Housing prospects improving

The outlook for residential property investors has improved quite substantially over the past few weeks. The first big improvement has been accruing at a fast pace for much of this year and comes in the form of an unexpected acceleration in New Zealand’s rate of population growth. 

A year ago I had an expectation that around now New Zealand would be enjoying a net migration inflow of about 20,000 people after experiencing a net outflow of that amount about a year ago. Instead the net gain has added up to 129,000 people in the year to October which represents a 2.5% boost to our population. 

This is a radical shift in the rate of population growth and it comes at a time of falling residential construction levels. That is, at the same time that the demand for housing in one form or another is rising rapidly the new supply coming forward is decreasing. The impact on prices is inevitable. 

The second factor strongly favouring property investors has been the change in government and confirmation in the coalition agreements that full restoration of interest expense deductibility will return from April 1 2025. A year before that 80% deductibility will return which in the minds of many people will be as good as 100% anyway. 

The third factor in play is a shift in interest rate prospects. Outside of New Zealand and especially in the United States data on the pace of economic growth and inflationary pressures have been coming in weaker than expected. This has just led the Federal Reserve in the United States to say that they don't anticipate tightening via monetary policy any further and that in fact they will be cutting their key overnight interest rate three times during 2024. 

This has caused some substantial declines in wholesale interest rates in the United States with the likes of the 10 year U S government bond yield for instance now over 1% down from where it was two months ago. These declines have fed through to declines in medium to long term interest rates in other markets around the planet. 

But here in New Zealand we also have new extra downward pressure because of data just released by Statistics New Zealand. Rather than growing 0.3% during the September quarter as the Reserve Bank had factored into their inflation projections our economy actually shrank by 0.3%. Not only that, but the quarterly rates of growth for the previous three quarters have all been revised downward. 

It looks like tight monetary policy has been having a far greater impact on our economy and therefore inflationary pressures than the Reserve Bank had been expecting. The upshot is that it is now extremely unlikely the Reserve Bank will raise the cash rate again and also extremely unlikely that they won't be cutting it until the middle of 2025 as they recently projected. 

Instead the first easing of monetary policy is likely in the middle of 2024 and before then we are likely to see wholesale interest rate declines already underway feed through to some initially restrained reductions in bank mortgage interest rates. 

The important thing is that borrowers will now see light at the end of the tunnel with regard to high interest rate costs and expectations of cheaper funding down the track will start to bring people back into the property market earlier than would otherwise have been the case. 

All of these fundamentals argue for the pace of house price growth in New Zealand accelerating as I have been indicating for the past year. My expectation since early this year for price changes through 2023 has been an increase nationwide of between 3% and 5%. It looks like we're going to end up close to that 3% rise. My expectation for next year has been 10% price rises and I'm sticking with that and throwing in a risk that the average increase is more than that. Price rises through 2025 are likely to be greater again.

In Auckland average prices have in fact already risen by 6.7% from their low in May and upside potential looks quite strong when we acknowledge that the bulk of migrants into the country end up in Auckland. 

Merry Christmas everybody and here’s looking forward to a housing environment over the next few years which is far less burdensome for the providers of rental accommodation in New Zealand than was the case under the previous government. 

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