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.

December 2018: Turning up the heat (PDF 716kB)

The planet is warming, presenting a challenge for policymakers on a global scale that needs to be addressed. Among other issues, for New Zealand the price and availability of insurance (and thereby credit) is likely to be affected over the long term by the threat of physical damage, particularly in coastal regions. This could weigh on property values in these areas and put balance sheets under strain, with financial stability implications. The overall economic impacts of climate change are difficult to estimate, though New Zealand appears better placed than many. But the costs of reducing emissions are significant. As the economy transitions to meet emissions targets, prices of emission-intensive goods and services are expected to increase considerably, and significant structural change in the economy is expected to take place. This is likely to dampen household incomes and consumption, with lower-income households most affected, which could also weigh on property values.

November 2018: Hot or not (PDF 636kB)

This month we take a closer look at housing market performance across different regions in New Zealand. Weakness in the Auckland and Canterbury markets have weighed on the nationwide picture, with these regions comprising 42% of house sales combined. But a number of other regions have experienced strong price gains recently. Based on a number of metrics, we identify Gisborne, Manawatu-Whanganui, Tasman-Nelson-Marlborough and Otago as hotspots, while exceptional heat is being seen in Southland and Hawke’s Bay. In addition, Bay of Plenty, Waikato and Wellington markets are also running hot, just not as hot as they have been. Conditions can change quickly and the outlook is uncertain, but all else equal, strong demand in these markets appears conducive to further regional price increases. This delayed cycle relative to Auckland is not unusual for the New Zealand housing market. On the whole, we expect that the nationwide market will remain contained. But regional divergence is expected, with hotspots expected to continue to outperform while headwinds blow strongest in Auckland and Canterbury.

October 2018: Where to next? (PDF 628kB)

This month we update our views on the outlook for the housing market. A number of offsetting forces are buffeting the market, but the balance of those forces may be changing. Our central view is that the market will see some volatility in coming months, especially in light of policy changes, but that an overarching theme of softness will prevail – with house price inflation expected to be modest. However, we’d emphasise that the outlook is very uncertain at present, and is subject to a number of important risks on both sides. Recent falls in mortgage rates could lend further support to the market, particularly given market tightness in certain regions. But on the other hand, policy changes could see a significant departure of investors from the market, recent softness could see expectations reassessed, and/or the migration outlook could be weaker than expected. On balance, we see risks as tilted to the downside. And in that environment, we expect that the RBNZ will ease loan-to-value restrictions a little at the November FSR. This will provide a boost to the market, but the effect is not expected to be large.

September 2018: Build me up buttercup (PDF 724kB)

Since late 2017 households have been building their housing equity. In part this reflects reduced turnover as the housing market has cooled; high turnover tends to be associated with increased debt because buyers typically have less equity than sellers. Recent lower turnover partly reflects government policy changes, uncertainty and affordability constraints. But credit conditions have played an important role in reducing turnover and building housing equity too. In addition, households are perhaps more constrained or more cautious towards debt in the post-crisis period. Nonetheless, debt levels remain high, meaning that households will be vulnerable should house prices fall or interest rates rise. The fact that those entering the market now have bigger buffers does help mitigate the risk and the potential fallout of a disorderly housing market downturn, with macro-prudential policy having played an important role here. But in light of financial stability risks, we expect that the RBNZ will take a cautious (and gradual) approach to easing loan-to-value ratio restrictions. An easing in November is possible, but settings are expected to remain “tight” for some time.

August 2018: Going global (PDF 804kB)

New Zealand’s housing market has slowed at the same time as a number of other markets, particularly Australia. So is the New Zealand housing market being dragged down by global developments? Our analysis suggests probably not. But it could be in the future. The recent slowing in the local market appears to reflect primarily domestic factors, including investor wariness and policy changes. Affordability constraints also appear to be weighing in Auckland – and some international markets like Sydney. But other domestic factors are offsetting; credit is generally available, population growth continues and interest rates remain low. Moreover, the RBNZ has monetary and macro-prudential policy ammo if required. Nonetheless, in the event of a global shock, there is a risk that the New Zealand housing market could be significantly affected. Global housing markets have become increasingly synchronised over time, particularly in downturns. This ups the stakes, particularly given that household debt is close to record highs.

July 2018: Holding the key (PDF 628kB)

It is widely known that housing is expensive in New Zealand. But we think the effects of unaffordable housing might be much more pervasive than generally appreciated. Not only does the high hurdle to purchasing homes have important implications for wealth equality, generational equity and financial stability, but it also impacts the economy’s productive potential. High house prices make it more difficult for younger households to invest in businesses, limiting the entrepreneurial endeavours of younger people. They also create barriers to labour mobility and social mobility, both of which matter for achieving our productive potential. And to the degree that high house prices are a symptom of excess domestic demand pressure, they will be associated with upward pressure on the real exchange rate, stifling exporting and import-competing activity. The challenges of low productivity growth and housing unaffordability are both complex and difficult to solve, but in our view these issues are inextricably linked.

