27 May 2009 | House buying confidence improves
The economic stars are aligning for the housing market, so now is the time to be bold and buy, suggests Adrian Chang in the Sunday Star Times.
BNZ chief economist, Tony Alexander, has pointed to three fundamental indicators of the housing market:
- housing construction; and
- interest rates.
All were pointing towards the right time to buy.
Property data out last week showed an increase in the number of houses sold in March, at a time where Quotable Value figures showed property values were down almost 10% across New Zealand in the year to March.
Writing in his BusinessDay blog last week, Alexander said he did not believe house prices would drop 40%, which some commentators were tipping. "Here in New Zealand the fundamentals have never added up to large declines in average house prices."
The first of those fundamentals, migration, was one of the major factors of the housing boom of mid-2000. Economic and political turmoil encourages Kiwis to stay at home and foreigners to shift here.
In the year to December 2000, there were 11,000 more migrants leaving New Zealand than arriving. By the end of 2001, after the World Trade Centre terrorist attacks, that number had almost reversed 10,000 more arrivals than departures. Over 2002-03 there was a net 73,000 inflow of new immigrants and most wanted to buy houses.
Migration statistics for February this year the latest available show the massive worldwide economic turmoil is starting to make itself felt. On a seasonally adjusted basis, permanent arrivals exceeded departures by 1700 in February, up from 700 in January and 300 in December. Alexander believes a year-end total of 15,000 to 30,000 new immigrants is an "easy call", meaning there will be more buyers in the market.
Another factor putting pressure on house prices is construction. January saw the lowest monthly level of new housing consents issued in 44 years. February's data showed an 11.7% improvement, but the long-term, seasonally adjusted trend is still within a hair's breadth of 17-year lows. Low construction levels is an important signal that future housing supply will be tight and this tends to signal increased property prices.
Interest rates are the final key indicator and have fallen dramatically in recent months, meaning it is cheaper to service mortgages. Although banks have been criticised for increasing interest rates for long-term fixed mortgages, Alexander says two-year fixed rates are around 1.6% lower than historical averages and the one-year rate is around 2.8% below average.
Reserve Bank governor Alan Bollard has slashed the official cash rate from 8.25% in June 2008 to 3% now, and is expected to cut it to 2.5% or even 2% by mid-year. He has suggested the OCR will remain low for some time, meaning it will be cheaper to service mortgage debt.
However, there are still those advising would-be buyers to hang on.
ASB chief economist Nick Tuffley said the current prospects of rising unemployment and a deep recession would put a damper on a migration-driven housing boom.
"Also, the starting point for housing prices is high relative to income, and rents are low relative to house prices. So house prices used to be very expensive, now they are merely expensive," said Tuffley.
His colleague, ASB economist Jane Turner, said that although increased interest in buying tended to correlate with improvement in house prices, she felt prices were likely to fall further.
"We don't think we're at the bottom of the housing market yet; we think there are likely to be a few more months of falling prices, so there's not any particular rush to get in there."