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Monthly Economic Indicators

Special Topic: Housing market developments

Nation-wide house prices have begun to rise and other indicators of housing market activity show a recovery over the past few months.  This Special Topic looks at the reasons behind the recovery and the implications for our economic forecasts.     

House prices rise

The newly developed Real Estate Institute of New Zealand (REINZ) Monthly Housing Price Index (HPI) shows that average house prices in July 2009 were 0.9% higher than at the same time last year, the first annual increase since March 2008 (Figure 7). 

Figure 7 - House prices
Figure 7 - House prices.
Source:  QVNZ, REINZ

The HPI is constructed using a stratification method, which helps avoid the distortion that can arise when the proportion of sales of expensive houses rise in one period but fall in the next.  The HPI divides sales from each of REINZ’s 1,852 suburbs into one of ten price groups or strata, with each stratum containing 10% of total house sales.  A median sale price is calculated for each stratum and the average across all strata produces the price measure used to calculate the index.  

Figure 7 shows there is little difference in annual house price inflation between the new REINZ measure and the existing Quotable Value NZ Quarterly House Price Index (QHPI).  The main benefit of the REINZ measure is its timeliness.  The QVNZ measure, which is based on property title transactions, has the advantage of wider coverage but takes over 3 months to compile.  In comparison, the REINZ measure is based on sales reported by REINZ members, which enables it to be published around 14 days after the end of the month.    

Other housing market indicators recover

Measures of housing market activity provide indications of the overall balance of supply and demand in the market.  Overall, the indicators in Table 1 show a modest recovery in both supply (new listings and consents) and demand in recent months.   

Table 1 - Housing market indicators
Table 1 - Housing market indicators.
Source:  Reserve Bank, Real Estate Institute of NZ (REINZ), Barfoot & Thompson (B&T), Quotable Value (QV), Stats NZ

Mortgage approvals have eased following a surge in April, but are tracking 5% to 10% higher than in the same month a year ago and are at similar levels to 2005.  The fall in the average number of days to sell a property is indicative of a rise in demand that has not been fully met from the increase in new listings.   

Figure 8 charts house price changes against average days to sell and shows days to sell generally leading house prices.  The recent fall in days to sell points to further price growth.

Figure 8 - Housing activity and prices
Figure 8 - Housing activity and prices.
Source:  REINZ, Treasury

Another indicator of the balance between supply and demand can be derived by comparing building consents and population growth.  This approach was used by the Prime Minister’s Department in its report on house prices.   Using data from 1995 to 2007, the report found no shortage in the stock of dwellings.  Table 2 updates their analysis and suggests that a shortage is emerging. Rising rental prices would help corroborate this view, but the latest data shows rents are flat to declining.  Moreover, the conclusions from the table are sensitive to assumptions on average household size and the proportion of consents that are completed.  For example, if the desired household size is below the average of 2.7 recorded in the 2006 Census, any shortage is exacerbated.  On the other hand, a higher ratio of completions to consents ameliorates any shortage. The regional dimension to the growth in dwellings and population is also important, and some observers have noted a shortage of dwellings in Auckland. 

Table 2 - Housing supply and demand
Table 2 - Housing  supply and demand.
Source:  Statistics NZ, Treasury

The recovery in the housing market could reflect a number of related factors.  First, buying property has become more affordable:  house prices are below their 2007 peaks, construction costs are down and the cost of secured borrowing has fallen. Second, credit availability has improved a little.  Third, concerns about the severity of the recession may have abated: households’ confidence has picked up from the levels seen around the end of last year.  Fourth, net migration has surged from around 3,500 in the year to November 2008 to 14,500 in the year to July 2009. 

Reflecting these factors, July’s ASB Housing Confidence Survey recorded a net 54% agreeing that now is a good time to buy a house, over twice the proportion recorded in December 2008 and the highest reading since 2002.    

Implications for the economic outlook

The outlook for house prices has changed markedly since the Budget when we forecast house prices to fall by around 10% over the year ahead.  Net migration inflows, which are now expected to rise to 20,000-25,000 (well ahead of the 10,000 forecast in the Budget), and relatively low levels of dwelling consents and new listings will put upward pressure on prices.  But beyond the short-term, slowing wage growth, high levels of household debt, an expanding supply of houses for sale and rising interest rates will forestall a return to the rates of house price inflation seen earlier in the decade. 

Figure 9 - Forecast residential investment
Figure 9 - Forecast residential investment.
Source:  Statistics NZ, Treasury

In terms of GDP we continue to expect residential construction activity to record a further decline in the June quarter – a reflection of the lags between consents and activity and some catch-up from the surprisingly small decline recorded in the March quarter (Figure 9).  Nonetheless, the recovery in the housing market is indicative of a return to growth in residential investment over the second half of 2009.  In addition, residential investment may play an even more prominent role than forecast in the expected recovery over 2010.  

Our Half Year Update provides an opportunity to factor these developments into our economic forecasts. 
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