Housing slump 'risk to economy'

Property

NZIER says a 'sudden stop' in the housing market could put the brakes on the economy

27th May 14, 12:00pm by David Hargreaves

<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

Independent research organisation the New Zealand Institute of Economic Research is warning that the recent sharp fall in house sales poses a risk that could "put the brakes" on the currently strong economy.

In the organisation's latest quarterly predictions, principal economist Shamubeel Eaqub said the New Zealand economy had been recovering from the recession and NZIER was expecting that it would grow by 3.5% this year.

"But slumping house sales are a significant risk to our optimistic outlook for the economy," he said.

Eaqub said that house sales volumes lead economic growth by around six months. And sales have slumped by nearly 20% in the last six months (see chart below).

Eaqub said the current growth in the economy was being driven by increased spending and investment by households and businesses.

"The Canterbury rebuild remains a prominent feature, although economic growth is broadening to more regions.

"The impact from last year’s drought was also less than in 2008, and is now boosting rural growth."

But, back on housing, Eaqub said Auckland house prices had surged to record highs.

"Investor demand is driving the Auckland market. In an investor-driven market, sales and prices can turn rapidly.

"A sudden stop in house sales could make banks more careful in lending. That would put the brakes on broader economic growth."

He said that slowing growth in China was another risk, with over 20% of New Zealand exports going there.

"The indirect links through Australia and other countries exposed to China may be even more important, particularly for exporters outside of dairy, meat and forestry."

Eaqub said that further interest rate hikes on top of the two that the Reserve Bank has already done this year were likely to cool the Auckland housing market.

"A pause in hikes is possible after June, if the economy slows too quickly," he said.

The RBNZ would "be wary of causing a housing bust" in the provinces and sectors outside of Auckland housing, which Eaqub said were not overheating (see chart below).

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34 Comments

by raegun | 27th May 14, 12:17pm 1401149839

Still needs to happen. Housing needs to be what it should be - housing, not a blasted investment market. Sooner the better, I say

by rjf | 27th May 14, 12:48pm 1401151696

Unless incomes start increasing 10% YOY we're going to hit the wall at some stage. Better now than later.

by MortgageBelt | 27th May 14, 12:20pm 1401150019

Families should not be paying higher mortgage rates living in provincial areas due to the Auckland housing market driven up by nonresident foreign buyers.

by steven | 27th May 14, 12:23pm 1401150194

Agree....though the effect of foreign buyers isnt really known...which is a pity.

regards

by James007 | 27th May 14, 12:26pm 1401150376

The previous story says:

The insurance industry’s difficulty in rebuilding or repairing properties is worrying – only 809 rebuilt and 872 repaired homes in 3 ½ years (that’s the whole industry – not just Southern Response).

That is pretty pathetic (As about the same number of houses were built in Queenstown over the same period and they didn't have an earthquake) and shows that there is a huge volume of just residential work needing to progress in Christchurch. The more slowly this proceeds the less pressure on the whole economy.

by Simon | 27th May 14, 12:26pm 1401150389

From the guy that 2 years ago was telling everyone in auck they would be better off renting. Effectively costing anyone who listened to his advice around $200k (the extra amount they would now have to pay to buy the same house they decided not to buy in 2011).

Now saying interest rate could impact provinces outside of auck more? How does that work, can he explain any logic behind that assertion? Lower priced property, that yeilds around 7% plus, that is often cheaper to buy then rent in the provinces is apparently going to be more effected by interest rate hikes than auckland property that yeilds 3%, and has 500k plus mortgages the norm, and by every imaginable measure is stetched like a tightly pulled rubber band?

by Simon | 27th May 14, 12:34pm 1401150852

And 'prices driven up by investors'?

No investor in their right mind would buy an auck property at these prices with these yeilds.

The problem is not 'investors' who generally look at the income a property makes against the price paid for it.

Speculators, prehaps. First home buyers, definately. Emotionally driven, financially illiterate home buyers wanting to out do their peers, and sucked in by the media hype of a 'housing shortage' and 'foreign buyers'...

by dh | 27th May 14, 6:05pm 1401170717

If there is one group that provably has nothing to do with the house price increases, it is people on mortgages (and so First Home Buyers). Just look at the dollar amount total mortgages loaned by NZ households since 2000 compared to the total amount house prices have gone up. The two totals have nothing to do with each other.

