Building permit jump brightens home front

By BRIAN FALLOW

A jump in building consents last month is another sign that the housing market is looking up.

The $300 million of new dwelling permits local authorities issued in October represents an 11.7 per cent increase on the previous month, seasonally adjusted, Statistics New Zealand said yesterday.

The monthly figure has been saw-toothing around a trend that has been rising since the start of the year, even though levels are still below 1999 levels.

The fundamentals are encouraging. Since the middle of the year net migration flows have shown a turnaround.

"Following three years of the population falling by around 0.3 per cent a year because of net outward migration, the latest figures correspond to an annual gain of around 0.7 per cent," said Deutsche Bank chief economist Ulf Schoefisch.

While this would increase the economy's growth potential and relieve skill shortages, it could also generate increased pressure in the housing market, as in the mid-1990s.

"The associated increase in demand for housing, together with the stimulatory impact of low real interest rates, should lead to a sizeable increase in building activity," Mr Schoefisch said.

Floating mortgage rates are at their lowest for almost two years.

Offsetting that is the fragile nature of consumer confidence, in the face of a global economic slowdown and the war on terrorism.

But that is a two-edged sword. When financial markets are weak, investment dollars can flow to property as a safe haven.

Bank of New Zealand chief economist Tony Alexander points to the fact that in the most recent WestpacTrust McDermott Miller consumer confidence survey, more respondents said they would invest a $5000 windfall in real estate than in any survey since March 1998.

But Mr Alexander also notes that construction costs have been rising faster than house prices, which shifts the balance in favour of buying over building.

Existing house prices rose 0.6 per cent nationwide in the year ended September, measured by Quotable Value New Zealand's index, but residential building costs rose 2 per cent over the same period, measured by the capital goods price index.

Over the past two years, construction costs rose 4.7 per cent, but house prices fell 0.5 per cent.

House prices in Greater Auckland have risen 0.3 per cent over the past year, but remain 2 per cent lower than two years ago.

"Based on the long-term relationship between changes in house prices and changes in consumer prices - with the former outpacing the latter on average 1.5 per cent a year - houses are no longer expensive," Mr Alexander said.

"This goes especially for Auckland."

The ratio of Auckland prices to prices in the rest of New Zealand is below the trend, just as it was before the big gains in 1981, 1987 and 1993, but much less so than it was in 1993.

The Real Estate Institute's figures for last month recorded a strong pick-up in activity.

Turnover was 36 per cent higher than in October last year nationwide, and 41 per cent higher in Auckland.

Mr Alexander said that given the risks, especially around confidence, he could not say unequivocally that the housing outlook was rosy.

"We expect to see New Zealand's unemployment rate rise in the coming quarters as the slowdown in world growth until mid-2002 kicks through into slower export growth and businesses exercising caution regarding expansion plans," he said.

"Global slowdowns hit us with a lag, through lower commodity prices, static or falling tourism and weak demand for other services and manufactured goods.

"So in the coming three to six months we expect to see redundancy announcements and a pullback in farmers' willingness to spend."

The National Bank's business confidence survey for next month recorded a rise in confidence in the construction sector's view of its own outlook.

In particular, firms' employment intentions over the next three months rose from a net 6 per cent expecting to shed staff a month ago to a net 5 per cent expecting to be hiring.

That may be related to an increase in work in the non-residential sector.

Yesterday's consents data for October recorded $291 million worth of approvals for non-residential buildings, the second highest.