David Hargreaves says the first half of next year should give us a much clearer idea of which way the housing market will go

By David Hargreaves

The approaching end of a year is always a good time to collect thoughts and think to the future in terms of what it might bring.

And as far as the housing market's concerned, the end of this year and into next is looking quite crucial.

I wrote a little while back that Spring was looking pivotal for the market and thus far it does seem to be carrying mostly positive messages. 

Ah, but are these messages portending just a short period of buoyancy as some are suggesting, followed by a downturn? Or the start of another upturn?

It is useful to consider what the issues are as we go into next year. That is: What needs to happen for some of the bigger issues to be resolved. And where this might lead us.

In that sense, I think the first half of next year will give us much greater clarity of the direction the housing market could take for really the next several years.

KiwiBuild

Very important in all this is how KiwiBuild pans out.

This is a high stakes policy for this Government. If it is seen to be failing on this one then that might be sufficient, on its own, for Labour to lose the election.

The National Party Opposition, when it's not going on and on and on about taxes that haven't yet been invented that Labour's apparently going to invent, has been spending the little time remaining attacking KiwiBuild. 

And it's an obvious target and clearly it's proving much harder to get the beast up and running than Phil Twyford thought, or at least indicated.

Personally  I think the proliferation in various places and on various websites of running totals and 'trackers' etc gauging the perceived success or lack so far of the policy are a little melodramatic and a lot pointless. Did anybody really think that 100,000 houses could be just conjured out of the mist immediately? There was always going to need to be a lead-time.

But Twyford has now set specific targets and people will want to hold him to those. So first up, will be achieving 1,000 houses by the end of the June financial year. Yep, the end of the first half of next year.

It's fair to say then that come July 1 next year we'll have a much clearer picture of whether KiwiBuild in its current form is a starter or not.

Confidence lacking

The fact that such a relatively small number of would-be KiwiBuild buyers have proceeded through all the bells and whistles to pre-qualify suggests to me there's a certain lack of confidence in the whole scheme at this stage.

So, the old 'runs on the board' will be important. Therefore that first target needs to be achieved. And I would suggest it needs to be achieved with some comfort and with signs that the whole thing is getting a head of steam up (as it would need to if we are talking about 12,000 houses a year ultimately).

If KiwiBuild is getting traction by the middle of next year, the next thing we need to observe is whether the KiwiBuild houses do actually seem to be adding to overall supply - or whether they are starting to merely replace other private sector-led projects. 

That's my key concern. The whole point of KiwiBuild is that it does make a substantial dent in the perceived under-supply of housing.

There is a risk, particularly through the 'off the plans' part of KiwiBuild - effectively the underwriting of private sector developments - that the Government simply becomes the prime developer of housing in the country and there's no real overall dent in the shortage. (And remember, 800 of those 1,000 first-year houses are supposedly going to come through the off the plans part of KiwiBuild.)

If however, we do see by the middle of the year that other housing developments outside of KiwiBuild are still going ahead and KiwiBuild is doing okay - then this starts to give some confidence that the shortages, particularly in Auckland can start being alleviated.

House price expectations

Obviously that's then got to have some impact on house price expectations. It does remain the big question what happens if you can manage to really meaningfully start reducing the shortfall in houses. Does this see house prices generally stabilise? Or will they drop? Will they drop by a lot?

But the flip side though is what if KiwiBuild, come the middle of next year, is struggling to reach the required numbers? Or, alternatively, what if it's becoming clear that KiwiBuild is simply taking on most of the existing developments in the pipeline and therefore not providing an extra lift to housing supply? Well what would this do for house prices?

If the confidence is not there that the shortages of houses will be reduced, then maybe this would put upward pressure on house prices again. Off we go again. I would still not rule that out, even though I know that's not what economists generally say. 

At this point it's worth bringing immigration into the mix. The numbers as we know have been reducing from high levels. But I think contained within those latest figures from Stats NZ are signs that the numbers of people leaving the country may have somewhat plateaued, although numbers coming in are starting to moderate too. 

