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BNZ chief economist: The longer home buyers hold off the more house prices will rise

Property
BNZ chief economist: The longer home buyers hold off the more house prices will rise
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BNZ chief economist Tony Alexander says his "best guess" is that housing may remain a seller's market till about 2017-18.

He also says that current moves by the Reserve Bank might lead to a spreading of house price rises from Auckland and Christchurch to other parts of the country.

In his latest "Weekly Overview" Alexander said for the past four years buyers had been asking him whether it would be better for them to hold off buying till prices fall and they can get something cheaper.

"My answer now is the same as it was back then. The longer you hold off the higher prices will go,"he said.

"Those holding off since the end of 2008 because they believed silly forecasts that house prices would collapse 40% are now facing average Auckland house prices instead near 40% higher than they were back then."

Alexander went on to pose the question of whether "this early in the housing cycle" it was possible to pick when the market may shift once again from a seller’s to a buyer’s market in which buyers would be able to pick and choose from a good range of houses on offer, "even though the prices may not correct downward by all that much if at all".

"The answer is 'not really' as there are too many unknowns. Best guess? 2017-18."

Upward pressure

Alexander said the rising gains in the population due to migration would put further upward pressure on house prices.

"In the year to July the net migration gain for New Zealand was 10,569 people. This was up from 7,907 one month earlier (that is a very quick turnaround), a net loss of 3,799 people a year ago, and an average net gain for the past decade of 10,520 per annum.

"In other words we have now officially entered above average net migration gain territory.

"Where may this end? If we annualise the last three months’ seasonally adjusted figures we get a gain of near 24,000. That is boom territory and will clearly add to housing pressure."

Alexander also questioned whether the Reserve Bank's move last week to introduce "speed limits" on high loan to value lending would have the impact the central bank wants – namely restraining the rise in house prices.

No impact on prices

"Almost certainly not,"  he said.

"Prices are rising in response to catch-up buying from investors and first home buyers running into a worsening supply situation that will not change much this cycle, given accelerating population growth courtesy of a migration boom, plus an aging population placing even more pressure on the housing stock."

Alexander said credit growth was not in fact particularly strong, so "attacking lending growth" as the RBNZ was doing would have little housing market impact.

"Household debt at the end of June was only 5.1% ahead of a year earlier. Growth is averaging almost 0.5% seasonally adjusted a month or 6% annualised so little real acceleration in lending growth is underway."

Catch-up increases

Alexander said "eventually" the Reserve Bank would be forced into a period of catch-up increases in interest rates- "which will likely scare the beejeebers out of those who have not yet seen our central bank in full action".

Before then some house buyers would shift their attention out of Auckland to other, cheaper, parts of the country where their deposit would go further

"So, the RB move will accelerate the spreading of Auckland and Christchurch house price gains to the rest of New Zealand," he said.

"The spread of ultra-fast broadband will encourage this population spread also to some degree. Frankly that sounds like a positive thing though some parts of the country have a lot to do in order to build their image as a suitable place to live."

Alexander said the tightening of the LVR rules would also likely to see a revival of the Auckland apartment market "with demand from buyers for lesser-priced properties which are near where they want to be".

"The alternative for many will be either forgoing home ownership this cycle, buying further away from the city centre, or shifting elsewhere in the country."

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22 Comments

A buyers market?

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Yea... strange headline SK.

A buyers market this ain't.

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Thank you very much, SK. All is in order now.

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Thing is, while one can construct an arguement that nett migration is having an effect on a "seems reasonable" basis, in particular areas of constrained supply, the numbers just don't show any real relationship.

Running a quick comparison between annual average house prices (value of total stock/ number of dwellings) compared to migration patterns (total nett annual migration) since 1991 (data I have on hand) we get an adjusted R squared number of -0.04 (a horrible comparison). By comparison the tansfer of money across borders for the same period (Current Accounts, Capital transfers Debits, representing money clogging up in the NZ financial system) we get an adjusted R squared number of 0.9 (which, for a discipline like economics is a massive correlation). The movement of money is far more siginificant than the movement of people.

If I had to speculate, I would guess that the sort of people who are no longer moving to Australia to start a better life are the sort of people who live as part of an exisiting household in NZ, and these are not the sort of people who are buying houses (many being closer to the median wage than the average wage).

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dh,

I always like your reasoning and numbers approach. Follow the money, it seems.

Well done, thanks

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Hi dh, thought provoking but the analysis is too narrow.  Like most things in life the housing market can't be calculated using one simple measure. 

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For the record I don't think that the flow of credit through NZ is the only explanation of the housing bubble. There are a number of contributions, and the stronger ones flow up or down in the same kind of pattern as house prices (that is how we can say there is a link between them and house prices). The main ones are transfer of capital, interest rates, and the household debt ratio (though this last does not seem to have been driving the market as much in the past few years).

What I was saying about the migration of people is that if the migration of people affects house prices, then at some point in the past 25 years (figures simply because that is what I had the data to hand of) house prices and migration should be showing a similar trend: Nett migration up (or down, it doesn't matter how the two affect each other) house price rises higher (or lower). The adjusted R squared value, which you could call the "how much do these things show the same pattern on a rating of 0 (not at all) to 1 (they are the same thing)" suggests that migration does not have much to do with the end house price. I threw in the cash transfers figure so people could get a sense of the kind of results a significant variable will give.

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"best guess" nice way to start

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Economists are great at predicting in a predictable environment i.e. things carry on as they are and all graph lines are plotted according to current trajectory. They are hopeless at factoring in those annoying little unknowns that tend to drive the declines - black swans, bank runs, shock and awe... 

