House price boom over

New Zealand’s housing market has significantly slowed, and the long-expected correction seems to be underway. The median selling price rose last year, but by just 4.6% (in nominal terms).

This modest growth followed 11.86% house price rises in 2006, 13.46% house price rises in 2005, and 13.24% rises in 2004. Since the start of 2000 to end-2007 house prices in New Zealand have risen 103.84%.

The national median house price stood at NZ$349,000 in March, 2008, only 1.60% higher than the March 2007 median price of NZ$343,500.

The total value of houses sold was NZ$2.11 billion in March 2008, down 53.42% down on the transactions recorded in the effervescent market of two years earlier (NZ$4.53 billion).

Affordability issues

The ratio of house prices to income was increasingly stretched at 11.1x in 2007, up from from 6.2x in 2000. The overall affordability index declined by 6.2% over the year, according to the March 2008 Home Affordability Report of the Massey University. The declines were largest in Southland (21.3%), Central Otago/Lakes (20.9%), Nelson/Marlborough (13.6%) and Canterbury/Westland (10.9%).

The outstanding debt of households has significantly increased since 2000. Debt servicing, as a percentage of disposable income was 14.5% in the 4th quarter of 2007, up from 8.5% in the 1st quarter of 2000. This ratio of household debt servicing costs to income is comparable to those found in Australia, the UK and USA. Over 90% of household debt is housing debt, at an average interest rate of around 8%.

Sustained increases in floating and 2-year fixed rates have been experienced since 2000. We believe that mortgage rates above 10% will put pressure on the market, and that house price rises will further decelerate.

The RBNZ has been very effective

A slower year-on-year inflation rate was recorded at 2.3% in 2007, down ffrom 3.4% in 2006. Since 1990 inflation has averaged around 2.5% compared with averages of around 12% in the 1970s and 11% in the 1980s.

Real GDP grew by a modest 2.5% in the year to end-2007, and is expected to grow slightly fast this year, at 2.6%. New Zealand has experienced years of unbroken economic growth since 1999 boosted by strong personal consumption.

In April 2000 the New Zealand dollar dropped to record lows, at 0.4066 cents to the US dollar. After 2002, it strengthened considerably, reflecting the strong domestic economy, rising export commodity prices and a softening US dollar.

The New Zealand dollar has once again depreciated rapidly over 2007, spurred by higher overseas interest rates and indications that economic activity is calming.

Immigrants’ role

The net inflow of permanent and long-term migration in New Zealand continues to decline. The number of net migrants in 2007 was 5,500, significantly lower than the 14,609 in 2006.

The fall in migrants should reduce demand for housing – but perversely, it also affects housing supply. Massey University notes shortages of material and labor skills in the construction sector. To address the skills shortage the government implemented immigration reforms in December 2004. This includes:

• Increasing the number of points allocated to skilled employment, qualifications and work experience in areas of absolute skill shortage; and
• Recognizing a wider range of qualifications where they meet industry needs. New Zealand population currently at 4.25 million will reach 5 million in 2020 with growth rate of 1% per year.