ANZ Property Focus

ANZ Property Focus assesses the state of the property market in New Zealand, providing investors and prospective homeowners with an independent appraisal of recent developments.

June 2017:  Who’s hot and who’s not (PDF 552kB)

They say a picture is worth a thousand words, so this month’s feature takes a look at regional housing markets, gauging who is hot, and who is not. The clear take-away is that Auckland is bearing the brunt of the recent slowdown in housing market activity, with numerous other regions still performing well and playing catch-up; although unsurprisingly, some are doing better than others. This Auckland underperformance is a story that will persist if the 2005-2007 experience is repeated. Capital (and people) naturally flow to regions where valuations look more attractive and the gap between Auckland house prices and the rest of the country is extreme.

May 2017: Show me the money (PDF 568kB)

New Zealand has a considerable pipeline of investment needs, which largely reflects some catch-up and the necessities of catering for a rapidly growing population. Given a domestic saving shortfall, New Zealand’s typical modus operandi has been to fund its investment needs through offshore borrowing (running a large current account deficit). While that is still possible to a degree, it is facing far more challenges now given prudential restrictions, credit rating agency attention and financial stability considerations. The onus is falling more on the saving side of the ledger to pull its weight to fund domestic investment needs. While a decent income growth backdrop will assist, there will still be trade-offs. In order for the investment wheels of the economy to continue to turn at the rate necessary, domestic saving will need to lift, and ultimately more saving equals less consumption, with the latter the sacrificial pawn to allow stronger investment.

April 2017: Harder and smarter (PDF 460kB)

Productivity growth is at the heart of lifting real incomes and boosting living standards i.e. growing outputs faster than inputs. As few would favour a severe house price crunch, the far more attractive way for housing to become more affordable is for incomes to lift. Unfortunately, productivity figures for New Zealand don’t make for pleasant reading. The trend has waned, and GDP growth per capita has been weak. We’ve seen good headline GDP growth but it has been driven by more inputs, particularly more labour. Of course stronger employment is a good thing, but lifting broad living standards requires a bigger return on our efforts. On some levels weak productivity growth doesn’t tie in with anecdote. It also must be kept in mind that weaker productivity growth has been a global phenomenon, with New Zealand being ‘less bad’ than many others. The economic impact (cost) of natural disasters in recent years will have also suppressed productivity, though to what extent is impossible to know. All up, the productivity or GDP per capita story is not as bad as headline figures portray. However, they are still not flash, and lifting productivity performance is essential if living standards are going to rise and the likes of housing affordability agendas met.

March 2017: This time is different (PDF 508kB)

The property market has cooled rapidly as the combination of loan-to-value ratio restrictions, higher interest rates (a turn in both the local and international cycles) and credit rationing dampen demand. That’s provided a near-term hit to recent exuberance, though it’s worth bearing in mind that a demand-supply mismatch will provide support and typically that’s seen the market run away again after previous similar lulls. What is different this time around is that interest rates are moving up and appear set to continue to do so, and policymakers are more serious in their desire to quell excessive lending growth. This will reduce the potential for the market to lift in a material fashion from here.

February 2017: An arm and a leg (PDF 488kB)

There are increasing signs that pro-cyclical parts of the economy – house sales and residential building consent issuance – have weakened. LVR restrictions, difficulty finding skilled labour and credit rationing are some of the constraining factors. Such a deceleration is actually healthy if it can take some pricing heat and speculative excesses out of the market, thereby reducing boom/bust risk. However, less housing supply will hardly do that, and one reason supply looks like it is being curtailed is burgeoning costs, with multi-dwelling consent values per square metre exploding in Auckland of late. Some of that may reflect compositional shifts (ie higher-value units) but that’s hardly boosting affordable housing. Market forces, in the form of intra-regional migration and changes in household size, will no doubt partially offset growing imbalances. But the market critically needs more supply, and booming costs make it harder for the numbers to stack up for developers.

January 2017: Turning tide (PDF 452kB)

The RBNZ has an inflation target, so when inflation moves, interest rates are going to move in tandem. A myriad of inflation drivers – commodity prices, factor constraints, the labour market and the global inflation cycle – are now pointing up. That means the bias for interest rates is upwards too. That said, dampening factors remain in place (the strong NZD, excess global capacity and the deflationary impact of technology) so it’s hard to see the inflationary genie exploding out of the bottle. We’ve seen false inflation (and interest rate) starts before, where the threat failed to gain traction. Inflation therefore needs to be pretty well at target (2%), as opposed to heading towards it, before the RBNZ reacts and lifts rates. If inflation pushes a little through target then so be it; the RBNZ has the tools to deal with that and it’s a better option than another false start.

