ANALYSIS: Here are the main themes running through the residential property market at the moment.
First, courtesy of planning rule changes and some overhand from the pandemic binge there has been a structural shift in the supply of dwellings in New Zealand. As noted here previously, annual consent numbers have averaged 0.65% of the population each year since 1970.
Now, after all the pain of tight monetary policy, the pullback in consent issuance has only taken us back to that long-term average and not well below it as one would have seen in earlier decades. The peak was 1% over the years to June 2021 and 2022. This is great news for home affordability at long last.
Second, with lots of listings, not much competition, and accumulated savings from years of – until recently – good employment levels, first-home buyers are driving the market, and have been since the start of 2023. Investors have dipped their toes in the market on occasion over the last two years, but they backed off quickly once prices stopped rising.
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Third, prices have fallen 2% in the past four months, and a structural shift in the market is underway, in which people’s expectations of price growth over the coming years will change. That is, capital gain expectations are pulling away from where they were during the three-decade period until 2021, when interest rates kept edging lower and house-production was constrained.
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Fourth, the costs of running a rental property business (investing in houses to let) have soared. Expenses have stepped much higher for rates, insurance, maintenance, and dwelling quality generally. At the same time, legislation has moved in favour of tenants.
Fifth, there is a structural decline underway in the proportion of our population wanting to be property investors. This is being discussed more openly in media and reflects the structural changes noted above, along with special pressure on rents at the moment, because of the fall in net migration flows to below average levels.
There are certainly still a good number of people who want to purchase property for investment purposes. There always has been. But think of investors as forming a pyramid. The upper layers contain those who have invested in property as a business for generations and own maybe 20-100-plus properties.
Independent economist Tony Alexander: “Any extra rate cuts from the Reserve Bank will not spur the real estate market into life.” Photo / Fiona Goodall
Then there are some layers of those with 10-20 or 5-10 properties. Below that are those with 2-4 and under that we get those with just one. These latter people have not been property investors in the past, just like their parents were almost certainly not investors. But they have seen the rampant discussion about rapid and easy house price rises and the eye-opening calculations of people making more from their property rising in price than from their wage or salary.
These bottom-layer people have bought not to run a business long-term but because they felt like they were missing out on something and would look like an idiot if they did not join the in-crowd.
It is these people who now will look elsewhere, along with some in the next few layers above them, who are finding the numbers don’t stack up as well as they did in the past for properties they currently own and others they might normally have rotated into their portfolio.
This means two things. One, investor demand for property has structurally stepped lower. Two, many investors with properties are now looking to sell them. That is providing extra stock for first-time buyers to peruse and will help keep a lid on prices for the near future.
These factors explain why over 2% falls in mortgage rates this past year have failed to lift prices and why any extra rate cuts from the Reserve Bank will not spur the real estate market into life.
– Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz