The housing market is bearing up surprisingly well; the real question now is whether it will be 'left alone' or not after the election

By David Hargreaves

I could, and probably will, be accused of seeing silver lining where there is none - but to me the latest REINZ housing figures for August looked surprisingly resilient.

The bald figures in terms of activity - houses sold - looked reasonably horrible. Yes, volumes across the country down 20% on the same month a year ago. Auckland's volumes down a little more than that.

But how do the figures compare with the run-up to the last election?

Courtesy of National following a well-used playbook in how to conduct an election, this election will take place almost exactly three years after the last one.

The 2014 one happened on September 20. This one's happening on the nearest equivalent Saturday, the 23rd, of course.

What that means is we can compare quite nicely how the housing market has fared in the run up to this election with how it did in 2014.

Now we can compare the performance of the housing market then and now okay, but the elections themselves are not comparing apples with apples.

It seemed to me that David Cunliffe (remember him?) was (or at least should have been) preparing his concession of defeat speech from early in 2014, such a mismatch was the contest between he and the much-cleverer-than-he-portrays-himself John Key.

A freeze

But notwithstanding the apparent (I thought) inevitability of that election, the housing market did go into something of a freeze - before champagne corks popped and it was all on again for young and old after National were confirmed in the posh seats in Parliament and the status quo resumed.

This year we had seemed to be heading down a familiar route - till the noisy arrival at the podium of Jacinda Ardern. And now it's tough to pick who will win. It's anybody's guess what the outcome will be, but I reckon the best guess is that we won't have a clue on Saturday night/ Sunday morning who will be able to form a government. Which might not be good for the housing market. More on that in a minute.

So, in 2014 August saw us building up to an election that National was in pole position to win, August 2017 saw the sudden upsurge of Labour Party support, turning the election campaign upside down.

You would imagine that under such circumstances the house selling market might have shrivelled and gone away. But in fact, the figures in August 2017 are roughly comparable - in terms of sales activity - with those in August 2014.

In terms of the whole country, in August 2014 the REINZ reported 5,481 sales nationwide. In August 2017 there were 5,896 - so actually 7.6% more.

In Auckland

What of the biggest market, Auckland? Well, it WAS down. In August 2014 the largest city recorded 2,136 sales, last month there were 1,808 - so, a drop of 15.4%, which is a fair bit.

But the close nature of this election is not the only difference this year compared with 2014, however,

This time around the RBNZ LVR restrictions are much heavier - with the 40% deposit rule for investors having been chucked on top of the 10% 'speed limits' that were in place in 2014.

Banks have had it tougher attracting deposit funds and, along with some capital constraints stemming from Australia, have been 'rationing' credit.

And certainly anecdotally the flow of foreign capital into New Zealand houses has dried up for now.

With all the negatives, or 'headwinds' as the economists like to call them, it is amazing the housing market is not currently marching backwards at 1,000 kilometres an hour under the weight of these combined forces. The fact it is not suggests that the underpinning demand remains there - probably because the supply of new housing is not keeping up.

So, I would still not rule out the possibility of a reasonably strong resurgence in the market next year. But it does depend on a lot of things.

Forming a new Government

How quickly will we settle the composition of the next Government?

Will the next Government set about a (convincing) programme to increase house building?

Will foreign buying resume in force?

What will happen to the banks' approach to lending - particularly for new builds?

Will the RBNZ loosen the LVRs policy? Indeed, will the RBNZ, with a new Governor to be installed next year be put under pressure (as has already seemed likely) from the new Government to take a more hands-off approach?

Unless there's a dramatic reversal in immigration, the shortage of housing in Auckland is going to continue getting worse in the short term. That actually gives a genuine reason why prices should go up.

Then there's offshore buying. It's possible we'll get a new Government that intends to put in place a policy stopping people offshore from buying existing houses.

A difficult policy

I reckon given our existing trade agreements with, particularly Asian countries, once proper investigation is made it will be found that implementing such a rule will be incredibly difficult.

The interesting thing is, if a new Government comes in with such a policy but then can't implement it for a couple of years (which I think is highly likely) then this could actually encourage a flurry of buying activity to beat the implementation of the rule.