I have been of the belief for some time that we would see a sharp upturn in the number of Kiwis heading to Australia and a continuation of the recent high numbers of non-NZ citizens leaving the country.

But there is a suggestion within the detail of the latest Stats NZ figures that perhaps such might not quite be the case and it may be that the net numbers of immigrants coming in will continue at somewhere above 50,000 a year for the foreseeable future. For the record, the seasonally-adjusted monthly Stats NZ figures are suggesting that annual immigration's currently running at a level of 56,000. 

That's still a lot and if it holds there then we are sure going to keep needing plenty more houses. And in such an environment, it's difficult to see house prices flagging - particularly if KiwiBuild is starting to look shaky.

Again, the first half of next year will give us a clearer picture on immigration and whether there will be an upsurge, particularly in Kiwis leaving - since this generally starts to happen in earnest toward the end of summer as winter looms.

So, KiwiBuild and immigration levels between them will be very significant influences on what happens in the housing market next year.

The mortgage market

What happens in the mortgage market will also be significant.

We have seen banks competing strongly for market share in recent weeks. The outlook for interest rates is that there's unlikely to be any moves by the Reserve Bank - either up or down - next year.

So, in all probability the low levels of interest rates are here for the next 12 months at least and that will remain conducive for the housing market.

If the banks continue to compete with the kind of intensity seen in the past few weeks then this will be conducive too - because people will get good deals.

The Reserve Bank's view of the housing market becomes crucial too. It of course will be deciding on Wednesday the 28th whether or not to further relax the high loan to value ratio (LVR) lending limits for both investors and owner-occupiers.

If it does - relax them, that is - then this should also give a boost to the housing market.

And i guess it's worth adding here that if the RBNZ decides against such a move now, it WILL in all probability then relax the LVRs when it has its first Financial Stability Report for next year, which will be in May.

Then there's the economy. Despite dire confidence levels, it's holding up okay. And there's no sign (in fact very much the opposite) of any spike in unemployment that would portend problems for the housing market. After all, even a 'cheap' mortgage ain't very cheap at all if you haven't got a job to pay for it. But full employment means well-serviced mortgage payments. We should, though, get a clearer view over the next six months of whether those falling levels of business confidence ARE starting to cause the economy to slow down.

The known and the unknown

What I've covered are some of the 'known' issues and they are domestically-related. 

Of course, the great unknown is always what the big wide world might throw at us. And if there is some massive eternal shock, then all bets are off. Recall what happened to our housing market after the 2008 GFC.

I think the past 12 months have been a period of huge uncertainty around the housing market and to some extent a period of 'drift'. And it's been difficult trying to get 'answers' from the various economic indicators as to which way things may go.

The first half of next year though will, I'm sure, answer a lot of the questions that we currently have. And we'll all know by the middle of next year much more clearly just where we are heading and where that housing market will be heading.

I know you will all have views on this, so let's have 'em!

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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57 Comments

"And in such an environment, it's difficult to see house prices flagging - particularly if KiwiBuild is starting to look shaky." [David Hargreaves, 23/11/2018]

That sentence says it all.

TTP

"Of course, the great unknown is always what the big wide world might throw at us. And if there is some massive eternal shock, then all bets are off. Recall what happened to our housing market after the 2008 GFC"[David Hargreaves 23/11/2018]

Right now, this speaks volumes.

Yeah, those morons who bought in 2007 and held until today must be crying in to the fists full of money they made, serves them right!

Lamanar, Yvil, all the boasting made on this forum is about gains made on paper (unbanked). Many have leveraged their equity and borrowed even more. It's all just pyramid talk until its actually banked. It's foolishly premature to self gratify don't you think? Remember, in times of deflation, the only thing that you own that gains in value, is debt.

My house has also gained an obscene amount. I don't take this for granted. It's a serious anomaly driven along by unprecedented amounts of cheap and easily obtained money. When it comes time to sell, I get what I get for it at the time.