Now you may well say Investors would be insane, but that is much harder to prove that they are not investing, even if you think it is insane. For the record, I don't think it likely it is New Zealand Investors, because that would imply the boom since 2000 is associated with the movement of non-mortgage backed capital from one sector of the economy to another. And there is not a lot of evidence for that, but the evidence is not as clear cut as for people buying with mortgages not driving the situation.

by Chairman Moa | 27th May 14, 12:38pm 1401151083

Is this the new Monty Python ? One minute it was bad for the economy, then it was good..

Can someone please make an informed decision?

nek minnit..

by macbet | 27th May 14, 12:38pm 1401151107

If removing the wealth effect from pumped out house prices affects the "strong economy" then it suggests it's not really a very strong economy. Combine it with weakness in the other two pillars of the exonomy, falling dairy prices and Lord of the Rings sequels and it's not looking too rosy.

The government will pull out every stop, and leave no tax-break unturned to keep house prices motoring along. Otherwise they are out. They've probably enough momentum to get them through the next election. After failing to kickstart the economy, the Tories in the UK sparked a boom with "Help to Buy" government guaranteed mortgages - it does win elections... mind you, it's a London/south east only effect (in the same way foreign and local investors are pumping mainly Auckland). The Tories have just been clobbered in the Euro elections by UKIP, a collection of NIMBY's, little Englanders and racists. UKIP won the election outside of London. They struck a chord with a lot of people who don't see mainstream parties as relevant to them and who don't get any upside in the property boom.

There is line in the above that is rarely stated but bang on:

""Investor demand is driving the Auckland market. In an investor-driven market, sales and prices can turn rapidly."

The more investors involved, the more house prices will behave the way volatile markets do... live by the sword etc.

by two otherguys | 27th May 14, 12:44pm 1401151498

The perverse logic of

Eaqub saying that further interest rate hikes on top of the two that the Reserve Bank has already done this year were likely to cool the Auckland housing market

The Christchurch Earthquake emergency interest rate cut of ½% by Alan Bollard and RBNZ drove Auckland property into "heated or overheated" territory

If ever there was a case for interest rates to be applied on a regional basis, that is it

by MortgageBelt | 27th May 14, 12:45pm 1401151518

Interest rates have very little influence on Auckland housing price levels.

by Esprit | 27th May 14, 1:14pm 1401153250

Well, New Zealand interest rates effect it little, because so much of the money flooding into the Auckland market is borrowed offshore and shipped in.

by BigDaddy | 27th May 14, 1:01pm 1401152516

This wet-behind-the-ears, know-it -all 33 year old Shamubeel Eaqub fellow is wheeled out like some pet rooster to quote advice on a subject of which he patenty knows nothing, and who blithely contradicts whatever he may have said earlier without even batting a feather..

A while ago he recommended that everyone should rent, as he does, because it was cheaper, which begs the question from whom should he rent? The terrible "speculators" maybe, that are buying up houses that allow people like him to have the choice?

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=108…

One minute the market is racing away, next minute it' all over.

Please interview somebody that has experience and stop feeding his ego.

by bob | 27th May 14, 1:15pm 1401153306

Don't be too harsh. He's basically saying that if something bad happens to the economy then it would be bad for the economy - very perceptive.

by Your Landlord | 27th May 14, 1:25pm 1401153922

Yes very perceptive... I would never have thought that "if something bad happens to the economy then it would be bad for the economy."

by Zombie ponzi | 27th May 14, 1:37pm 1401154661

Day in and day out BigDolly plays the man and not the ball. If you have an argument counter to NZIER then present it.

While I wouldn't defend NZIER their "house prices are running away" and "falling sales will slow the economy" arguments don't seem incompatible to me. The rub of it is that we are housing and debt fuelled economy.

Also, your "who can they rent from" argument doesn't hold water, because if there were too many renters, rents would rise and it wouldn't be cheaper than buying!

by SK | 27th May 14, 1:38pm 1401154721

Shamubeel Eaqub is suffering from a major case of confirmation bias. Academics are supposed to learn about these dangers as part of their 'higher' education. He must have been ill that day.

by Happy123 | 27th May 14, 2:00pm 1401156012

And over at the NZ Herald:

"Labour leader David Cunliffe has defended helping a Chicago-based friend buy a house in Omaha, despite saying overseas investors were hurting the housing market."

by SK | 27th May 14, 2:21pm 1401157305

I believe his friend was NZ resident.

by Chairman Moa | 27th May 14, 3:47pm 1401162443

He/she isn’t from the motherland so it should be allowed to purchase.

by Basel Brush III | 27th May 14, 9:39pm 1401183556

Not just a resident but a NZ CITIZEN.

So where is the story?