There's plenty to ponder on.

There could be a lot of uncertainty in the short term - starting as soon as this Sunday if we don't immediately know who is going to form the Government.

And then once we've got the new Government, will there be policies that disadvantage the housing market?

Wait and see

It all suggests there's going to be some serious 'wait and see' through till the end of the year. Would there be any chance of some serious Government intervention in the housing market that would lead to ongoing depressing of prices?

Nothing can probably be ruled out. I think it's more likely though that the market will be left to its own devices. And I think LVRs will be eased. And I think there's no chance now that we will see debt to income ratios - not in the foreseeable future.

So, assuming no curve balls are thrown, once people have got a greater sense of what policies will be in place and once we are clearer on issues such as new leadership of the RBNZ and the likely future direction on things such as LVRs, the underpinning demand/supply imbalance is likely to show again in the housing market. Interest rates should continue to be very supportive through next year so, even though borrowing ratios are looking high, interest rate serviceability is not very high historically at all.

I would say still therefore that the chances of a reasonably strong resurgence of the housing market from mid-2018 onwards are quite good.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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83 Comments

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David Hargreaves, a meaningful analysis would look at how quickly data would realistically show a market slowing down when it faces "headwinds".
You say; "You would imagine that under such circumstances the house selling market might have shrivelled and gone away" and " it is amazing the housing market is not currently marching backwards at 1,000 kilometres an hour under the weight of these combined forces" but fail to give any examples of when ANY housing market has ever done this, let alone the NZ housing market.

It is often observed that when indeed a housing market does crash, it takes between 2-4 years from peak to trough so why would you, or anyone, for that matter, be expecting dramatic data this soon? And why does the data you do present, suggest resilience? Can you suggest a similar housing market decline that went from peak (March) to a notable decline within 5 months?
My reading of housing market history is that price price drops are NOT sudden so I am wondering why you are suggesting that they would be?

Elections impact volumes little. Auckland was selling 2558 properties to one another in June 2002, 3048 in August 2005 and 1808 in August 2017 , that is 41 percent fewer. Of the last 8 elections the 3 year Auckland , median price peak has occurred in the preceding March with the exception of a December 07 peak prior to the November 2008 election ( in the middle of the GFC ), and November 2010 prior to the November 2011 election ( banks at this time started cashbacks , ipads and grocery vouchers because credit growth had stalled) . Five of the peaks were less than 3 percent variance. The largest fall of course is the 2017 peak to month prior to election of 8.3 percent. In nominal terms the fall is 3 times that of any preceding fall. And we have historically low interest rates, a preponderance of interest only mortgages and a nation and a city more indebted , with fewer households holding that debt than ever ever ever before. Oddly enough New Zealand should now raise interest rates.

A useful and analytical contribution, thank you. For those of us who are doom-sayers the market has been remarkably resilient. However, I think the problem is that house prices have built in too much expectation of future population growth. The reality is that at current pricing levels a lot of industry is not sustainable in Auckland. What I believe has happened is that for a (relatively small) change in rentals the number of people per household has gone up. I also wonder if the influx of overseas money was also because house prices were going up - and when they stop going up Auckland house isn't a good investment.

The thing to remember is that a 10% increase in house prices when the house price/income ratio is 5:1 moves it to 5.5:1. However, a 10% increase when the ratio is 10:1 moves the ratio to 11:1 - well beyond sustainability. This means that the room for further price increases is very narrow.

A useful and analytical contribution, thank you. For those of us who are doom-sayers the market has been remarkably resilient.

Useful? In what respect? I see nothing more that that the well-worn ideas spread by talking heads / experts rehashed for allotted space.

And as for analytical, the only technique I see is comparisons with the recent past.

Hell, even Ashley Church posted on Linkedin making inferences about the the state of the market from the outcomes of The Block. It's the kind of baloney one would expect from the mainstream media. That being said, media events such as The Block are probably useful insights into human behavior.

