What Is Sparking New Zealand’s Housing Revival?
Migration and housing shortages will add pressures to housing supply that will outpace demand, leading to a rise in New Zealand property prices. According to realestate.co.nz, the average asking price for house rose to NZ$429,000 in April, its highest level in four years and just surpassing the previous market high point in October 2007. Meanwhile in March 2011, the REINZ median house price reached a record high of NZ$365,000 from NZ$350,000 in February. The housing shortages brought about by the Christchurch earthquakes along with low numbers of houses built in recent years affords a platform for a housing market revival. While higher priced properties in Auckland saw increased activity and prices, Christchurch and outer areas of large cities experienced flat to falling prices.
Home Loan Affordability
The March Roost Home Loan Affordability Report showed “lower interest rates and flat to lower house prices helped improve loan affordability in 21 out of 24 areas surveyed across New Zealand.” Central Auckland, Tauranga, and the Kapiti Coast were the three areas that saw home loan affordability depreciate due to rising house prices, which undercut the positive effects of the March 10 RBNZ OCR cut and floating mortgage rate cuts by banks.
Rhonda Maxwell, spokeswoman for Roost Home Loans, noted “banks are competing harder than ever for business, which is improving the prospects for first home buyers in particular.” First home buyer affordability is at its best levels in seven years “as flat to lower prices for entry level homes and the mid-March mortgage rate cuts combined to reduce mortgage servicing costs as a percentage of after-tax income.”
Mortgage Rate Approvals
Mortgage approvals are showing signs of life after stalling amid the global recession and the Christchurch earthquake. Statistics from the Reserve Bank of New Zealand (RBNZ) showed banks approved NZ$896 million worth of mortgages in the week to April 1, 2011, the highest level of approvals by value since the week to November 20, 2009. The acceleration in mortgage approvals came after the RBNZ lowered the official cash rate (OCR) to 2.5% and banks cut their floating rates for new borrowers to 5.75% to stimulate demand.
Figure 1: Mortgage Approvals Showing improvement
Source: Reserve Bank of New Zealand (RBNZ)
In recent months, banks have significantly loosened their lending criteria, increasing maximum loan to value ratios to 95% or higher and allowing larger multiples of lending to income. Banks have also waived legal fees and other fees to revive their lending growth to its highest level of approvals since the week to November 20, 2009. The Roost Home Loan Affordability Report highlighted that while most home owners are still on fixed mortgages, new borrowers are choosing to float, as floating rates at around 5.75% are cheaper than average term fixed rates at around 6.2%. As mortgage approvals pick up and housing turnover continues to strengthen, the National Bank of New Zealand (NBNZ) said prices will eventually follow.
Figure 2: Banks cut Mortgage Interest Rates to Stimulate Demand
Source: Reserve Bank of New Zealand (RBNZ)
Market Trends since the September Earthquake
Quotable Value (QV) data showed that in the months preceding the September 2010 earthquake, house values in Christchurch were slowly declining, in line with the national trend. Instantly following the earthquake, house values began to rise and by November prices increased 3% before flattening through to February. QV noted that “while badly damaged properties were not selling, houses in less damaged areas were beginning to sell again, and in November sales numbers were nearly back up to pre-earthquake levels.” If there are tendencies to take from the September earthquake, Christchurch will experience increased demand for houses in less affected areas that will cause house prices to rise.
Migration Adds Pressure to Supply and Demand
ANZ Bank expects Christchurch to lose 4% of its population, or 15,000 residents, permanently over the coming year as a result of migration following the most destructive earthquake in New Zealand’s history. ANZ Bank economists noted the 15,000 figure comprised 9,500 residents choosing to depart permanently, 4,000 fewer overseas migrant arrivals, and 1,500 fewer internal migrants. The bank anticipates “the exodus would likely see existing pressures, such as housing shortages in Auckland, intensify as Christchurch residents moved elsewhere, and as migrants who would have headed for the city went to others instead.”
The Canterbury region represents the second biggest property region at around 15% of the market. According to the Real Estate Institute of New Zealand (REINZ), the number of days it took to sell a house, a gauge of underlying demand, fell from 58 days in February 2011 to 41 days in March. Auckland posted the shortest days to sell at 35 days, while the number of days it took to sell a house in Canterbury improved to 50 days in March from 57 days in February. While the level of unsold homes on the national market continues to grow, reaching 53.7 weeks by the year end April 2011, realestate.co.nz said “given this high level of inventory, matched to slow levels of new listings it is becoming clear that the high asking price is more likely to be the result of keen interest focused purely on new listings.” ASB Bank reiterates this sentiment that they are expecting strong demand for properties in Christchurch which have not been damaged, which should be supportive of prices in the region.
Figure 3: House Prices on the Rise
Source: Real Estate Institute of New Zealand (REINZ)
Outlook and Implications
With national house sales picking up since March 2011, excluding the Christchurch market, consumers are seeing price stability and gaining confidence to enter the housing market. Ongoing weak building consents, low interest rates, and persistent housing stock shortages brought about by the Christchurch earthquake provides a platform for a housing market revival. ASB Bank economists Chris Tennent-Brown noted “a contained level of inventory, positive migration and population growth, as well as the recent drop in interest rates, were all positive for the property market in the year ahead.” ASB Bank expects nationwide prices to increase by around 3% over the year ahead and sees “stronger price appreciation in areas such as Auckland, and ongoing weakness in areas where population and income growth are less supportive.”
Lower interest rates, loosening of lending criteria, and flat to lower house prices helped to improve home loan affordability in March. A rise in homeownership will provide a backdrop for increased consumption and spark a revival in consumer spending as households internalize the goods and services tax (GST) and take advantage of increased purchasing power brought about by home equity withdrawals. However, NBNZ noted the last thing the RBNZ “wants at present is a resurgent housing market, which could call an abrupt end to consumers’ new-found prudence, and a return to the unsustainable borrowing of old.” Since its last policy meeting on April 28, 2011, the RBNZ noted housing market turnover is beginning to increase but, given “continued economic disruption stemming from the earthquakes, the current level of the OCR is likely to remain appropriate for some time.”
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