Future of New Zealand Property
New Zealand property has been one of the most talked about topics in recent times. But before I proceed, it is best to clarify that for the purpose of this article, New Zealand property refers to New Zealand residential housing market. Property prices in New Zealand have risen substantially over the past five years. The median house price in New Zealand has increased from $370,000 as at 31 March 2012 to $546,000 as at 31 March 2017 (www.interest.co.nz), an increase of 47.6%. This overall increase has been significantly led by Auckland where the median house price has increased from $495,200 to $890,000 over the same time (www.interest.co.nz), representing an increase of 79.7%. Note that I have quoted the median price (the middle of the range) rather than the mean price (the average of the range) because mean price can be biased by a few unusually priced (either unusually high or unusually low) sales. Naturally, such an increase in price has been a source of wealth creation for all who owned a property (or many!) during this time. But what does the future hold for this kiwi-beloved source of wealth creation? I have given my opinion on this question here.
Factors affecting New Zealand property market
Before trying to understand the future of New Zealand property, it is worthwhile to first consider the factors, which have driven New Zealand property in recent years. New Zealand property has been driven by a number of factors. A comprehensive discussion of all those factors is beyond the scope of this article. Accordingly, I have identified cheap and easily accessible credit, positive net migration and lack of residential housing construction in the years following the Global Financial Crisis (GFC) as some of the more prominent factors to be discussed here. Let’s look at each of these factors.
Credit – Mortgage rates have been historically low primarily as a result of the low official cash rate (OCR) maintained by the Reserve Bank of New Zealand (RBNZ) domestically and also due to low central bank interest rates in developed economies globally post the GFC. Low mortgage rates mean low mortgage service costs (i.e. low mortgage payments). This has enhanced the purchasing power of potential property buyers by allowing them to borrow higher sums of money than would have been affordable if mortgage rates were at the pre-GFC levels (e.g. 1-year mortgage rates averaged nearly 10% in March 2008 – (www.interest.co.nz). Going forward though, the RBNZ is widely expected to raise the OCR (most likely first half of 2018). Based on this expectation, and the fact that the Federal Reserve (the US equivalent of RBNZ) has started hiking the federal funds rate (US equivalent of OCR), most banks in New Zealand have already started raising the mortgage rates on offer. This trend of rising mortgage rates is expected to continue for the foreseeable future. Albeit the rate of increases in mortgage rates cannot be determined with certainty, it is certain that higher mortgage rates will make it costlier to service a mortgage thereby restricting the amounts of money potential property buyers can afford to borrow. This is expected to have a lowering impact on the demand for property. Furthermore, the RBNZ has implemented credit restricting regulations in the form of loan-to-value ratio (LVR) restrictions. This has largely been targeted to restrict the activity of property investors. The incumbent LVR restrictions have forced investors to produce larger deposits (read 40%) to secure mortgages for investment properties. This has significantly reduced property demand from investors (at least for the time being).
Migration – Net migration is calculated by subtracting permanent or long-term departures from permanent or long-term arrivals. For the 12 months ended 31 March 2012, net migration stood at negative 3,383 (www.stats.govt.nz). This meant that New Zealand’s population decreased by 3,383 for that year. Net migration for the 12 months ended 31 March 2017 was positive 71,932 (www.stats.govt.nz), an increase in New Zealand population of nearly 72,000 for the year. Without getting into a political tangle, let us try to understand some of the factors driving this unusually high rate of net migration. The New Zealand economy has performed better than most developed economies globally following the GFC. This has resulted in lesser number of Kiwis leaving New Zealand in search of greener pastures overseas. At the same time, a greater number of expats has been returning to New Zealand to be closer to home and/or to seek better employment opportunities given the tougher economic environment overseas. For similar reasons (and the fact that we have a beautiful country!), non-expats from developed economies as well as emerging economies have been arriving on our shores in recent years. The slow-down in the Australian economy following the mining boom has also contributed meaningfully to this influx. Obviously, all these additional people need accommodation, which has significantly fuelled the demand for residential housing in New Zealand. Auckland, being the business hub of the country, has seen the largest share of net migrants settle within its boundaries, which partially explains Auckland leading rest of New Zealand in the rise in property prices. To somewhat address the high net migration, the incumbent government has recently announced changes to the New Zealand immigration criteria for the skilled-migrant category. These restrictions may reduce migrant numbers over the coming years but are unlikely to produce an immediate impact. Additionally, the New Zealand economy is still well placed relative to the Australian economy and some other developed economies globally. Therefore, net migration is expected to remain positive for the short to medium term, which will provide demand for property.