JC, it's unfortunate you "see nothing more that that the well-worn ideas spread by talking heads / experts rehashed for allotted space." David wrote a very good, neutrally balanced article and his comparison with the previous election is new and informative

How is this article "useful" to you? What have you learnt? You may feel emotionally satisfied. Anything else?

I have learned that sales volumes in NZ are actually a little higher in 2017 compared to 2014 whereas sales volumes in Auckland are lower this year compared to 2014. This is not what I expected, so yes I have learned something

So you learnt sales volume was lower in a pre-election month 3 years ago and probably statistically insignificant, despite your expectations.

What is meaningful about that?

Not going to waste any more time on you JC

Most likely because you have nothing meaningful to add from your observation.

Our population has gone up about 7% since 2014 so for a true comparison you need to add the 7% to the 2017 sales.

The Auckland market is holding up only through high withdrawal of properties from the market. Even B&T said this last month I think it was. If every property taken to market was being sold, prices would be tanking. So for every vendor who has taken a property off the market, the question is, when will they put it back on the market?

More recently, B&T has talked about this big surge of listings they have signed up for Spring. They should be hitting the market any week now.

No one should be expecting any differently at this stage!!! No housing market correction ever drops in free fall this quickly. Look at any chart of housing market cycles and you will see it takes years from peak to trough. And in many markets, the peak is reached and then it bobs up and down for 6 months, mostly static before prices start actually dropping.

I would NOT be expecting prices to be dropping through the floor at this stage, even if this IS the beginning of a correction (which IMO is also too early to call). This is a very premature article.

"Look at any chart of housing market cycles and you will see it takes years from peak to trough"
Can you please post such a chart for New Zealand gingerninja, thanks

An interesting challenge. I previously looked at data for the GFC. I recall Wellington fell 13% in six months, then resumed the upwards trend. I couldn't see any long term downtrends but I'm sure someone will find a way to manipulate the data. Likely with as much believability as the link between divorces in Maine and per capita margarine consumption http://www.bbc.com/news/magazine-27537142

And what did the market look like for the 6 months before it began to fall?

Hi Yvil,

Here is a chart;

https://www.rbnz.govt.nz/-/media/ReserveBank/Images/Speeches/2013/549147...

https://www.rbnz.govt.nz/research-and-publications/speeches/2013/speech2... (and this is to the overall report)

As you can see, it shows prices dropping from Q1 2007 till Q3 2009.

I don't know why you couldn't just google image search any property market in the world to see the same pattern. It's the norm.

Thanks for the chart gingerninja, it shows indeed that NZ had negative returns for 1 year, 2008-2009 up to minus 8.5%

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David, sounds like you're expecting then that if - for example - National return to power then it would be up to the Reserve Bank (under pressure from Bill English) to remove its limits, banks to lend again, and then it would be up to investors domestic and foreign to push the buying volume again?

With the inability of significant volumes of young Kiwis to come into the market, that will then mean it'll be dependent on investors buying from each other, and imported buyers in the form of wealthy migrants and foreign investors.

The question then will be - why will schoolteachers, firemen, ambulance drivers, nurses etc. etc. choose to live in Auckland anymore?

They won't. Police will be based out of Hamilton and drive into Auckland when called out. Itll be the wealthy few and gang members living in Auckland.

Hey, I think I have seen that one .. with Dwayne "The Rock" Johnston in it.

Could be, but....

Up another 10 per cent - or a market crash? It depends on who you ask...at the bottom end of predictions is the long-time housing market bear Capital Economics, which expects prices to rise by 3.5 per cent this year. At the top end, one online estate agency is predicting rises of up to 10 per cent. Cast your mind back 12 months. This time last year, there was no shortage of predictions that prices would fall.......
(From " Is 2007 the year in which house prices will finally crash?" and the answer was....yes)
http://www.independent.co.uk/property/house-and-home/is-2007-the-year-in...

Scary how much of this might just as well be from an article this year!

Yes, and despite the fact that this was the GFC and UK banks actually had to be bailed out, housing prices still took from Autumn 2007 (peak) till Spring 2009 to reach bottom. And the banks weren't bailed out till 2008.

