4th Quarter Directors Market Commentary – where to from here for the market?

Despite what we might have called “pre-election jitters” dampening the market a tad, the housing market rebounded in October, and is lining up for a strong finish to the year. Increased mortgage lending that is recovering from 2 year lows, cuts to fixed mortgage rates, and net migration at record highs all provide strong support.

In broad terms the volume of house sales is where it was a year ago. Annual house price inflation is slowing overall. The LVR speed limits, growing unaffordability and recent increases to the floating mortgage rates proved a bit of a ‘dampener’ earlier in the year, but some of those have since eased. There are clearly 2 stories here – the story for Auckland and Canterbury, and the story for the rest of the country. Some say that the booming net migration could provide the market with a booster shot, but that will be dependent on where that net migration is concentrated.

Key housing indicators continue to track steadily. Sales volumes for October were up nearly 12% at 6,608 dwellings on September (some of which is seasonal) but down marginally from October 2013. The lift in sales volumes is off a sluggish middle of the year where the market was more subdued.
As we would expect with an increase in sales volumes the median days to sell dropped 1 compared to September, but similar to the sales volume trend, it took 3 days longer to sell than it did in October 2013. In the larger scheme of things, that’s neither here nor there.

Let’s take a quick look at some of the key housing indicators:

• Interest Rates
  We don’t expect the RBNZ to raise the OCR any time soon. After October’s CPI announcement (1% inflation vs RBNZ forecast of 1.9%) a lot of economists will have scurried back to their desks to revise their predictions. A survey of economists indicates some think an increase may happen around Sept next year, while another group think it won’t be until 2016. These forecasts indicate floating rates are going stay put for the time being. However, the longer-term fixed interest rates, which are driven by offshore markets rather than by NZ’s OCR, have started to fall.
• Home loan affordability
  Housing supply issues and affordability are long term issues, especially for Auckland. There are a number of complexities and views around the causes and solutions to this. What we can agree on is that in Auckland house price inflation is high, growing at a much faster rate than incomes, and that land supply and pricing is at the core of the challenge. Housing ownership is pivotal to NZ’s social structure. More legislation has been passed in parliament on housing in the last 12 months, than any other area in the last 5 years. The recent fall in fixed interest rates should help somewhat, however we are still a long way from a long term fix.

• Net Migration
  Breaking News!….Net migration has reached its highest level ever in the year to October 2014. This is an annual net gain of just under 48,000. This is a major about turn for net migration. Only a couple of years ago we had more people leaving than arriving. In the last year the largest sources of migrants were (in this order) from Australia, United Kingdom, India and China. These 4 countries provided just over half the migrant arrivals. On the departures side, Australia, UK and China were the top destinations for exits. To truly assess how net migration will impact the housing market, we need to understand where the gains are concentrated. Approximately half of net migration continues to occur in Auckland, with a quarter in Canterbury, Otago and Wellington. The remainder is made up by the rest of the country. This will continue to place pressure on Auckland’s housing market and do the affordability dilemma no favours.
• Building Consents
  Building Consent issuance dwindled in the few months leading up to the September General Election. It has since gained a head of steam in October. There were a number of reasons consents tapered off, including lower business confidence and some wariness around Labour’s plans to introduce capital gains tax. With the return of a national-led government we expect consent issuance to rise again. New dwelling issuance was up 22% to the year ending October 30…the most consents issued in a 12 month period since May 2008. Auckland’s consents were up 31% on the previous October year, which is a step in the right direction.
• Housing Confidence
  Housing price expectations remain high according to the ASB NZ Housing Confidence Survey for the October 2014 quarter. Just under half of the respondents expect house prices to continue to rise. This is pretty much in line with the previous quarter reports for the year, but has declined a small amount from late 2013. A net 8% of respondents think it is not a good time to buy a house, a figure that is more optimistic than the last quarter. We expect this largely to be due to an easing on mortgage rates and lending restrictions in the latter part of the year.

Where to from here for the market?

In terms of investment, Auckland remains one of the more logical choices…and the one most asked about. Despite what many of you off shore are reading about the tens of thousands of new houses going up overnight in the new Special Housing Areas (SHA’s), Auckland’s biggest housing challenge is supply. It is difficult to see prices easing, until the supply-demand picture is re-balanced. Auckland started with a shortage in 2008, then hit record low levels for construction, levels we hadn’t seen since the 60’s. It has recovered somewhat, but currently tracking at 7000 building consents a year is a long way off the 13,000 dwellings that need to be built each year to meet the demand outlined in the proposed Unitary Plan (the blueprint that will dictate how Auckland grows over the next 30 years).
You might think the Housing Accord is the knight in shining armour to kick-start Auckland’s supply catch up. In reality it is fraught with challenges. There are a number of considerations….just because land is physically available doesn’t mean a landowner will develop it. If he/she can afford the rates then landbanking until the pressures on the city grow and push prices up further has always proved itself to be a good option; there is reform required with the Resource Management Act (RMA) to strike a better balance between growing the economy and protecting the environment; there’s disagreement between central and local government on who should pay development contributions – the developer or the ratepayer; conflict between the landowner and the developer on cost-sharing; planning tools – district plans etc, take too long. This at least gives you a taste of the challenges and the disconnect between the theory and the reality. While demand outstrips supply, the pressure on house prices will continue.