Construction – Construction of new dwellings is required to maintain a sufficient supply for the demand of properties. Construction activity is measured by the number of new dwelling building consents issued. In the five years to 2008 (i.e. the years before the GFC), the average number of building consents issued was 27,551 per year (www.stats.govt.nz). From 2009 to 2013 (i.e. the years following the GFC), the average number of building consents issued was 15,644 per year (www.stats.govt.nz) – new construction activity nearly halved following the GFC. Note that building activity has picked up over the last four years averaging 26,456 consents per year including 30,626 new residential building consents issued for the 12 months ended 31 March 2017 (www.stats.govt.nz). As previously discussed, net migration has increased phenomenally over the last five years fuelling demand for property. The pick-up in building activity over the last four years has created a pipeline of properties to be supplied to the property market but the time taken from the issue of a building consent to the actual completion of the dwelling means that supply is lagging demand. Supply has been further slowed due to capacity constraints in terms of a shortage of construction labour as well as a shortage of construction materials. I should also point out that the increasingly tougher credit conditions discussed above are also adding to the struggles of property developers. All of this has resulted in a supply shortfall of residential housing in New Zealand (more pronounced in Auckland). In my opinion, given the expected positive net migration levels and the capacity and credit constraints slowing the eventual supply of dwellings, a supply shortfall may persist over the short to medium term.
Hypothetically, doomsday for New Zealand property can occur if net migration turns negative while there is a simultaneous higher than expected supply of housing. Net migration may turn negative if global economies (particularly Australia) begin to perform better than the New Zealand economy, a possible but unlikely scenario in the short to medium term. As previously mentioned, housing supply is constrained due to a shortage of construction labour and materials as well as tougher credit conditions, all of which are expected to persist at least in the short term.
So, putting it all together, for the reasons discussed above:
Higher mortgage rates in combination with LVR restrictions will have a negative impact on property prices going forward
Net migration is expected to remain strongly positive for the short to medium term, which will provide a base support to property prices
Greater construction activity will eventually eliminate the existing supply shortage but that is expected to take some time to eventuate. Hence, there will be support for property prices in the short to medium term due to excess demand.
Based on the above, I believe New Zealand property prices will broadly experience moderate growth in the short to medium term unless there is an unexpected shift in the underlying factors. In my opinion, the times of high-rolling double-digit annual growth in property prices are principally behind us. That said, I also do not believe that the New Zealand property market is a bubble, which is likely to burst resulting in a collapse of property prices because New Zealand property has been primarily driven by fundamentals rather than pure speculation as discussed above.
What should you do?
Investing 101 suggests that one should spread their wealth across different asset classes to minimise the risk of losing wealth due to a downturn in a particular asset class. Although I do not believe New Zealand property is likely to experience a major downturn in the near future, if most of your wealth is tied-up in New Zealand property, it would be prudent to consider spreading your wealth across other asset classes. To help you decide on the best way forward for you given your personal circumstances, please contact your financial advisor.
Note: This article contains personal opinions in combination with facts from cited public sources. This article should be used for information only. It does not contain personalised financial advice with respect to your personal circumstances and as such should not be relied upon for financial decisions. For personalised financial advice, please contact an authorised financial adviser. Personalised financial advice is available at Montage Financial Planning Ltd.