The following is the feature article from ANZ's latest monthly Property Focus report.
This month we provide an updated graphical summary of recent property market trends. The volume of house sales is broadly where it was compared to a year ago. Annual house price inflation is slowing. The high-LVR speed limits, stretched affordability, and climbing floating mortgage rates appear to have taken some of the wind out of the housing market’s sails.
Despite this, pockets of strength remain, with an Auckland and Canterbury vs rest of New Zealand divide still apparent. Booming net immigration could provide the market with a second wind, with the housing market set to remain on the RBNZ’s radar screens for a while yet.
House prices and sales
Sales volumes and prices tend to be closely correlated, with periods of strong housing turnover coinciding with higher rates of house price inflation. Of late, the truncated stock of dwellings on the market, rising short-term mortgage rates, and the high-LVR lending restrictions have kept residential sales numbers low, with October volumes 3% lower than a year ago and 18% below historical averages as a portion of the dwelling stock. Annual house price inflation has slowed and is low, although recent monthly data does hint at a potential second wind.
REINZ and QV house prices
There are three key measures of house prices in New Zealand. They differ slightly but the broad trends are similar. The most frequently referenced measure is the median house price measure published by the REINZ. REINZ also produce a stratified house price index, which attempts to adjust for variation in the quality of houses sold. Property IQ produce the QVNZ house price index, which is calculated from the average sale price based on all residential sales, but captures sales at a later stage of the transaction process.
Annual house price inflation is slowing on all measures. The median sale price of houses sold by REINZ rose 5.5% in the year to October versus a year earlier. Prices from the stratified House Price Index rose 3.9% in the 12 months to October as opposed to a 5.9% increase from the QV measure over the same period.
Net PLT immigration and house prices
Migration flows to and from New Zealand are one of the major drivers of housing market cycles. The early-1970s, mid-1990s and mid-2000s booms coincided with large net migration inflows. Annual net PLT immigration rose to 47,700 persons in the 12 months to October, a record high and equivalent to around 1.1% of the resident population.
While more than half of the increase in net PLT immigration over the past 12 months reflects fewer departures (which typically have a smaller impact on the housing market), this proportion is gradually decreasing. The migration inflows have been the strongest in Auckland and Canterbury, which have accounted for around 80% of the net PLT population inflow, despite accounting for less than half of NZ’s resident population.
House prices vs employment
With the economic expansion becoming more mature, still-elevated surveyed employment intentions are translating into hiring. Contained wage inflation has contributed to a slowing in labour income growth to around a 5% annual rate in the September year.
While house price inflation has slowed, the ratio of the value of the nationwide housing stock to household incomes is close to 6, slightly below the circa 6.5 level seen during the 2007 housing boom, but well above the sub-3 level usually evident prior to the early 1990s.
Household debt and nominal mortgage rates
Nominal mortgage interest rates hit 50-year lows last year. After adjusting for current rates of CPI inflation, real mortgage interest rates are close to historical averages and well above the negative real interest rates commonly observed in the 1970s. A low nominal interest rate environment and financial liberalisation has enhanced the ability of households to take on more debt, and has been linked with the period of rising house prices since the late 1990s.
Unlike the 1970s period, where high rates of inflation eroded the real value of debt, inflation at present is low.
House prices to rents and mortgage rates
Increases in property prices have outpaced those in incomes and rents. Median house prices have quadrupled since the early 1990s, while dwelling rents have slightly more than doubled. Back in the early 1990s, the median sales price of an existing dwelling was equivalent to around 14 years of rental payments. It is now around 24, back to where it was in 2007.
Nationwide rental yields (expressed as the ratio of annual rental payments to house sales prices) have been declining since the early 1990s, with this fall coinciding with the shift lower in nominal mortgage interest rates, which has increased debt serviceability. Annual house price inflation is slowing (sub-4% pa), but it remains above that of increases in residential rents (sub-3% pa).
Rental yields by region
The nationwide rental yield is around 4%, almost half what it was in the early 1990s. Differences are apparent by region. Despite the Auckland region being generally judged to have a housing shortage, rental yields remain
below nationwide averages, whilst yields are above nationwide averages in Canterbury. Rental yields in Otago and Southland are about twice those in Central Otago.
