New Zealand’s housing market has emerged from 2008’s slump, pushed by record low interest rates, plus lots of government spending.
The median home sales price rose 6.1% during the year to end-September 2009, to NZ$350,000 (US$ 254,429), according to the Real Estate Institute of New Zealand (REINZ) - or 4.3% when adjusted for inflation.
“We’re seeing a slow, but steady, appreciation in sale values and we’re now back to the prices being fetched in the corresponding period in 2007 when the median was NZ$351,500 (US$260,602),” said REINZ President Peter McDonald.
Over the period of the housing boom (2001 to 2007) house prices had risen 94% (66% in real terms), including 13.5% in 2005, 11.9% in 2006, and 4.5% in 2007.
Demand and house prices started to fall in early 2008, as the global crisis spread to New Zealand. During 2008, house prices fell 4.8% (-7.9% in real terms).
From end-2008 to early-2009, the government spent massively to mitigate the global crisis.
New Zealand’s economy, and particularly its housing market, clearly benefited from these stimulus measures, and property sales and prices rose as confidence improved.
Wellington recorded the highest house price increase of 9.8% (8% in real terms) during the year to September 2009. It was followed by Auckland, where house prices rose 8.8% (7% in real terms), and by Christchurch, where house prices rose 6% (4.2%) over the same period, according to REINZ. No coincidence that these are New Zealand’s three most populous regions.
During the boom (2001-2007), the South Island had registered the highest house price increases, due to the strong commodity market and tourism.
The North Island also saw strong house price rises from 2001 to 2007.
So the pattern is this:
Auckland has the most expensive housing in New Zealand, with median prices of NZ$462,500 (US$336,210) in September 2009. Wellington’s median house price was NZ$392,000 (US$284,960), and Christchurch’s median was NZ$331,000 (US$240,617).
MEDIAN HOUSE PRICE
|ANNUAL CHANGE (%)|
|Other North Island|
|Other South Island|
The average number of days on market fell to 33 in September 2009, from 52 days in September 2008, as confidence improved.
New Zealand’s rapidly rising population, mainly due to influx of migrants, makes the construction of more houses urgently necessary. In the year to June 2009, the population grew by about 47,000.
Housing supply is now tight. Listings levels are low, and new immigration inflows are rising, which is expected to push house prices to rise in the remainder of 2009, according to the Monitory Policy Statement (September 2009) of the Reserve Bank of New Zealand (RBNZ). However, this will be partly offset by expected increased residential investment, the statement added.
In 2008, the dwelling stock grew by just 1.3% from a year earlier, a slowdown from the 1.7% annual growth between 2003 and 2007. Of the 1,696,800 existing dwelling units (2008), 67% were owner-occupied, 29% rented, and 4% provided free.
The total number of private dwellings rose just 0.9% to September 2009, from the same period last year, according to Statistics New Zealand.
According to the New Zealand Property Investors Federation, about 20,000 new houses should be built each year. However, only about 7,000 new houses are in fact built every year.
In the year to July 2009, there were 13,954 new dwelling consents (of which 1,808 for apartments), down by 38% from the 22,536 consents the same period last year, according to Statistics New Zealand. The value of new dwelling consents was NZ$2 billion (US$1.45 billion), down 35.8% from last year.
This July, consents rose 10.4% - so construction activity is expanding, but remains at low levels.
The recent downturn began when the RBNZ’s Official Cash Rate (OCR) was raised by steps to 8.25% by July 2008, from 5% in December 2003, to curb inflationary pressures. Floating mortgage rates rose to above 10%, while the 2-year fixed mortgage rate was above 9% by the second half of 2007.
However starting July 2008, the RBNZ dramatically reversed gear.
By April 2009 the key rate was down a record low 2.5%, where it has remained ever since. The floating mortgage rate dropped to 6.4% in August 2009, from 10.7% in August 2008. The two-year fixed rate fell to 6.6% in August 2009, from 9% a year earlier.
The OCR is expected to remain at 2.5% until late 2010, as New Zealand’s strong currency threatens the country’s economic recovery.
“We see no urgency to begin withdrawing monetary policy stimulus and we expect to keep the cash rate at the current level until the second half of 2010,” said Reserve Bank Governor Alan Bollard.
About 23% of the total residential mortgages had floating interest rates in September 2009, up from 14% a year earlier. About 37% of all mortgages can be reset after a year, while 49% are fixed for 2-4 years.
New Zealand’s mortgage market has expanded rapidly over the past decade. Housing loans rose from just 55.6% of GDP in 1998, to 90.7% of GDP in 2008. Outstanding housing loans soared 186% from 1998 to 2008, according to RBNZ.
The banking system now controls about 96% of the mortgage market, up from 94% in 2007.
Total residential mortgages outstanding at banks rose 5% during the year to September 2009, to around NZ159 billion (US$117.3 billion).
As house prices bounce back, it is becoming increasingly more expensive to buy than to rent, according to the latest Rent-or-Buy report by the Bank of New Zealand (BNZ) – despite the low interest rates.
In August 2009 the median weekly rent for three-bedroom houses was NZ$310 (US$229), unchanged from the same period last year, or 23.2% of household take-home pay, as compared to 26.2% of household take-home pay to service mortgage payments for an equivalent house, said BNZ
This is a danger sign.
However, the situation is diverse, with urban centre yields higher than elsewhere. Gross rental yields in Auckland are attractive at around 6.78% (September 2009), according to the latest Global Property Guide research. In Wellington, gross rental yields are slightly lower at around 5.77%. But returns in Christchurch are unattractive, with gross rental yields of about 4.08%.
International migrant flows have a significant impact on house price movements and construction activity in New Zealand. The housing boom during the early-2000s was strongly associated with immigration increases during that time.
The net inflow of permanent and long-term migration was highest in 2002, with more than 38,000 migrants, followed by 35,000 in 2003 and 15,000 in 2004. However, net migration was just 3,800 in 2008, which was attributed to a weak economy and low employment opportunities.
New Zealand is now experiencing an influx of immigrants. In the year to September 2009, the net inflow of permanent and long-term migrants totaled 17,043, four times the total during the same period last year.
"Migration is a positive for the economy and will provide support to both the housing market and spending," said ANZ National Bank. "However, some uncertainty remains whether the recent size of these migration gains can be maintained."
New Zealand’s population is currently around 4.3 million. With a growth rate of 1% per year, population is projected to reach 5 million in 2020.
After five quarters of negative GDP growth, NZ’s economy recorded a GDP growth rate of 0.1% in the second quarter this year, which means that technically the recession is over.
However, the stronger housing market which led the economy out of recession – not exports. The New Zealand dollar has risen dramatically to NZD1=USD0.7024 in September, from NZD1=USD0.5151 in February 2009.
"The high level of the New Zealand dollar has limited the scope for exports to contribute to the recovery and reinforces a bias toward domestic expenditure," said New Zealand central bank Governor Alan Bollard.
"The current composition of growth continues to raise questions about its sustainability. These concerns would intensify if credit growth began to propel stronger domestic demand", added Bollard.
In June 2009, the country’s deficit was NZ10.5 billion (US$7.75 billion), in sharp contrast to the NZ2.4 billion (US$1.77 billion) surplus in 2008.
As firms have scaled back production, unemployment has risen. Unemployment rose to 4.2% in 2008, up from 3.7% in 2007. In the second quarter of 2009, the unemployment rate stood at 6%, up from 5% from the previous quarter, according to Statistics New Zealand. In 2009, the unemployment rate is projected to rise to 6.3%, according to OECD forecasts.
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