 

One of the things that makes the current situation more unstable is that the market is being driven by investors and they can flee pretty quickly if things don't look so promising. It might be a China-based mother-and-daughter buying five properties in one day (another tale at the weekend - legit) or it might be the "mom and pop" investor who quite rightly doesn't trust the banks and knows property is the safest investment ever. They are seeking capital gain. If the gains dry up and is percieved as the end of the party there is a rush to the exits. 

 

Banks obviously have no interest in that happening so it's important that Tony et al keep confidence high amongst the barmy army. No-one wants an unruly rush to the exits. If 80%+ of sales were to people buying a home to live in then I think there would be no issue. But when so much of Auckland demand is driven by "investors", in what is effectively the last great global open-door property party™ then I think there is risk that at some stage the grown-ups have to come home to this party and cause a scramble for the exits!

 

Sorry - stretched the analogy a bit. 

 

You get the point - it is not a natural housing market, especially in Auckland. It's an investor's party and as long as the mood is right the party goes on. And if Mr Alexander, Mr Barfoot, Mr Thompson and the guy in the local baker says "party on" then who's going to spoil it? 

 

The risk is if it does get spoiled then the falls are harder when it's overly investor driven. Rewind to Ireland a few years back - everyone had an apartment or house as an investment. Credit was cheap. In fact, many had apartments in Bulgaria, Turkey and other sunny spots! And why not, they were believers. They were investors. They were mugged.

 

 

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Read up on Steve Keen and Minsky, enlightening to say the least.

regards

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Anybody else want to venture a "guess"?

The new science of "Guestimology" is the growing branch in present day economics... as we have little else to work with other than spurious post-Deression comparisons with events that occured to the world 80-odd years ago.

Hardly a solid analytical base when you compare (then) to our present co-dependent globalised economies where events can change and impact faster than a banker's sneeze.

As for my favourite banking guru's analysis of NZ's current position?... Tony Alexander doesn't mince words in pointing out it's not looking rosy for downward pressure on house prices. And he's on the money to announce the impact the positive migrant inflow numbers is going to have on the already critical shortfall in housing stock.

If that impact has not yet shown in purchase figures is because I would assume new migrants are only just arriving and are currently renting/staying with family until they find their feet. It's just a matter of time when the rush for the door becomes worse.

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For the last 30 odd years it seems the world has followed a right wing economics model first enlightened by Ronald Raygun, nick named by some "voodoo economics".  Now we see such acolytes of this "school" seem to be guessing while other schools such as Keynes and Minsky have working models explaining whats going on and the fixes and worked, yes in the Great Depression.  So really its a case of walking around with eyes wide open as opposed to wide shut...

For the banking economists ask yourself what's their track record....bear in mind that have been predicting OCR (and fast) rises for 4 or 5 years.  Now sure I can see we will have some months maybe 20+ where house prices continue to rise, it cant do so forever sooner or later we'll see a pop.

regards

 

 

 

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Hi steven,

 

"maybe 20+ where house prices continue to rise, it cant do so forever sooner or later we'll see a pop"

 

Your changing your tune??  Didn't you say 6 months ago that things were about to "pop" then?  And didn't you say 1 year ago that things were going to "pop" then?  In fact, haven't you been predicting a giant crash for years now, whilst the exact opposite has been happening...

 

You total, complete and ongoing inability to pick the housing market trends does not seem to stop your commenting however. 

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Some thought provoking comments there with some hard yards behind them too. dh's comments give pause...

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Tony Alexander's best guess....? why the man's a legend in economic folklore...as follows

Tony walking along a road in the countryside comes across a shepherd and a huge flock of sheep. Tells the shepherd, "I will bet you $100 against one of your sheep that I can tell you the exact number in this flock." The shepherd thinks it over; it's a big flock so he takes the bet. "973," says Tony..triumphantly. The shepherd is astonished, because that is exactly right. Says "OK, I'm a man of my word, take an animal." Tony picks one up and begins to walk away.

"Wait," cries the shepherd, "Let me have a chance to get even. Double or nothing that I can guess your exact occupation." Tony says sure. "You are an economist for a large Banking organisation," says the shepherd. "Amazing!" responds the Tony, "You are exactly right! But tell me, how did you deduce that?"

"Well," says the shepherd, "put down my dog and I will tell you."

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So he's probably "Alexander the not so Great "among expats reliant on soundly researched projections instead of trend best guessers.. eh ostrich..?....but he would reason, captured money is to the advantage of one while the loss of another.....  

I'll just bet he's got one of those pooter strapolator thingys...from the days of future past model makers. 

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Do your own DD.

 

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Oh I do ...SK....I do what is due. That said if all were able to follow your very sound advice ,people like Alexander would simply  "poof" vanish into thin air or sell real estate if that air should heat up a little.

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Fat Tony always makes it plain as day that picking interst rate and currency movements is an extreme inexact science.

In any case, most recently he correctly recommended fixing at the low point in long rates, a few months ago.

Someone may have been able to fix 5years @ 5.5%

Today they would pay around 7%

Not to mention debunking the myth of the impending 40% drop in house prices!

 

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Not to mention debunking the myth of the impending 40% drop in house prices!

Shhhsh SK....ya don't mention it round these parts....and I think it was 30% but understandably it has grown along with the myth.

Fat Tony ...indeed..!

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This article is just more property worship, oh no we better get all in quick now! or well miss out!

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