It's really premature in any housing market cycle to be suggesting that prices are resilient. House prices don't drop quickly, even in a global financial crisis, so we shouldn't be expecting fast price drops now either.

Exactly ginerninja - this 'resilience' could just be the beginning of the end - or it could be the start of the beginning of stagnant prices for the next.....(INSERT GUESTIMATE HERE....).

If this is a bubble and it does deflate - its going to take years to do so.....given the unprecendented growth we've had for 15 years or so, I see no reason why the market couldn't fall for the next 5 years or more....(espeically if we experience a recession for whatever reason and reversal in immigration - why would young people stick around if people are losing jobs and incredibly expense house prices that they still can't afford are falling?)

Yup exactly. It could be death by a thousand cuts over 5 years, a decade of stagnation, could be the verge of a monumental crash that we will be talking about as a cautionary tail for decades to come. OR it could be that NZ economy will suddenly take off, for some yet, unknown reason, wages will soar. It's just too early to say.

I just think it's very premature to be talking about market resilience when you shouldn't be expecting anything but, at this stage in any housing market cycle anyway.

David is talking about Real Estate in NZ, not in another country

And NZ housing market has never behaved any differently during a correction either. Price crashes simply do not happen quickly.

YVIL,

this chart for NZ shows almost the exact same time frame in NZ

https://www.rbnz.govt.nz/research-and-publications/speeches/2013/speech2...

All markets are interlinked especially when prices have been driven by a common source, in this case China. Well all know that.

Thanks David ... The housing market is indeed showing a bit of consolidation and it would either continue a bit more of the same until a new Gov is formed, then it might take a bit of direction depending on who will be in power .... generally people will get sick of talking about it after the elections ...
However, I dont expect much to happen effectively to this market until we have some good numbers in New Supply trickling in ... the demand is still there and with 3 year fixed interest rates under 5%, the current prices will become the new Normal - any relief on the borrowing side will see the market take off again. Summer is around the corner !

What sort of yield are you talking there Eco Bird?

Hi Eco Bird,

I suspect you are broadly correct with your comments above.

In my view, the housing market will likely strengthen a bit through 2018 - especially if Labour holds power.

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I think it's more likely though that the market will be left to its own devices

Wishful thinking - it's never been a free market: Let us count some of the ways it Ain't a market:

  • Dopey zoneration policies by economically clueless TLA's which serve to foobar the price of the land under them Hooses
  • A cosy Building Materials Duopoly, untrammelled by ComCom, hostile to new entrants and highly protective of their own cartelised patches
  • Consents, and other regulation, subject to local brown-cardy-staffed monopolies which have yet to recognise that Time = Money so have complete freedom to inject Time and Modest Fees into every activity under their baleful purview
  • A building industry composed of thousands of two-bit builders, clonking up houses in a manner which would not be unfamiliar to a 19th century carpenter, all vying for the same few high-end-of-market jobs, because that's where the munny is, leading to highly inelastic supply at t'other end
  • A regional price floor slipped in under all house prices by economically clueless Gubmint schemes like Welcome Home Loans (criterion - can you Fog a Mirror?) which ensures house prices - new or old - are sticky on the downside

No doubt, common taters can think of more ways it ain't a real 'market'.....so 'it's own devices' has, shall we say, a very particular meaning. It means, being left in the gentle claws of the Opolists, rent-seekers and ticket-clippers.

Wishful thinking - it's never been a free market: Let us count some of the ways it Ain't a market:

Nicely expressed. , being left in the gentle claws of the Opolists, rent-seekers and ticket-clippers captures it wonderfully.

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And don't forget the Accommodation Supplement - a $2 billion annual (and growing) taxpayer subsidy to private owners in the housing market.

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Anyone else find it bizarre that National supporters lose the plot over Labour's tax intentions and yet we find ourselves having to pay $2 billion a year in housig subsidies under the current government and their failure to tackle the housing crisis? Imagine what we could do with $2 billion dollars (annually)......the mind literally boggles thinking about that....