June 2018: Rent-seeking behaviour (PDF 528kB)

The Government has implemented or proposed a number of policies that will affect investment in residential property. Outcomes are uncertain, but the policies being proposed are no magic bullet to fix New Zealand’s housing affordability issue, though they will likely have a temporary dampening effect on house price inflation. The most important factors underpinning housing demand have been strong immigration and low interest rates, and these factors are expected to persist. There are also crucial issues for affordability related to the supply side: high construction costs, construction industry productivity, restricted supply of land, and provision of infrastructure – and it is important that focus remains on addressing these issues, although quick fixes are in short supply here too. As with all policies, there may be unintended consequences, including potential upward pressure on rents, or negative impacts on housing supply at the margin – particularly for apartments. On the other hand, the proposed policies could have other benefits, like encouraging households to diversify their assets.

May 2018: Sense and serviceability (PDF 512kB)

The conventional economic wisdom in New Zealand is that a strong housing market supports consumption. But recently, this relationship has weakened, with households in aggregate seemingly no longer feeling good about rising house prices. Houses are unaffordable for many, servicing a large mortgage is a stretch, even at low interest rates, and the home ownership rate has declined. We suspect that the relationship between house price inflation and consumer confidence has changed as a result of these affordability concerns, in combination with the policy-driven slowdown in the housing market. Going forward, the relationship between the housing market and spending is expected to be more nuanced, with housing affordability concerns unlikely to recede any time soon.  

April 2018: Solid foundations (PDF 536kB)

New home building is at a high level. While rebuild activity in Canterbury has waned, overall housing demand is being driven by strong population growth, a shortfall of housing, and low interest rates. And despite rising construction and land costs, high existing house prices have made building attractive relative to buying. With demand expected to remain solid, we expect residential building activity will remain at high levels. But capacity in the construction industry is constrained and labour shortages are acute. Government initiatives intended to improve housing affordability will also contribute to demand, but we expect impacts on both the rate of home building and house prices will be relatively small. We have reached a more difficult phase in the construction cycle and rising costs and delays could put pressure on firms in the industry. Pockets of pressure could emerge, particularly around cash flow.  

March 2018: Catch me if you can (PDF 476kB)

The housing market has entered 2018 on a firmer footing after cooling through 2017. From here, we expect the housing market to remain stable, with prices rising at a moderate pace. A key headwind is affordability – particularly in Auckland, where eye watering prices are holding the market back from resurgence. But this is not true everywhere. And now that the Auckland market has cooled, the rest of the country is playing ‘catch up’. While there are reasons to expect Auckland house prices to rise faster than elsewhere on average over time, a large and unsustainable divide was created by Auckland’s recent astronomical rise. Going forward, this catch-up dynamic is expected to support the rate of house price inflation outside Auckland. And with steam taken out of the Auckland market and affordability at its limits, we expect price pressures there to remain subdued.

February 2018: On ice but not on the rocks (PDF 492kB)

Over recent months we have outlined our thoughts on where we believe the housing market goes from here. Although activity has shown more signs of life of late, and the risk profile does appear less negatively skewed than it did, we have not changed our overall views. We see prices effectively staying ‘on ice’ for the foreseeable future, with modest growth overall. But what does that imply for the broader economic outlook? History has taught us that the housing market has a critical bearing on the economic cycle. All else being equal, we expect softer house price growth to be a headwind for consumption growth going forward, although perhaps to a lesser extent than history would suggest, given that the softer housing market has not been driven by a turn in the interest rate cycle, but rather by a more restrictive credit landscape, including macro-prudential policy. Nevertheless, with the household saving rate having deteriorated over recent years (to an unsustainable level in our view), weaker house price performance is expected to see households look to rebuild precautionary saving, and this will be a headwind for overall activity growth.

January 2018: Crystal ball (PDF 524kB)

The housing market has had a great run in recent years, but times are changing. The market cooled over 2017, but staged a small comeback late in the year. What could be in store for 2018? In November last year we discussed the possible impact of the new Government’s policies, concluding that they are likely to keep house prices ‘on ice’ for the foreseeable future. This month, we focus on some other key drivers – the outlook for migration, mortgage rates, and the Reserve Bank’s LVR restrictions – and come to a similar conclusion. We are not anticipating anything untoward; there are certainly still factors that will keep the market supported. However, there are offsetting forces too that make a marked rebound in house price inflation unlikely.