I am not gloating, im gently chiding your comment because looking at 2008 is an argument against your own point. You can say what you will about the future but 2008 is not a good example of property getting its just deserts.

Laminar, I totally agree. In 1991, and in fact, 1997, 2001 and 2008, things did look dire. Each subsequent time stimulus was more aggressive, interest rates ever lower. I don't recall anyone predicting Central Banks would print money in 2008. I'm just considering a scenario where, being that we are practically at ground zero, what form can stimulus take next time around?

Ben Bernanke Dec 5th, 2010 "One myth that's out there is that what we're doing is printing money. We're not printing money"

In any case, I was effectively balancing out Agent TTP's comment from text that was also in the article.

sahara or.....?

R P "Recall what happened to our housing market after the 2008"

Yes I do recall very well, the NZ housing market went down 9% in 2008 and then up 70% until today, tragedy LOL

How much would the NZ housing market have gone down if we didn't have QE Fed and a massive reduction in Interest rates? If we hit another 2008 scenario, what will happen this time around?

NZdan, I prefer to deal with what is, not with what could have been

@Nzdan If we had not cut our interest rates property would be almost worthless today. Our dollar would have screamed higher, crashed exports, blown out the trade deficit, sent unemployment spiraling upwards, collapsed property, collapsed the banks and eventually collapsed our currency anyway.
If 2008 rolls around again we will cut rates, increase government spending and eventually start purchasing securities if further easing is required.
Why do you ask?

I ask because I’m curious. I’m not DGM or spruiker, I just like to look at where we are at and project forward some logic. So we cut our interest rates to avoid all the blowout you mentioned in 2008...cool....so if we come full circle we just cut our rates again? Until what?

"Of course, the great unknown is always what the big wide world might throw at us. And if there is some massive eternal shock, then all bets are off. Recall what happened to our housing market after the 2008 GFC"

Actually the article should have had this as the opening paragraph, rather than as an afterthought.

YoungTel, I totally agree. Everywhere one looks, valuations are ripe.

Hooray for stagnation?

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I think the biggest determinant of the market will be regulatory impacts from cashflow analysis on Bank lending, not RBNZ LVR changes. Talking to our bank manager the focus on new policy around cashflow and living expenses (as identified in the Royal Commission) is having a far far higher impact than LVRs ever did on lending.

The interest rate "specials" are a smoke screen being a mechanism for Banks looking to gain market share before the heavier restrictions come down from Aus next year and reduce the movement of consumers between banks.

Spot on.

This, plus the removal of the marginal foreign buyer.

It surprises me there is so little talk about the impact of the Australian market. Last time I checked 70-80% of our Banking sector is just a subsidiary of Australian banks. ANZ is now predicting 20% falls in Sydney/Melbourne – the general consensus is between 12 and 17%

What does that do to the risk appetite for AU banks lending in a similarly hot NZ market?

The fall in AU prices comes amid low interest rates, high employment and a strong economy … I hate to think what will happen if any of these factors turn, adding further downwards pressure on prices.

.

cashflow and living expenses (as identified in the Royal Commission) is having a far far higher impact than LVRs ever did on lending.

@shaok . Makes sense reg cash flow. But why NZ banks depend on royal commission outcome? We r more stable and not as exposed to overseas as Aus banks, I read somewhere.
Also I don't hv any clur why RBNZ loose LVR.. they should help ppl to save more for 15-20% deposit

Spoiler alert: Flat

Haha, short & to the point

Been trying to look at this from different angles over the last few weeks. If the stock market keeps dropping worldwide, the corresponding drop to Kiwisaver investments will hurt first time buyers and the general wealth effect in NZ.
Remember we have never really had a national 'share investment' scheme like this and we don't know how a shock to Kiwisaver balances will effect the overall market. Albeit Kiwisaver is a long term investment, but so is housing and that wealth effect has been fuelling consumption.