You mean the Auckland Housing Crisis that has occurred under Len Brown (LAB) and Phil Goff (LAB), hard to figure why anyone trusts Labour on housing...

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Indeed, I can't imagine why they allowed all those thousands and thousands of immigrants into the country, I cant imagine why they allowed foreigners to buy houses, I can't understand why they didn't put rates through the roof to provide all the extra infrastructure for all these new people. Oops, those were the government's jobs. Nice try.

No, they just cut of land supply and shoved housing costs through the roof. Slowed building to a crawl and made people homeless.

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And don't forget, a considerable number of those in receipt of the supplement will be foreign landlords. I wonder if there is another country in the world that pays out welfare to foreigners.

David is talking about the Real Estate market, Waymad your points refer to construction, whilst they are linked they are not the same

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Is it really in our interests to go back to the circus in the Auckland housing market?
Should Labour gain power, is there any reason why they cannot slap a 500% stamp duty on non NZ citizen purchases until they sort out things with our trading partners.

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Exactly Chris-M. Or Labour could implement their prefered foreign buyer ban while they go through the formal process of ratifying it. If any foreign power disputes the legality of this interim approach -then add in a 500% stamp duty. Bugger negotiating for something thing that Korea, Australia..... already have. Let's just do it. Let's not be wimpy scaredy cats......

South Korea might not exist in 2 weeks time so why worry?

If Trump pushes the button they'll be an Island called "Korea".

No it will be a new lake mate, not an island when the crater fills up with water.

And all this time I thought you were the caring type IO

Perhaps the TPP should include a line for trade of nuclear arms, including free air delivery?

We need to be able to house our own people first and give them the opportunity to buy a home in their own country- they have priority over foreign property speculators from China or Korea (or whatever other country you want to name)....

Chris-M, you ask: "is there any reason why they cannot slap a 500% stamp duty on non NZ citizen purchases"
yes, there is, it's called trading agreements between countries, like we sell "them" dairy products, wine, fruits & veges etc and we can't just "slap 500% duty on "them"

There's a distinct and significant difference between milk and houses Yvil - there is absolutely no reason why NZ should be a free-for-all housing scramble.

The sentiments expressed here are not dissimilar to Trump's view on Trade Agreements.

Is Trump the new Godwin?

That shark was jumped yesterday when someone here compared National to developments in the 1930s.

Not to mention the constant name-calling of any left-leaners as "communists".

NZ is certainly an increasingly popular country to own property.

I believe that's the fundamental, underlying reason why property prices are holding well and still increasing in some locations - despite the major upswing of 2014-16.

It's more of a structural phenomena than the typical cyclical trend.

Property ownership/investment in desirable NZ localities (e.g. Wellington & Auckland) is a good bet for the future. But don't ignore the regions. Some, like Palmerston North, are well placed for strong growth.

That is unusual popularity when home ownership rates are collapsing

As mentioned above. We sell our milk to them, we also sell them our land and our future.
Its an amazing deal, unless you live here, then it looks a bit on the piss.

On Saturday night we may not know how many seats Labour, National and the Greens will get in parliament.

Last election the Greens gained an extra MP and National lost one from the special vote -the so called -London effect.

But this time around there could be the advance non-enrolled special vote effect. All those young folk encouraged to do a two for one, this week and last, where they enroll and make an advanced vote at the same time will not be counted on the 23rd. They will be counted later with the other special votes.

I reckon it will take the full two weeks until all of the Special Votes are counted to know. Here's a good summary explanation of what to expect;

Just when will the fat lady start singing this election?
https://www.pundit.co.nz/content/just-when-will-the-fat-lady-start-singi...

In 2014 the election date was 20 September. The govt wasn't officially formed until 19 November.

Great, well-balanced article David ! Congratulations on writing a neutral, level-headed piece on property based on facts rather than hype and beliefs

Agree that DTI’s will not come in, LVR’s will move back up to 90% for owner occupied and 80% for investors nationwide as the Auckland market cools 10-20% or so in some areas. That should make it easier for first home buyers to get into the market, but only the ones that are positive and don’t whinge.