December 2017: Stocking half full (PDF 476kB)

Some clear headwinds are being navigated right now that have increased the odds of a growth wobble, leaving the economy somewhat delicately placed. However, we are not ready to call time on the cycle just yet. The drivers of growth are shifting, and such transitions are often not smooth, but there are still enough positive forces that we expect to see growth return to broadly around trend over the next couple of years (but probably not much more). In itself, trend growth is unlikely to be enough to get domestic inflation pressures up in a sustainable fashion, but signs of more cost-push pressures from the labour market are something that we think the RBNZ will eventually respond to, albeit in a tip-toe fashion. That said, the timing of that response is highly uncertain and skewed towards later as opposed to earlier. It is admittedly a more nuanced economic story, but one that still has a positive hue to it overall.

November 2017: The policy pipeline (PDF 504kB)

The new Government has made it clear that it believes the country faces a severe shortage of affordable housing, particularly in Auckland. We concur. It acknowledges that there is no ‘quick fix’, which we also agree with, but it intends to take a more ‘active’ role in addressing the problem. This includes partnering with the private sector to build 100,000 ‘affordable’ homes including more state housing (half in Auckland), freeing up Auckland land supply, changing the taxation of investor housing, banning foreigners from purchasing existing houses, and bettering the lot of renters by improving the quality of the housing stock. Given that details of the measures proposed are yet to be finalised, the impact is difficult to estimate. But in our view, in aggregate they will at the very least contribute to keeping housing market activity and hence house prices ‘on ice’ for the foreseeable future.

October 2017: The once over (PDF 488kB)

This year’s ANZ-Property Investor Federation survey of property investors showed a greater degree of caution on the part of investors. However, investors remain optimistic about the medium to long-term value of their investments and at the time of the survey in August were still expecting quite significant increases in Auckland house prices. We suspect that price expectations have fallen and cautiousness has increased since the survey was taken, given the ongoing slowdown in the property market, particularly in Auckland.

September 2017: A fireside chat (PDF 496kB)

In this month’s feature article, our Chief Economist Cameron Bagrie provides some quick answers to topical housing market questions. He concludes 1) that LVR restrictions could be loosened from mid-2018, but likely in a staggered manner; 2) despite the economics (a supply shortage) telling us prices will keep rising in Auckland, the fact that rents haven’t moved to reflect the shortage shows us house prices have been heavily influenced by interest rates and credit – and these factors are set to be less supportive going forward; 3) the banks’ funding gap is still a key indicator and it has closed up, which suggests some of the extreme competitive pressure in the deposit space could ease and the credit wheels could turn a little faster; 4) falling Auckland house prices and rising construction costs could spell trouble in the developer space; and 5) while weaker housing activity has traditionally turned the broader economy lower, that link is expected to be broken to some degree this cycle.

August 2017: The lowdown on the slowdown (PDF 456kB)

Strong arguments can be made for why the OCR might not increase much, if at all, in the future. Inflation is low and technology is reducing firms’ pricing power. The world is struggling to generate growth strong enough to absorb spare capacity and in many places, key pro-cyclical sectors such as housing are now “rolling over”. We live in a world beset by low inflation and New Zealand is not immune to these forces. Additionally, prudential policy is increasingly doing the job the OCR used to do. Not only does all this mean that there is little pressure on the OCR to move up at present, it also means that the neutral interest rate (where the OCR will settle across the cycle) has fallen – quite a lot. The OCR is only one factor that shapes borrowing rates and they could change for other reasons, such as bank funding costs. But the OCR is still a material influence and while we can debate whether or not it will lift from current low levels, what is increasingly clear is that it is not going to move by much in any case.

July 2017: When the tide flows out…… (PDF 476kB)

Worried about your interest bill? Then keep an eye on inflation trends. We noted in January that inflation in New Zealand would lift off lows, but that the RBNZ would not respond and hike anytime soon. Six months on, and inflation signals are more mixed and convoluted, which will reinforce the RBNZ’s cautious neutral tone and expectations that the OCR is firmly on hold. Global deflationary forces have reappeared and there is scant evidence of inflation pressures building outside of housing. Not only this, but some housing-related pockets have turned lower again. Technology continues to deflate firms’ pricing ability. Looking forward, a key influence on inflation looks set to be the labour market, which is tightening, and the risk of a bow-wave of catch-up wage settlements is real. If that transpires (and at the moment it is still an ‘if’), stronger productivity growth will be needed to cap adverse inflation consequences and mitigate how far the OCR will need to rise. We continue to expect the RBNZ to lift the OCR in mid-2018. However, risks are skewed towards later, and we are only expecting a gradually removal of stimulus, pencilling in two x 25bps rises per year in 2018 and 2019.

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.

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