The house price cycle kicks upward
The past few years have certainly been very interesting when it comes to movements in the residential property market around the country. House prices have increased tremendously in fits and starts driven by a wide variety of factors. One of the key ones started in 2004 when insufficient dwellings began to be built in Auckland and when the global financial crisis ended and average house prices in New Zealand had fallen by 11% the shortage produced a doubling in Auckland house prices over about a four year period.
Other parts of the country eventually followed as investors sought better yield outside our largest city and home buyers sought more accessible prices. After the imposition of new lending restrictions from the end of 2016 Auckland flattened out and the pace of house price growth in the rest of the country slowed down.
Then, in 2019 the Reserve Bank cut interest rates to record lows in response to deep concerns about deflation in New Zealand.
This extra cut in interest rates propelled house prices upward again and although they fell by 3% in the first two months of the pandemic in 2020 they then soared some 46% on average because interest rates were cut again, lending restrictions were removed for about a year, and people looked for something to do with money they could no longer spend on international travel.
House prices then fell on average about 17% from the peaks late in 2021 in response to a fairly large credit crunch along with a rapid tightening of monetary policy and for a while net negative migration flows.
Now, since the middle of last year house prices have been rising at an average pace of 0.8% a month. This has occurred despite interest rates continuing to go up and as I have explained in this column repeatedly for some months now a number of key factors have been in play.
One is that there is a 2 1/2 year queue of delayed buyers getting activated as they respond to a doubling in the number of properties listed for sale and the absence of investors from the market. Lower prices have also helped and more recently there has been deepening concern from buyers about the impact likely to come from record net migration inflows.
Another key factor in play is the declining number of properties being added to the housing pool. The number of housing consents issued for the construction of new dwellings has already fallen from a record level of 51,000 in the middle of 2022 to around 38,000 now and at the pace at which consents are falling these numbers may fall below 30,000 by the end of this year.
Decreasing supply set against increasing demand from population growth approaching 3% in the past year can do only one thing to house prices. Push them higher. But we have to add two other special factors into this mix. First, as mentioned above, house prices have been rising even though interest rates have continued to go up. Now interest rates are starting to fall.
Second, tax rules affecting investors are changing and interest expense deductibility is returning. Full deductibility will return from April 1 next year but the 80% deductibility this year is close enough to 100% for us to talk about many investors once again looking favourably at the property sector. They of course will be encouraged to do so by decreasing term deposit interest rates and decreasing mortgage interest rates.
It is impossible to know the speed with which house prices will rise this year, but it doesn't really matter from an investor’s point of view. Very few people purchase a property with the intention of selling it within 12 or 18 months. For the overwhelming majority of people residential property investment
has a long term focus. So far house prices have been rising for six months. The house price cycle usually has an upward leg running for five or six years. These are still very early days in that upward leg.
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