Banks will probably apply their own LVRs in an unsteady market. They know as well as most of us do, that the real reason the market has stalled is the lack of foreign buyers, and the most influential of them aint coming back in the near future

With all the negatives, or 'headwinds' as the economists like to call them, it is amazing the housing market is not currently marching backwards at 1,000 kilometres an hour under the weight of these combined forces. The fact it is not suggests that the underpinning demand remains there - probably because the supply of new housing is not keeping up.

No, this is simply a cost inflation scenario. Auckland is high cost (because of land supply cuts) and therefore it will remain high cost.

People's reaction to a falling market follows much the same path as the grief process, at the moment there is lots of denial around - stage 1

There is a lot of denial indeed

Auckland property is high cost, low value with poor yield expectation for the next 25 years. It is a bad investment that will underperform the rest of the country, until costs are lowered. But since Phil Goff is fully committed to slashing Auckland land supplies, the price will remain elevated.

Costs are not going to be lowered, in fact they will only increase as Phil Goff is building hugely expensive sprawl around every town in the region, except Auckland City.

Given Auckland's population growth (50,000 people per year) and inadequate supply of new dwellings, it's hard to see house prices not increasing.

Agreed !Hard to see house prices not increasing. Great comment!

Oh look, TTP has had a baby, a bright one as well, not yet 24 hrs old

"If" Auckland can continue to attract high population growth. But everywhere in the region builds faster than Auckland, providing extremely adequate supply of new dwellings and commercial space just down the road or across the ditch. It becomes a very big "if" Auckland can attract the next wave of people and jobs.

Housing...crux of the election because shelter is a basic need along with clean water. Basic needs for tax paying kiwis, or objects of foreign and domestic speculation and record bank/foreign owners profits.

Vote accordingly. Seems pretty obvious really.

This election is different, its a close race with lots of uncertainty and the likely prospect of having to form a coalition which will freeze the market. As pointed out on the radio today however is that wasted votes on the Greens when they don't hit 5% and wasted votes on TOP will see National get back in with as little as 43% of the votes and they will NOT need NZF.

Kind of strange no political party has suggested no longer paying tax on your bank savings, they would get my vote straight away. Can you all remember when your bank savings were not taxed ? then they started taxing it but you could claim it back in your tax return ? then they just canned that and took all that tax and kept it ?

9 year cycle 2018/2019 soft years market next up leg starts 2020 look over graphs easy to see and easy to make money once you see and believe it been following this for 40 years not that complicated !

Firstly I think it is more likely to be 2020/21, but either way Auckland went backwards in 2016/17. Something else is happening.

Auckland has broken with the cycle, which means you'd have to get out of Auckland to make money.

Think and vote

Labour’s ban on foreign speculators purchasing existing houses will be based on the Australian policy. Under our policy only citizens and permanent residents will be able to buy existing homes. The ban will also apply to foreign trusts and foreign corporations. Removing this speculative demand from the market will help stabilise prices and give Kiwi families a fair shot at buying a place of their own.

http://www.labour.org.nz/cracking_down_on_speculators

I think the biggest event that is unfolding that will effect our housing market is the demise of the 'Petro Dollar'.
The USA's wars ,invasions and attacks have all been against countries pulling out of the Petro Dollar.
The war on terrorism is a war on these countries the so called 'Axis of Evil'.
China and Russia are starting to step up and stop USA aggression backing Syria and Iran.
Who knows what will happen to Venuezela now that they have stopped trading their oil with the Petro Dollar. They are a bit far away for Russia or China to offer military support.
USA is likely to come up with some hair brained reason for them to have a military intervention and get them back on track trading with the Petro dollar.
Even the Saudies are starting to sidestep the Petro dollar. The USA economy will have a major correction as they lose the status of being the reserve currency of world trade.
If this happens, It could be worse than the GFC.

If you are in the heavily specilated dgz area in a single dwelling zone, and labour/nzf policy closes down immigration/foreign speculation, you are about to take a bath. If you have be rezoned for more intensive development you will hold up somewhat subject to council being brought to heel. Otherwise is musical chairs in a big way and you still standing up.