Herald beat up?

by rastus1 | 27th May 14, 2:50pm 1401159043

recent sharp fall in house sales poses a risk that could "put the brakes" on the currently strong economy

How does this work? So if we are keep up the nonsense of selling homes to each other at an ever inflated rate, then the economy will stay strong? I'd suggest that the decline in sales is more due to the inability/lack of desire for new entrants to enter the market and keep up this ponzi scheme. There may well be a shortage in Auck, but perhaps the peasants have decided that the cost of entering the ponzi scheme has become just too large - they are (wiseley) avoiding signing up to a life of debt enslavement.

Once the run to the door starts, it will be all on.

by Andrewj | 27th May 14, 2:57pm 1401159420

he said, investors should look at China’s trading partners – Australia, New Zealand and Brazil. Those countries will be forced to loosen their monetary policy, raising rates and creating carry-trade opportunities.

http://www.zerohedge.com/news/2014-05-26/kyle-bass-chinas-contraction-a…

by notaneconomist | 28th May 14, 10:54am 1401231278

It will be interesting to see how the RBNZ is going to handle this situation AJ. They have been under some pressure for most of this year and it certainly isn't the internal economy factors that are contributing to those pressures however the general public is sold the concept that is it their spending habits and lack of savings that are the problem.......inflation factors have all been engineered through various Government policies i.e.GST increases, astonomical Council charges, fees and locking up land supply, raising of minimum wage etc,

In short the internal basics have inflated (energy, housing, etc) while the imported stuff has deflated.

I hope people realise the impacts of recent RBNZ statements on interferring in the NZD.

The debate on One World/Super Currency could get a whole lot more momentum.

http://usa.chinadaily.com.cn/world/2014-01/29/content_17264069.htm

by FromAnotherPlanet | 27th May 14, 8:01pm 1401177672

It would be interesting to get some statistics on where foreign students who studied in NZ from the last decade are residing. Of those who did choose to get residency in NZ, I doubt they'd want to start a family living in one of those shoe boxes.

by dh | 27th May 14, 8:18pm 1401178722

Go for it (at least in the case of high school students)

http://www.educationcounts.govt.nz/statistics/schooling/july_school_rol…

for through to university doctorate level you can start here

http://www.educationcounts.govt.nz/statistics/international/internation…

by FromAnotherPlanet | 27th May 14, 9:43pm 1401183826

Thanks for the links. I was trying to get the punters on the site to think a bit about how ubtle demographic changes could contribute to house price changes. In the last decade we had a lot of foreign students (particularly of Asian extraction) studying in our Tertiary institutions - I justed needed to find some evidence to back up my feeling that a lot of these students "graduated" to be being a permanent resident. My thinking is a lot of these so called foreign non resident buyers (code for Chinese Mandarin speakers) are actually locals settling in NZ proper.

Also, the last census indicated that NZ as a whole aged in distribution - could this indicate that there is a higher proportion of people at that stage of their life where they want to settle down in their own home? Rents haven't gone crazy like the sale price of houses, could this indicate that some of these rentals should actually be converted to owner occupied?

by dh | 27th May 14, 10:24pm 1401186242

Going by the census, the owner occupier has been decreasing over time.

by puketepapa | 28th May 14, 10:38am 1401230289

What was unbelievable about it Kimy?

What were you doing "walking into" it?

Was it one of your rentals?

Were you on an inspection tour maybe?

and you discovered there were 14 people in it?

by Chairman Moa | 28th May 14, 3:28pm 1401247692

Did you find what you were looking for? Wasn't a massage place was it?

by Crazy Horse | 28th May 14, 1:02pm 1401238968

Welcome kimy to the fine city of Auckland ....you have walked into the new "norm" ...this is what the "powers that be" of Aotearoa want ... as long as they, their families and "cronies" are all nicely tucked into their now paid off villas and large townhouses in the "leafy" Auckland suburbs, everything is all fine and dandy .......

Nothing to see here, that's right, move along ....

PS I don't think this is a Philipino thing either ....could be anyone ....showing a bit of a bias there kimy ???

by Chris-M | 27th May 14, 11:06pm 1401188763

An ecconomy that relies on speculative expectations of house price rises for its health is not a soundly based economy. It is more like a ponsie scheme and the sooner it crashes to reality and matters are sorted out once and for all the better. The longer continues on this basis, the greater the pain will be when it does enevitably crash.

by SmoKey | 28th May 14, 10:35am 1401230157

Definition of an Economist : One who sees something works in practice and wonders whether it will work in theory also.