PROPERTY NEWS

NEW ZEALAND RATED RISKIEST HOUSING MARKET

New Zealand is at the top of Bloomberg’s list of riskiest housing markets – those which are vulnerable to a price crash. The country experienced extreme price growth over the pandemic, driving house valuations to absurd levels when looking at price-to-rent and price-to-income ratios. Bloomberg has spelt out the impacts of a severe house price correction: “Falling house prices will erode household wealth, dent consumer confidence and potentially curb future development. “Animal spirits are typically tamed when people are faced with higher repayment costs on an asset that is losing value. “There are going to be house buyers who have entered the market in the past year or so who started off with a mortgage rate of 2.5% and all of a sudden they are rolling off on to a mortgage rate closer to 6%. “There is going to be some pain for sure.”

The country’s median dwelling price has already plunged 9.2% from the November 2021 peak with the stock of unsold homes also ballooning.

CONSTRUCTION TO START FALLING SOON

Residential construction is close to topping out – if it hasn’t already – in this housing cycle. ANZ’s latest Property Focus says there simply isn’t enough economic resource available for residential construction to grow much more, and any light at the end of the migration-and-buildingmaterials tunnel seems months away. By then, demand will likely feel different. ANZ chief economist Sharon Zollner says while the bank’s forecast is for the overall level of residential construction to remain high by historical standards, a period of contraction is on the cards. “We have pencilled in about a 6% contraction in residential investment activity over next year. Relative to previous cycles, this can be thought of as a soft landing. “However, while benign, this is a significantly weaker forecast than the RBNZ’s May Monetary Policy Statement (MPS), and one of the reasons why the OCR will top out at just 3.5% - as opposed to the near 4% signalled by the RBNZ and the over 4% peak currently priced in by the market.” The RBNZ is looking to dampen the inflation fire down before it truly gets out of hand, and the housing market and residential construction sector will be big factors in how that’s achieved. Zollner says the bank suspects it’ll happen a bit quicker than the RBNZ expects, but it remains a question of timing. “The RBNZ will keep going until house prices fall more and construction cools significantly, as it’s a key part of getting on top of the broader inflation problem. It’s a question of when, not if.”

Residential construction accounted for about 6.5% of real expenditure GDP in the year to March, and a little less than that in the production measure of GDP. Factor in sky-high building-cost inflation, and residential investment has shot up to almost 9% of the economy. Residential investment is an area of the economy which tends to experience relatively outsized swings through the business cycle. When residential investment gets going, it really gets going. says Zollner. And when it stops, it can be just as dramatic. “Swings in residential construction, and the housing cycle more broadly, tend to also be associated with swings in prices.”

INVESTORS DIGGING THEIR TOES IN

Investors are in for the long haul and don’t radically change their plans, according to the latest Investment Insight survey. Turns out the popular image of property investment driven strongly by a desire to ride the price cycle, or buy and flick, is not currently backed up by investors’ expressed aims. About 65% of survey respondents say they are in property long-term. Created by independent economist Tony Alexander and property management company Crockers, the investor survey has been running since June last year. In the latest results, investors’ buying intentions are not trending anywhere in particular; neither are their plans for selling. Although the percentage of respondents planning to sell has lifted to 24% from 20% in April and March, there is no true drift up or down. The continuing reluctance to sell is due to a number of factors, including: • The continuing upward movement in rents • The role of property as a hedge against inflation, the still-low debtservicing costs for many on fixed terms • A comfortable ability to subsidise negative cash flows with employment income in a strong labour market • Falling share prices • Negative real returns on fixed interest assets like bank deposits

Meanwhile, a shift is underway in terms of those looking to buy an existing property over a new build. A record 56% of those looking to buy say they will opt for an existing dwelling - up from a low of 44% in November. Tony Alexander says there is also a rise in demand for existing apartments. “Maybe this is being driven by expectations of returning tourists and students – at least for Auckland’s CBD.” Alexander says the decline in property investors interested in undertaking their own developments is also clear. “Franky, in light of the worsening availability of key building materials such as plasterboard, rising costs, and labour issues, it is perhaps surprising 17% of investors still show a preference for doing their own projects.” ✚

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