Article: Property Investment

A New  Reality with Frank NewmanA New Reality with Frank Newman

The most recent issue of ANZ Property Focus has an interesting commentary about the current state of the property market and where it is likely to go from here.

Their article is worth mentioning because the tone of their predictions has swung to a negative outlook, although not dramatically so. They say, “Our central view is that the market will see some volatility in coming months, especially in light of policy changes, but that an overarching theme of softness will prevail – with house price inflation expected to be modest.”

On the positive side they say recent falls in mortgage rates could support prices, but looking 18 months out they see little change in mortgage interest rates.

On the negative side, they say changes to tenancy laws “could see a significant departure of investors from the market” and they expect migration inflows to be weaker than expected. They also say the change in price expectations could be self-perpetuating and cause buyers to take a wait and see approach.

They conclude, “On balance, we see risks as tilted to the downside. And in that environment, we expect that the RBNZ will ease loan-to-value restrictions a little at the November FSR [Financial Stability Report due 28 November]. This will provide a boost to the market, but the effect is not expected to be large.”

There is no doubt there is now less demand in the market and in some places properties are selling for less than would have been the case six months ago. The figures provided in the ANZ report point to the market having turned, led by Auckland. They say, “House sales have taken a step down – falling 14% since May… and house price inflation has been modest through the middle of the year, increasing just 0.8% over the past six months. The weakness has been concentrated in Auckland, with prices there having fallen 2% since February and sales down 16% since May. But in September, sales fell 10% in the rest of the country, with declines recorded in all regions.”

As I have noted many times previously in this column, I am of the view that immigration is the most critical variable in driving house prices - there is unquestionably a strong correlation between net migration and house prices.

About immigration the ANZ say, “Migration flows to and from New Zealand are one of the major drivers of housing market cycles. The early-1970s, mid-1990s, mid-2000s and most recent house price booms have coincided with large net migration inflows. The migration cycle is easing gradually from high levels, but it remains a slow grind. Permanent and long-term net migration monthly inflows fell by 350 to 4,640 in September (seasonally adjusted), with arrivals flat and departures lifting. At 62,700, annual net inflows are now down 13.4% since the cycle peaked in July 2017. In our view, risks to the migration cycle are skewed to the downside. How rapidly the migration cycle eases is a key source of uncertainty for the property market and economic activity generally…given the large influx of arrivals we have seen this cycle, there is a risk that those who have entered the country prove less likely to stay should the economic outlook appear less assured.”

There is no question the number of long-term arrivals into NZ is reducing, while the number of long-term departures is increasing. On a graph, both lines are on a convergence course, although it is likely to be some time before they do so given they are so far apart at present.

Perhaps the Auckland market is again the tell-tale indicator of where regional prices will go. It led the market up, and is likely to lead it down. The ANZ says, “In Auckland, where the market has been weak, there is disconnect between expectations of buyers and sellers – sellers are expecting well above council valuations, but buyers are bidding below.”  It currently takes 42 days to sell a house in Auckland, well above the historical average of 36 days. There is no doubt the speculative element in the Auckland market has now gone. The fast money that these speculators were chasing is no longer there. The question is how long it will be before the softness in Auckland becomes evident in the provinces.

Frank Newman is the principal of Newman Property Consultancy. He is the author of numerous books on investment matters. For questions or comment about this article contact .(JavaScript must be enabled to view this email address)

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