Median days to sell
The length of time it takes to sell a house is an indicator of the strength of the real estate market. It encompasses both demand and supply-side considerations. Nationwide, the median time to sell a house was just over 38 days in the three months to October, around 4 days more than a year ago, and just a shade below post-1990 averages (38.7).
The days to sell have edged up in most regions and only Canterbury (31), Auckland (33) and Otago (37) have lower median days to sell than the national average. Northland (64), Hawke’s Bay (60) and Central Otago Lakes (54) have the longest median days to sell.
Housing supply (seasonally adjusted)
The low inventory of property listings has kept inventory levels tight despite subdued sales volumes. The time to sell the nationwide stock of real estate listings is currently 7.4 months (32 weeks), somewhat above the level of a year or so ago. Inventory to sales ratios have tended to move up for most regions, although there are regional differences. It would take 3.3 months of sales in Auckland and 4.1 months of sales in Canterbury to clear inventories, as opposed to 11.4 months for the rest of the country.
Inventory levels are broadly unchanged relative to a year ago in NZ. Inventory levels have risen 20% in Canterbury, and are up 2% in Auckland, but are down 2% in the rest of the country.
House sales and GDP
Housing market activity has traditionally been closely correlated with movements in economic activity. Rather than indicating that the housing market is a major driver of economic activity, it is more likely that both are impacted by common determinants, including immigration, interest rates, and cyclical dynamics.
House sales volumes fell sharply following the introduction of the high-LVR lending speed limits, and while broadly unchanged on October 2013 levels, they are around 18% below historical averages as a proportion of the housing stock. While low housing market turnover suggests downside risks to the outlook, the economy has a number of other support factors.
House prices and the NZ dollar
There is also a close correlation between housing market activity/house price inflation and the NZ dollar. Rather than house prices being the driver of the NZD, both are likely to be determined by common elements (see above).
The lift in house prices since the GFC has been modest in relation to the strengthening NZD. While the low global interest rate environment has been a factor supporting both the NZD and NZ house prices, other global factors and NZ specifics outside of the housing market (eg an elevated goods terms of trade, the Canterbury rebuild) are likely to have been influential.
Nationwide consent issuance is recovering from historically low levels. Annual consent issuance has risen to its highest since March 2008. Annual residential consent issuance is hovering around record highs in Canterbury, and is back to around historical averages for Auckland. Residential consent issuance is climbing, but is still around 10% below historical averages for the rest of the country.
Weekly housing loan approval figures are published by the RBNZ. Approval numbers have picked up over the last few months, but remain below levels prior to the October 2013 introduction of the high-LVR lending speed limits. Approval values have also climbed, with the average value per approval, at around $200,000, about double that of a decade ago. Strengthening mortgage approvals point to a pending lift in household credit and housing market activity, albeit to still-moderate levels.
House sales and housing credit
With a deleveraging undercurrent evident following the global financial crisis, mortgage lending has been low in relation to the value of housing transactions. Households have used the period of low mortgage interest rates to retire debt by keeping mortgage repayments unchanged.
The introduction of the high-LVR lending restrictions has also had an impact, with new mortgage lending to low-deposit borrowers falling from around 30% to under 10% of total lending since November last year. The ratio of household debt peaked at around 162% of household disposable income and is now around 154% according to RBNZ figures.
Number of new residential mortgage lending by borrowing type
The high-LVR lending restrictions have been effective in slowing the demand for credit. The share of new lending to borrowers with less than 20% equity remained below the 10% speed limit, as it has done since November 2013. There are likely to have been displacement effects. September figures showed that first home buyers accounted for just 6% of new mortgages (28% of high-LVR lending).
House and section prices
Section prices are more cyclical than prices for existing dwellings on account of both the low numbers of sections in relation to the dwelling stock and to the highly cyclical nature of residential construction activity. Section prices slumped by more following the global financial crisis and have had a roller-coaster growth profile ever since.
Section sale prices in the three months to October were up 1.1% as opposed to a 4.3% rise in prices for existing dwellings over a similar period.