NZ Real Estate- BNZ comments

This snip from Tony Alexander's weekly update pretty much sums up my real estate concerns.
I believe we are seeing the peak (or very near it) of NZ property prices for the next 6-7 years, if not longer. Growth in the last 5-6 years has been driven by people withdrawing and spending equity gained by house price increases- so what happens when house prices reverse, thus reducing household wealth? It won't be pretty, but those with cash in the bank will be ready as always to start buying when the next round of commentators start predicting that we are in a different economic environment and that there will never be decent capital gains in property to be had again (as they did in the last cyclical downturn). Mind you , if oil prices continue at high levels, they might be right next time!

The Housing End Game – Strength For Now But Lower Further Out

This month we have taken a more wide-ranging look at the housing market for a variety of reasons and have chosen to start by considering a factor which many investors hang their hats on – migration flows.
One of the key driving forces in any housing market is population growth. The impact comes via two routes.
The first is simple growth in the number of people needing to be housed. The second is via investors looking for capital gains who buy properties hoping to either rent them out to the new people or (more probably) hoping to sell them to someone else hoping to get some capital gain from the population growth spurt.
On average over the last 20 years there has been a net gain to New Zeaand’s population from long term and permanent migration of 5,000 people. This rses to 13,000 for just the past decade. For the past four years the average gain has been 26,000 people. So we have recently enjoyed a very strong population
growth period. Now that growth is slowing rapidly and in the year to August the net migration gain was just below 7,000 people.
If we look at the three months to August we see that the number of immigrants was up 1% from a year ago versus falling 13% at the same time a year earlier and falling 8% two years ago. So the latest numbers on the face of it don’t look too bad on the inflow side. But the number of emigrants was up 15% from a year ago in the three months to August versus a 15% rise a year earlier and 3% fall two years ago. So we have an interestingly high rate of growth in the number of people eaving. This is not what one would expect to see in response to our economy having the lowest unemployment rate in the OECD, accelerating wages growth, expanding Working for Families middle income welfare package, and growth in the economy of 3.1% over the past year.

We don’t have information on why people are leavingbut what we think people should focus on is the following. It seems reasonable to conclude that as the rate of growthn our economy slows down and the labour market eases up, there will be less incentive for people to move here and greater incentive for people to leave. In fact with growth likely to fall below 2% the push factor could get quite strong – especially as things look OK across the ditch and they are enjoying tax cuts while we are expanding the welfare system.
We see a strong risk that come late this year or early 2006 the annual net migration gain will turn negative.
And if our growing concerns about the imbalances in our economy prove correct then we will see a downward cycle emerging where growth worries cause migration outflows and these cause even more growth and housing worries bringing falling house prices and growing discontent with New Zealand all up.

Residential property investors have had a fantastic run over the past four years with the past year comwith continued strong price rises and acting in our opinion as a sort of “bonus” brought on by low fixed abour market, and a fresh jump in commodity prices. At the moment the real estate market still looks fine with shortages of listings in most parts of the country causing prices to keep rising. But the market is getting further and further out on a limb and the foundations of the strength are steadily eroding.
Population growth is slowing, rental yields are falling and at very low levels, interest rates are rising with perhaps further upside than people realise, jobs growth is going to slow, dwelling supply is growing, and at some point we expect a general wave of caution to go through investors. History shows that picking what an asset market like housing is going to do is very difficult. One never knows when investors will be forced to sell because they are tired of negative cash flows and no onger believe capital gains are coming. You never know when and to what extent developers fall over because investors no longer buy their properties off the
plan and finance companies won’t give the second tier financing they are reliant on. Migration flows are difficult to pick, and as many forecasters have learned over the past year, picking where interest rates go is very difficult when you get structural changes in our economy – in this case massive capacity constraints.

So it is impossible to put a timeframe on what we think will be happening with regard to house prices, and impossible to say how much average house prices will fall by. But as economists our job is to stand back from the current fray and spot the bigger trend – and the bigger trend is completely unsustainable. For the moment the weight of money seeking a home is likely to keep house prices rising, with help from everincreasing construction costs caused by things as diverse asnadequate local authority resources, rising materials costs, and continuing skilled labour shortages. But the foundations of this housing cycle are decidedly shaky and a downturn lies not too far ahead. When it comes investors had best hope that the economy is not at the same time being hit by some fresh negative thing which undermines the high job security which has strongly underpinned the housing market and is still doing so. If that happens then home
buyers are going to get worried about debt servicing costs – with the ratio of debt servicing to disposable income sitting at a record high. This may then bring a round of owner-occupier house sales on top of developers quitting stock and investors cutting their cash flow negative portfolios.
Plus there is one other factor (at least) that is relevant to how long the housing market remains depressed.
We have in recent quarters been noting the way in which the switching of people from floating interest rates to fixed ones has blunted the effectiveness of monetary policy and lengthened the upward leg of the housing cycle. The same applies the other way around. When the NZ economy and housing market tank further down the track and the Reserve Bank eventually gets around to easing monetary policy, it will be a long time before there is much impact on the hip pockets of home owners. This is because it will take a long time for people to roll off fixed rates onto floating rates. In addition, as they do so the saving as they go from a 7.5% or 8% fixed rate to a 7.0% - 7.5% floating rate is not going to be all that great.
This means the flat period for the housing market this cycle could extend longer and deeper than has been the case before.