Both rents and house prices were rising during this period, but house prices increased by much more (hence lower yields). Fundamentally, an undersupply of housing was driving both rents and prices higher as supply struggled to keep up with strong net migration inflows. However, there was likely another factor underpinning the divergence between rent and house price increases – capital gains," he said.
"Rents are somewhat constrained by income levels, whereas house prices can be bid up by the expectation of capital gains. The expectation that they would earn capital gains also meant that property investors were willing to accept lower rental yields. The tax system also favours capital gains over other (taxable) forms of income."
Rents have some room to rise
Since 2007, rental yields had held fairly steady. Recently, undersupply had pushed rents upwards, but at a similar pace to the appreciation in house prices.
"Rents are currently about level with their long‐term average in relation to incomes, which suggests they do have some room to rise before reaching unsustainable levels. A continued undersupply of housing would produce upwards pressure," Tuffley said.
"Lower capital gains than in the past and a tax system less favourable to owners of rental property may induce investors to raise rents or seek properties with higher yields. On the other hand, the current environment is one of low interest rates and low investment returns across most asset classes. As long as that remains the case, upwards pressure on rental yields from investors may remain subdued. On balance, the fundamentals point towards moderate increases in rents," he said.
Could be faster price gains
Overall, the housing market was definitely coming back to life.
"For now, the dominant feature of the market is the low level of supply, particularly in Auckland and Christchurch. The pace of sales is picking up and a return to steady price increases may well boost demand further still," Tuffley said.
"While the economy remains soft, though, price increases will likely remain moderate, around 4‐5% over the next year. But slower than anticipated building or stronger investor appetites could easily result in faster price gains," he said.