This year, Auckland was relatively insulated, supported by strong international migration and better economic growth when compared to the rest of the country. But the global economic outlook is deteriorating sharply, which will slow the economy, and with it, the housing market. We predict that, at best, the housing market will remain in a holding pattern in the next year. In the case of a darker global scenario, the housing market would sink again.
Looking at the year, the housing market recovered through the first half of 2011, from bleak to only terrible. But even this modest recovery has faded in recent months. The number of house sales now is still lower than the low point in previous recessions. The problem is that the fundamentals of housing are weak. The two main sources of housing demand - new people coming to the country and investors - are both negative.
Population growth has slowed sharply over the past year. International migration, a key driver of new housing demand, has turned negative in six of the past seven months. This weakness is widespread across all regions except Auckland, which continues to be the favoured destination for migrants, so it will have better demand for housing than the rest of the country. Canterbury, meanwhile, faces an exodus of people, due to widespread job losses and post-earthquake disruption.
For investors, there is little incentive to buy. House prices have been broadly flat since the peak in mid-2007. House prices remain high relative to rents, meaning the rental income is not enough to cover interest and other costs such as insurance and maintenance.
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House prices are unlikely to rise as they remain very expensive, not only for investors, but also for first-home owners. Incomes haven't grown much in recent years, so the first home still remains out of reach for many. With little prospect of strong house price gains and negative cash earning from a rental property, investors will remain on the sidelines for some time to come.
Change is afoot. Our economy is slowing and it will be hit hard by a worsening global financial situation. The European sovereign debt crisis will lead to recessions in many of our key trading partners. If the European Monetary Union falls apart, another crisis like 2008 could unfold.
It may feel like we are far away from Europe, but in economic and trade terms we are very close. The linkages are clear. More than 10 per cent of our exports go to Europe. Asia, a major trading partner, exports a lot to Europe, too. New Zealand also attracts a number of tourists from Europe, around 20 per cent of all visitors. Therefore the European crisis will have a real economic impact in New Zealand, through lower economic growth, fewer new jobs and little income growth. All this will weigh on the housing market.
Our access to mortgages is also linked to the European crisis. The longer the European crisis goes on for, the harder and more expensive it will be for our banks to raise money from foreign markets. This means banks will be tougher when lending and the cost of mortgages may rise. However, the Reserve Bank (RBNZ) may step in to offset this. If the global situation continues to worsen, the RBNZ will cut the benchmark interest rate, which should keep mortgage rates low. At the very least, we do not think the RBNZ will be raising interest rates until mid-2013. The latest election returned National to power in a coalition with minor parties. There were no specific housing policies in the election campaign. However, we may see some new issues and policy suggestions next year, when the newly formed Productivity Commission releases its first report on housing affordability.
The fundamentals, meanwhile, are working against the housing market. Domestic factors such as population and income growth are weak. House prices are too high to be affordable for first home buyers and prices are too high relative to rents for investors to make a meaningful return on their investment. With a deteriorating outlook for the economy, jobs and incomes, there is little prospect for relief over the next year. Batten down the hatches.