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Monthly Economic Indicators

Special Topic: Housing Market Developments

Nationwide house prices and house sales have recorded significant gains in the past few months. This special topic looks at the drivers and dynamics behind the upturn and its implications for the economic outlook.

Housing activity picks up...

There has been a gradual lift in nationwide house prices since the beginning of 2011 according to both the Real Estate Institute of New Zealand (REINZ) monthly Housing Price Index (HPI) and the Quotable Value New Zealand (QVNZ) quarterly House Price Index. There is little difference between the two measures apart from timeliness, although the QVNZ index does have a wider coverage. The timelier REINZ HPI shows that average house prices were 5.3% higher in June than at the same time last year (Figure 6).

Figure 6 – House prices and sales volumes
Figure 6 – House prices and sales volumes   .
Source:  Quotable Value New Zealand (QVNZ), REINZ

Indicators of housing market activity displayed in Table 1 show that buyer demand has been steadily increasing but a supply response has been lacking, placing upward pressure on prices. House sales have recovered to levels last seen in 2009 but are still below their average since 2001. The average number of days it takes to sell a house has also been falling and indicates that the rise in demand has not been fully met by an increase in new listings. There has also been a surge in mortgage approvals this year with annual growth averaging around 20% in the last seven months, helped by record-low mortgage rates. Mortgage approvals do not necessarily translate into new housing loans as they include homeowners who switch banks and/or refinance. The higher frequency of auction sales, particularly in Auckland, means that there can be several pre-approvals per house sale.

On the other hand, new listings and consents for new dwelling approvals remain low and below average since 2001. According to the NZ Property Report from Realestate.co.nz for June, the inventory of unsold houses nationally is currently at a four year low. The slow growth in the housing stock in recent years has placed upward pressure on rents and since 2010, house prices and rents have been rising at a similar pace, keeping rental yields subdued.

Table 1 – Housing market indicators
Table 1 – Housing market indicators   .
Source:  QVNZ, REINZ, Reserve Bank, Barfoot & Thompson (B&T), Statistics NZ

...buoyed by Canterbury and Auckland...

The recent uplift in the housing market can be attributed to the shortages in Canterbury and a more general shortage in Auckland with housing markets elsewhere in the country relatively subdued. Median house prices in Auckland and Christchurch both posted record highs, up 7.1% and 8.7% respectively over June last year. It also takes three to four fewer days to sell a property on average in these regions compared to the national average. Although there are pockets of weakness in other regions, median house prices have generally risen between 1% and 4%.

The Auckland market is facing considerable demand pressure as the growth in new listings fails to keep pace with rising house sale volumes (Figure 7). This dynamic has been reflected in rising house prices. The shortage in Christchurch, as a result of the earthquakes, is seeing heightened competition for undamaged dwellings. Not only are Red Zone buyers entering the market, but first home buyers and investors are also actively seeking properties. Since the earthquake last year, rents in Canterbury have been growing at an annual rate of 6% on average, double the national rate of 3%.

Figure 7 – Auckland housing market
Figure 7 – Auckland housing market   .
Source:  REINZ, B&T

...as market participation increases...

House prices and rents have been rising at a similar pace but low mortgage rates are encouraging more buyers to enter the market. Although median house prices (expressed as a percentage of gross annual income) are still a barrier to some, debt-servicing costs have fallen significantly (Figure 8). The BNZ-REINZ Residential Market Survey showed a net 44% of agents reporting more first home buyers in the market in July, 14% higher than the same time last year. Property investors have also been seeking higher-yielding properties given subdued rental yields, but according to QVNZ they are being increasingly outbid by first home buyers.

Figure 8 – House prices and debt servicing relative to gross annual income
Figure 8 – House prices and debt  servicing relative to gross annual income   .
Source:  REINZ, Statistics NZ

...but households remain cautious...

The growth in new housing loans remains weak even though mortgage approval rates have been strong. Data from the RBNZ show that total household credit claims in July grew at an annual rate of 1.8%, well below the growth rate of house prices, and is indicative of the subdued level of residential investment (Figure 9). Since 2007, residential investment has grown more rapidly than the value of housing loans which means household equity has been rising. Equity injection or the share of residential investment not funded by mortgages, has risen by $13 billion between 2007 and 2012. This is helped by falling mortgage interest rates which boost the pay down of loans.

Figure 9 – Housing loan growth and residential investment
Figure 9 – Housing loan growth and  residential investment   .
Source:  Statistics NZ, RBNZ

...and supply has been slow to respond

Forward indicators of activity such as the National Bank Business Outlook and the NZIER Quarterly Survey of Business Opinion show that the building industry continues to be the most optimistic. However, the pace of residential dwelling construction and consents has fallen short of expectations. Listings of existing homes have also been slow to rise.

Several reasons have been advanced to explain the low market turnover and building activity. New listings have been constrained, with existing homeowners unable to trade up owing to the poor quality of listings, some may be holding out for higher capital gains or unwilling to take on more debt. New housing construction continues to be skewed towards the upper end of the market as inexpensive houses are under-capitalised in the face of elevated section prices. A shortage of new low cost housing in the last decade has seen lower quartile house prices increasing by more than upper quartile houses in all major regions.[1]

New construction could be held back due to the high cost of construction relative to existing house prices. Structural factors such as land availability and low productivity currently underlie elevated section prices and building costs. A preference for high-specification housing and the relatively higher cost of building materials in New Zealand also lead to high construction costs. These issues were raised in the Productivity Commission Inquiry into housing affordabilityand the government is currently considering its response.

The shake-out of the non-bank finance sector has reduced the availability of finance, and could be limiting the supply response. Banks are reluctant to fund projects with a high degree of uncertainty, particularly those that require new infrastructure. Alternative investment vehicles such as equity-based partnerships, for example, may be required.

The annual running total for new dwelling consents in Canterbury has now returned to pre-quake levels but the consents data has yet to signal a clear ramp-up. Activity so far has been centred on small repairs but larger value repairs are now getting underway. The difficulty around settling insurance claims also remains a bottleneck to progress. Some areas have been earmarked for new subdivisions but uptake from investors and residents is slow. Certainty and clarification around technical building requirements will also be required for investment decisions. However, the new CBD recovery plan will provide some confidence to investors.

Implications for the economic outlook

Given the tight market, we now expect house prices to exceed our Budget forecast of 1.6% annual growth in the year to December. However, house price growth is expected to moderate over the medium term as residential construction expands and new listings rise. Weak population growth outside of Auckland, rising interest rates and a cautious household sector over the forecast horizon will provide additional offsets to house price growth. In the short-term, rising house prices will provide some support for consumption growth but are unlikely to add much.

While consents fell in the June quarter, we expect residential investment to pick up in the near term as a backlog of consents from 2011 remains. The level of residential investment over the medium term is expected to surpass previous housing booms given the demand stimulus from the Canterbury rebuild and under-building in recent years (Figure 10).

These recent developments will be factored into our forecasts in the Half Year Update.

Figure 10 – Residential investment forecast and consents
Figure 10 – Residential investment forecast  and consents   .
Source:  Statistics NZ, Treasury

Notes

  • [1] See forthcoming Treasury Working Paper, ‘Housing Affordability in New Zealand: Evidence from Household Surveys’ by Law and Meehan (2012).
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