When stock markets drop, it reminds people of one of the key virtues of property.......

Property markets are far less volatile.

TTP

Not as volatile, but slow and expensive to transact. One balances out the other.

...frustratingly illiquid at the worst of times.

Quite interesting that the adverts appearing throughout this article are all advertising a reduction in price on new build properties!

VeryInteresting.

They are targeted to you. Everyone get different ads.

Re: the pop up adverts that are appearing in the articles. I'm getting adverts offering price reductions on new builds around Auckland .... what's everyone else getting?

Samsung mobile phones mostly.

Have they got rid of the autoplaying video ads? Ad-block went back on when those sprung up.

I've been getting ads for Women's shavers.

Hope you have bought a whole lot of them, some of the spruikers may need to start a side business if things go pear shaped

" if the RBNZ decides against such a move now, it WILL in all probability then relax the LVRs when it has its first Financial Stability Report for next year, which will be in May."
Big call!
Adrian Orr has been at pains to 'tell' us that he'll maintain the status quo, even if he has to drop interest rates when all about him are raising theirs etc. So to tinker with LVR's would be counter-productive. In all likelihood, they're here to stay; permanently - and what's wrong with that? Gets a bit of certainty into future projections and 'encourages' investment into other areas of the economy.
Where is the market going? Who knows! An Elliot Wave theorist might tell you it will correct 61.8% from the highs; generally viewed as November 2016. But there aren't many of them about...and Elliot is a Gaelic name, and look what happened to the Irish!.

Orr is simply trying to make his job easier by stating the market will be stable for another couple of years in terms of interest rates. This instills confidence in the market and gets people buying houses "Knowing" that rates will stay low. He is in effect trying to control the market with words.The problem is we no longer own the banks and our interest rates will go in any direction the Australians want them to go.

KiwiBuild and immigration:
The continuing historically high immigration levels are likely to be creating a demand for new houses at least twice (and likely somewhat more) that being produced by KiwiBuild.
This is not a comment on the merits or otherwise of Government policies on immigration or KiwiBuild - just a comment on the reality on the senseless of the situation.

Recall , also, what happened after 2008. Doom and Gloom and then Boom.

Yes, like Australia, NZ enjoyed the spoils of a great and spendthrift "White Knight" (China), on a quest for social stability. Who can it be next time around Zachary? With valuations, debt levels, greed and complacency at record levels, its now time to look to towards the future as one littered with unintended consequences. Note interest rates are already near basement levels last recorded 70 years ago. Its more likely than ever that the next downturn will be anything but traditional = "L"

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Very true.

Huge interest rate drops, mass immigration and foreign money really spurred the Australian and New Zealand markets forward.

Unfortunately many other countries suffered big housing market losses around the time of the GFC. The US is starting to build quite a nice interest rate buffer to allow for lower rates, and probably more QE once the next downturn arrives.

Australia and New Zealand don't have that interest rate ammunition. New Zealand interest rates at zero with a QE program....no chance....externally funded outposts don't get to play that game.

Doom and Gloom and then Boom.

I love it

Is how it is meant to work. A property boom ends, a contraction, then along comes a new influx of people looking to take advantage and wanting to invest. Those who stick it out for the long term get to profit. Some pain, big gain.

Auckland is breaking the cycle and making property over priced in a contraction. New investment is not attracted and goes elsewhere. Those that stick around are diminished. No pain, loss.

