UP FRONT | PROPERTY NEWS
NEW ZEALAND RATED RISKIEST HOUSING MARKET New Zealand is at the top of Bloomberg’s list of riskiest housing markets – those which are vulnerable to a price crash.
“Falling house prices will erode household wealth, dent consumer confidence and potentially curb future development.
The country experienced extreme price growth over the pandemic, driving house valuations to absurd levels when looking at price-to-rent and price-to-income ratios.
“Animal spirits are typically tamed when people are faced with higher repayment costs on an asset that is losing value.
Bloomberg has spelt out the impacts of a severe house price correction:
CONSTRUCTION TO START FALLING SOON Residential construction is close to topping out – if it hasn’t already – in this housing cycle. ANZ’s latest Property Focus says there simply isn’t enough economic resource available for residential construction to grow much more, and any light at the end of the migration-and-buildingmaterials tunnel seems months away. By then, demand will likely feel different. ANZ chief economist Sharon Zollner says while the bank’s forecast is for the overall level of residential construction to remain high by historical standards, a period of contraction is on the cards. “We have pencilled in about a 6% contraction in residential investment activity over next year. Relative to previous cycles, this can be thought of as a soft landing. “However, while benign, this is a significantly weaker forecast than the
010
TMM 03 | 2022
“There are going to be house buyers who have entered the market in the past year or so who started off with
RBNZ’s May Monetary Policy Statement (MPS), and one of the reasons why the OCR will top out at just 3.5% - as opposed to the near 4% signalled by the RBNZ and the over 4% peak currently priced in by the market.” The RBNZ is looking to dampen the inflation fire down before it truly gets out of hand, and the housing market and residential construction sector will be big factors in how that’s achieved. Zollner says the bank suspects it’ll happen a bit quicker than the RBNZ expects, but it remains a question of timing. “The RBNZ will keep going until house prices fall more and construction cools significantly, as it’s a key part of getting on top of the broader inflation problem. It’s a question of when, not if.” Residential construction accounted for about 6.5% of real expenditure GDP in the year to March, and a little less than that in the production measure of GDP. Factor in sky-high building-cost inflation, and residential investment has
a mortgage rate of 2.5% and all of a sudden they are rolling off on to a mortgage rate closer to 6%. “There is going to be some pain for sure.” The country’s median dwelling price has already plunged 9.2% from the November 2021 peak with the stock of unsold homes also ballooning.
shot up to almost 9% of the economy. Residential investment is an area of the economy which tends to experience relatively outsized swings through the business cycle. When residential investment gets going, it really gets going. says Zollner. And when it stops, it can be just as dramatic. “Swings in residential construction, and the housing cycle more broadly, tend to also be associated with swings in prices.”
