Migration offsetting economic deterioration

Recovery is underway in residential real estate markets around New Zealand, driven by a large number of forces. Many of these forces are acting on young buyers who have re-engaged with the market in numbers since very early in the year. 

As previously discussed here, young people have seen their wages rise at a fast clip, they enjoy strong job security, their deposits have grown, house prices have fallen, rents are rising, credit rules have been eased, there is a temporary aversion to new-builds by some, and listings are at strong levels delivering good choice. 

To date, however, there is no evidence of increased investor buying and owner-occupiers are showing just the first signs of feeling willing to buy/sell or sell/buy. But if National wins the October 14 general election we can expect investors to return. Picking how strong this factor will be however is impossible and the risk is people over-estimate it. 

It pays to remember that rules have changed in favour of tenants in recent years and costs of providing rental accommodation have risen strongly and continue to do so – especially for insurance, rates, and maintenance. 

One factor likely to be getting more attention very soon is the deteriorating outlook for the New Zealand economy. The chances are strong that we will go back into recession late this year led by a primary sector hit by reductions in demand from China. 

Fonterra have already slashed their projected payout for this season and a further cut is highly likely. Prices have fallen for red meat and forest products yet on-farm costs have soared since mid-2021. Widespread financial constraints on farmers will hit the regional economies and be one of the factors driving the expected underperformance over the next 2-3 years of regional housing markets. 

Will rural recession and weakness from the impact of high-interest rates yet to hit be enough to prevent the recent recovery in the residential real estate market from continuing? No. 

Something I have observed over the past 3-4 decades is that while the overall state of the NZ economy matters a lot, the specific factors which drive the housing market can dominate. This time around in particular a key specific factor is that many potential property buyers have been standing back from the market since early-2021. They initially could find nothing to buy then held off watching prices fall. 

Now, with higher deposits etc. mentioned above they are in most cases eager to transact. Many however cannot with bank stress test interest rates near 9%. This is especially so for investors. The worse the economic outlook for 2024 the greater and sooner will be declines in interest rates, therefore the sooner these currently highly frustrated buyers will be able to enter the market. 

Now, add in a 1.8% population boost in the past year just from net migration flows, falling growth in new house supply, and already falling listings, and the chances are very strong that economic weakness will not prevent rising real estate sales and house prices. 

The first signs of migration-driven pressure will appear in the rental market – and in fact, they already are. One of my monthly surveys clearly shows landlords are finding it easier to secure good tenants. The question now becomes one of how quickly this swift change in market dynamics since the end of 2022 will feed through into higher rents. 

Tony Alexander is an independent economist and produces a free weekly publication with a housing focus called “Tony’s View”, available for signup at www.tonyalexander.nz