December 2016: Last call (PDF 432kB)

It’s midnight at the bar. We’ve had a good time. Do we go home or stay out until 4am? History says the New Zealand economy (housing market) stays out and binges. The end result is an economic hangover as a bust follows the boom. Warning signs are starting to flash with regard to leverage (credit expansion relative to incomes) and asset valuations. The term “this time is different” is a phrase that can come back to haunt an economist but there are some key differences now. We have a housing boom but not a consumption equivalent as households show more restraint, which in combination with the high NZD and other deflationary forces is keeping inflation (and the RBNZ) at bay. Housing supply is still not keeping pace with demand so we don’t have a surfeit of stock that could pressure prices. We don’t have a shadow banking sector. The regulator (RBNZ) is playing bouncer at the door through loan-to-value restrictions and banks the responsible bar-tender tightening up the availability of credit. This will help dampen the extent of excesses built up at the top, which will lessen the pressure for an adjustment on the other side.

November 2016: The lowdown (PDF 492kB)

In the absence of a global downturn (a non-trivial risk), the lows in interest rates look behind us. The economy is strong, inflation signals are pointing more conclusively higher, global deflation risks have eased, the US Federal Reserve is set to hike rates, and attention is turning away from monetary policy keeping rates low towards expansionary fiscal policy adding to debt and yields. This does not mean a trend higher in interest rates is set to follow; there are too many vulnerabilities around the globe for that. Locally, a sizeable funding gap means credit growth needs to slow and deposit growth rise; that’s incongruous with borrowing (and deposit) rates falling.

October 2016: Great expectations (PDF 440kB)

Confidence about buying property remains high. The proportion of investors planning to buy more properties rose to the highest since 2009, and investors are optimistic over returns (both capital gains and rental income) for both the year ahead and longer term. In terms of what is keeping property investors up at night, LVR restrictions and other regulatory changes are up there, but are trumped by the risk of damage to property, especially from methamphetamine. While the RBNZ’s tightening of the LVR restrictions is certainly causing concern amongst property investors that it will cramp their style, there appears to be little concern that the restrictions could topple the housing market. Cyclical risks such as lower returns barely warranted a mention.

September 2016: Help wanted (PDF 484kB)

Amongst all the commentary about housing affordability, it is the house price that gets all the attention, with little focus on earnings and income. Prospects for the income side of the equation remain sound: GDP growth is strong, the labour market is tightening, and wage growth is expected to lift. We’re not talking “knock the ball out of the park” rises, but steady improvements. There are the usual suspects that could upset the apple cart (the global scene and too much borrowing demanding a shakeout) but New Zealand looks reasonably well placed. We see annual income growth settling around 4-5%. That’s highly respectable and a solid backbone, but won’t improve housing affordability if we remain in an environment of double-digit house price gains!

August 2016: Lies, damned lies and migration (PDF 496kB)

Migration is booming, with a net inflow of over 69,000 migrants (125,000 gross arrivals) over the past year, according to Statistics NZ data. That’s putting pressure on housing and infrastructure. But when you look at the fuller picture, including the number of permanent resident approvals (the aim of which has not really altered from 45-50k per annum), the story does appear less alarming. A German au pair, for instance, doesn’t have the same impact on the property market as a permanent resident. New Zealand’s economic and political credentials currently look pretty good. Because of that, we don’t believe net migrant inflows are going to cool aggressively any time soon, in the absence of policy intervention. Skill shortages will worsen as the population ages, so New Zealand needs to import labour. However, it is questionable whether current policy settings have got the ‘mix’ right and are achieving the desired outcomes. Sub-par GDP per capita growth is telling, as is the mismatch between reported skill shortages and the skill sets of arrivals. It is also odd that more foreign students are heading into Private Training Institutes as opposed to Universities. In short, there are aspects that suggest the migration framework, and the application of the rules, could be in need of adjustment.

July 2016: Drinks on the house (PDF 476kB)

Tighter LVR restrictions have been signalled, and are effectively in place now. It’s hard to go past the spirit of why they are needed given debt accumulation, New Zealand’s balance sheet, and exuberance across asset prices. A further tightening in the availability of credit via macro-prudential policy looks inevitable. Key challenges will be to ensure a) it doesn’t restrain housing supply; and b) it doesn’t force lending into the shadow and unregulated banking sector. While the RBNZ is set to cut the OCR again, we doubt the full 25bps will be passed on. Credit growth is outpacing deposit growth, a partial by-product of lower interest rates. Any shortfall needs to either be funded offshore (which is more expensive) or by shifting relative pricing, which means competing more aggressively for deposits and slowing credit growth. Banks’ cost of funds continues to rise. Deposit rates are now into the territory where further reductions would negatively impact already falling deposit growth rates. For money to be going out the door (lending), it needs to be coming in as well, and continued falls in deposit rates is incongruous with that. So we appear to be approaching a point where borrowers will not get the full benefit of OCR cuts, but depositors will not receive the full pain either, and in fact may benefit if competition heats up.

