In mid-July, Tony Alexander, Chief Economist for the BNZ, was asked whether NZ house prices might fall as sharply as those in Melbourne and Sydney (which have retreated 10% – 15% from their peaks). Tony doesn’t think that will happen in NZ – for the reasons below.
Forecasts of a collapse in New Zealand house prices have been made repeatedly since the 1980s and were most prevalent during and immediately after the GFC. None of these forecasts have proved correct. Average prices fell only 11% between 2007 and 2009 and have risen 88% since then. Nonetheless, focusing on a comparison with Australia, since 2003 while Australia’s Capital Cities House Price Index has risen by 90%, NZ’s nationwide index has risen by 150%. New Zealand ranks as one of the world’s least affordable housing markets.
Here are some reasons suggesting it is not valid to extrapolate recent declines in Australian house prices into the NZ scene.
One reason for the difference in price growth since 2003 is that although Australia’s 27% population growth since 2003 exceeds NZ’s 22%, Australia’s housing stock has grown by 30% versus just 20% in NZ. In NZ there is a housing shortage which is getting worse, whereas in Australia there is a (temporary) oversupply.
In the past 5 years NZ’s population has grown by 458,000. At an average household occupancy rate of 2.7 people per dwelling, this required 170,000 net extra houses to be built. Actual dwelling stock growth was only 126,000. The NZ housing shortage is growing and will continue to do so as net migration flows are remaining high near 50,000 (1% of population) per annum.
Between 2003 and 2019 the household debt servicing ratio in Australia rose from 8.2% to 9.1%. NZ’s ratio has fallen from 9.1% to 7.6%. Australia’s household debt to income ratio has jumped from 134% to 190%, NZ’s has risen from 130% to 164%.
There has never been as great a level of foreign house buying in New Zealand as Australia. The official NZ data only started in 2016 but shows average non-resident buying of 2.5% of all sales, falling now to 0.6%. In Australia, according to an NAB quarterly survey, foreign buying peaked in 2014 near 16% for new properties and 9% for existing ones. Fewer than 4% of existing dwelling sales now go to foreigners and 5% of new dwellings.
Since 2003 67% of dwellings built in Australia have been in multi-unit developments. The NZ proportion is just 26%. Prices for apartments have historically shown greater volatility than prices for houses.
In New Zealand there was no surge in people gearing compulsory superannuation money into housing as occurred in Australia, (given the absence of self-managed superannuation funds) and therefore no recent strong downward pressure on prices from the cessation of bank lending for such.
There are no stamp duties on dwelling purchases in NZ therefore there is an absence of the recent depressing price effect in Australia from states introducing and still increasing duties and levies on foreign buyers and owners.
In 2015 in Australia near 40% of lending to households was interest only. In NZ at the same time the proportion was 28%. Due to the imposition of new restrictions this ratio in Australia now stands near 20% versus 26% in New Zealand.
The most recent annual number of dwelling consents issued in NZ is 34,500 or 1.8% of the housing stock. In Australia the number is 190,285 and the proportion 1.9% – still greater than in NZ even after a fall from 230,000 a year ago. There is a shortage of builders across all trades in New Zealand – partly because shortages offshore have attracted some Kiwis away for higher incomes and opportunities.
The above is an excerpt from Tony Alexander’s Weekly Overview of 18 July 2019. Sign up here to receive the Weekly Overview each Thursday night.