I think it is unrealistic to expect our housing market to be anything but flat to drifting. If you are a ' Cycles ' observer this slowdown is expected and has I believe about another 18 months to 2 years to run. With stalled to drifting house price inflation, ( in Auckland and rest of the country to follow ) slowly increasing wages and low interest rates housing affordability has a chance to improve. KB in concept is a great idea, in reality constrained capacity in the building industry, KB pricing out of the average workers ability and the low number of people whom qualify for it makes it look like a fizzer. External shocks are always a threat but on reflection NZ got through the GFC in reasonable shape so we can deal with the next when and if it comes. Many on here will debate that interest rate rises back to normal will kill and burn the housing market, it looks to me the new norm are rates 4 - 5.5 % rather than 5 - 7 % so in that regard we are more aligned to other western ecomonies. So with KB unlikely to provide much, an alarming number of building companies going broke and confidence low in the housingmarket/building industry it would seem to me the housing situation as far as additional stock is set to deteriate further for quite sometime. This is a slow down with a moderate correction not a collapse. Our economy is humming along well, better than most expected including myself, my connection with people in many industries tell me that finding new staff paticularly experienced tradies is near impossible. One in particular in the steel business have 45 chinese temp tradies out of 150 and would be totally stuffed if immigration was shut down. They even provide English lessons free in work time in the hope some will past the permanent residency requirements. Whats the answer I don't know but our economy is hungry for workers !

Good comment Shoreman however I think it would have even greater impact if it was divided into four or five paragraphs. Seems to be the modern way.

Well said Shoreman, it's so refreshing to read a well-balanced post

But what you really mean is this statement excited my confirmation bias so much I nearly got an erection?

The pain will start from here on - atleast next 2 years.
The Global slowdown is already happening.

The pain will start from here on - atleast next 2 years.
The Global slowdown is already happening.

I disagree with this statement:

‘I wrote a little while back that Spring was looking pivotal for the market and thus far it does seem to be carrying mostly positive messages.’

Certainly in relation to Auckland price stagnation, low sales volumes and growing inventory all point to a negative outlook. As you note net migration inflows are slowing. Interest rates are a bright light for the housing market but more on that in a minute. There is evidence of an impact from the FBB - auction clearance rates dropped around 30% (mid 30s to mid 20s) immediately after. So I’d say spring was a draw as there is evidence to support both the optimistic and pessimistic outlooks. However, that means there is evidence consistent with the later.

Prices are clearly supported by interest rates. I believe the reserve bank has stuffed up. There are capacity issues all over the economy and there are inflationary pressures on the horizon. They are lucky oil dropped and the NZD rose. The big risk for the housing market is interest rates rising and barring a global recession they are going up soon. When they do it will be curtains for house prices.

You would have to define "Soon" Hardly. I still see a flat housing market even if rates begin to climb early next year. People will simply begin to forgo the luxuries in life to keep on paying the mortgage because that is what is at the top of the priority list. Factor in the number of people on fixed and it could take years to kick in. If all things stay as they are currently then house prices will be flat to small gains over the next 2 years.

A well considered and reasoned article David.
Highly recommended for FHB who will be be uncertain of the future of housing due to the amount off-the cuff shallow reasoned comment being banded about, and most likely the considerable amount of "racecourse betting"-type advice they will be getting from all and sundry.

What you have done is sketched out a likely scenario where we can't build enough houses and then said that is going to sustain house prices. And what you should be doing is examining building to costs to find out why we can't build enough housing - the answer is land supply to Auckland City.

If Auckland City Council land supply constraints are maintained house prices will remain high and not many will be built. An increasing number of first home buyers will exit the Auckland market and take with them the wherewithal to carry out the majority of potential future entrepreneurial growth. Auckland will stagnate.

Or maybe Phil Twyford will keep his election promise and open up land supply. Which will cause house prices to fall, create more jobs, build more houses and end the housing crisis.

Just kidding, that lying piece of... will do everything he can to keep the bubble inflated and make land banking profitable.

I don't think he was lying. I think he now realises it's neither as easy, or as effective, as he thought.
He's not particularly smart

One issue I've been mulling about Kiwibuild is that it appears to be targeting the top 5% income earners. For it to gain any real traction it needs to target the top 50% income earners and for that the scheme will need to change significantly.

Agree that Auckland house prices in general are too high for Kiwis. That said, I did see that of people who had bought a Kiwisaver house, most of them were sub-$120k household income.

If you are sub $130K, you qualify for a bunch of grants and you don't get a single dollar if you're over that mark.