June 2016: Amber alert (PDF 448kB)

Markets are set for a tumultuous period following the UK EU referendum result. Society has sent a message against globalisation and economic integration; that’s negative for microeconomic policy settings and ultimately growth. A key issue now is whether Brexit spills over into wider Europe and Asia.  We suspect it will, and from there likely into emerging markets, which means Asia and that’s hugely relevant for New Zealand. Global growth will be lower, although we are coy about making sweeping assessments at this early stage. What we know is that a) the global economy is already vulnerable; and b) steps against globalisation and integration are negatives that need to be reflected in asset valuations. For New Zealand, this represents a challenging backdrop of which to be mindful. Heading into a period of heightened uncertainty New Zealand doesn’t look as vulnerable as it did prior to the Asian Crisis or GFC. But we are on alert. At this stage, we expect the domestic impact to be small; New Zealand continues to have a number of positive forces in its favour – excellent momentum being one of them. But it is a moving feast and outside of direct trade linkages and capital flows we are watching our 6 C’s; contagion risks, confidence, cost of funds, commodity prices, the currency and China. It would be unwelcome and problematic to see a direct flow on into three or more.

May 2016: Accentuate the positive (PDF 376kB)

The property market is hot; regions are playing catch-up and Auckland is lifting again. Households are once more borrowing with gusto. That combination means greater risk of a macro-prudential response from the RBNZ. While it did not announce any additional measures in its latest Financial Stability Report, something looks to be around the corner. This will help dampen demand, but it does nothing to alter supply, which is where much of the problem resides. Residential consent issuance looks to be tailing off, with elevated cost increases indicative of resource constraints. High net PLT immigration merely adds to demand pressures.  

April 2016: A line-ball call (PDF 116kB)

The RBNZ held the OCR at 2.25% and a clear easing bias was retained. Whether the OCR gets cut again is a line-ball call; housing market strength calls for no change. With the effectiveness of the high-LVR lending restrictions and government policy measures to slow investor demand looking to be waning, the door remains open to other policy action. Auckland and nationwide house prices surged to new record highs, with regions outside of Canterbury generally booming. Residential consent issuance looks to be tailing off and record annual net PLT immigration makes the construction sector response a moving target. Households are exhibiting leveraging-style behaviour, which looks set to continue for a while yet. The longer this continues, the greater the odds of a correction in the market.  

March 2016: Jekyll and Hyde (PDF 164kB)

The RBNZ cut the OCR by 25bps this month citing global fragilities and declining inflation expectations; an even lower OCR is on offer. Despite ongoing strong net immigration and low interest rates, the Auckland property market remained in something of a hiatus, with the median days to sell higher than the nationwide average for the first time in nine years. But it’s full steam ahead for other regions, with the Wellington market showing notable strength. Annual residential consent issuance hit an 11-year high, but the trend is pointing downwards in Auckland and Wellington. Households are exhibiting leveraging-style behaviour, which looks set to continue for a while yet. That is concerning.

February 2016: Zero-sum game (PDF 196kB)

RBNZ Governor Wheeler acknowledged that a lower OCR may be needed over the coming year, though they look to be on hold for now. Offshore funding costs are on the rise. Despite ongoing strong net immigration and low interest rates, the Auckland property market remained in something of a hiatus, with prices down, volumes well below year-ago levels, and the median days to sell higher than the nationwide average for the first time in nine years. But it’s full steam ahead for other regions. Households continue to exhibit leveraging-style behaviour with borrowing outstripping income growth.

January 2016: Baton change to the regions (PDF 212kB)

The RBNZ left the OCR on hold, but noted that rates may move lower in 2016. We are not seeing enough to justify a further easing in policy but the risks are obvious. December REINZ data showed some modest recoil, with the Auckland housing market considerably less buoyant than prior to the introduction of regulatory changes in October, whilst markets in other regions are heating up, supported by historically low mortgage interest rates, relaxed LVR criteria and the “ripple’ impact of earlier Auckland house price strength. Dwelling construction activity is strengthening, but booming net immigration implies a moving target for housing demand. Credit growth has followed the housing market and households are re-leveraging, although mortgage approvals look to have plateaued.

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