20-11-2007

How will the broadbased slowdown in housing be achieved?

1. News
2. 2007
3. November

ANZ Property Focus

Looking at the composition behind the real estate data suggests the market is very dichotomised and house prices are falling – albeit modestly. While interest rates are clearly having an impact at one end, the reality of cash and strong balance sheets are supporting the other. It all leaves us wondering how the broadbased slowdown in housing will be achieved.

The latest REINZ data for October reinforces that the housing market has turned. Despite the fact that house sales rebounded in the month, they remain well down on the level from the similar period last year. Given the weakness seen recently – with house sales falling around 30 percent since the start of the year – some form of recovery was inevitable.

However, what the data also highlighted is that it is only certain pockets of the housing market that have experienced weakness. House sales at the lower-end of the market (i.e. less than $300,000) – typically associated with investment properties and first-home buyers – have eased 30 percent in the past 12 months and 41 percent in the past 24 months. But sales at the upper-end of the market have typically remained relatively stable, with sales of houses worth $1 million or more actually increasing in the past 12 months.

A key implication from this compositional shift is that official REINZ median price statistics (which show annual growth of 8 percent and flat growth over the past six months) is likely to be overstating what the typical (quality adjusted) house is selling for.

Moreover, the statistics also highlight a clear dichotomy in the market, although we acknowledge that average house price growth in the past few years also means there are fewer houses available for sale in the lower price bracket so some care must be taken interpreting the figures.

Nonetheless, at one end of the market:

• The four OCR increases from the Reserve Bank this year and the fact that fixed mortgage rates are now all around 9 percent or higher is impacting on the speculative and investment-end of the market.
• Rising house prices relative to incomes in association with a squeeze on incomes through high costs such as petrol, electricity, and food prices are making it more difficult for new home buyers to enter the market.
• Household indebtedness and the debt servicing burden keep hitting new highs and show no signs of consolidating yet.
• Migration data also shows a sharp moderation in net inflows within the 20-49 year age bracket – the age group that is typically associated with first-home buyers. It is equally difficult to go past the 26,000 New Zealanders who are heading to Australia each year.

However, the upper-end remains well supported. We continue to expect further housing market weakness over the months ahead. But this remains far from clear cut.

Against this backdrop, there are still a number of support factors for certain areas.

• Liquidity and cash remain plentiful, a consequence of generally loose monetary policy and rising asset prices since 1999.
• The upper-end of themarket, in particular, has been a key beneficiary of rising asset values, which has in turn increased wealth substantially. The average net worth per household (including housing assets) has risen from $195,700 to $375,200 over the past 5 years.
• There are growing anecdotes of a significant portion of the population aged 55 to 65 cashing up businesses and farms, therefore giving them plenty of spare funds to purchase the retirement dream.
• Net migration across the 60+ age group – an area that given current residency laws is likely to be dominated by high net-worth individuals – remains buoyant, notably from the UK which makes up around one third of permanent arrivals in this age bracket.

Our assessment

Typically a housing inspired slow-down starts at the lower-end and filters up.

This is generally a reasonably drawn out process and rather than coming about because of higher interest rates (which is often what contributed to a slowing at the lower-end), it usually arises from broader spillover effects as marginal wealth diminishes, which results in a slowing in the economy allround via the business sector, which then takes the heat out of the upperend.

We are not expecting this cycle to be any different and continue to expect further housing market weakness over the coming months. Once this diffuses through into a more broad-based economic slowing (the Reserve Bank’s key end-game), we expect the upper-end of the property market to also go through a subdued period.

However, it is far from clear-cut and we must also be mindful of the array of positives that will remain influential on the property market. The stark reality is that people have cash, strong balance sheets, and the impetus from surging commodity prices (land values) and altered demographics is massive. While such developments are welcome in terms of supporting the property market, they will nonetheless continue to lean against the Reserve Bank’s desire to see housing activity slow more broadly. Certainly a turn in the credit cycle (watch section prices going forward) will assist the Reserve Bank’s efforts. But it also leaves us wondering what will be the catalyst that leads to a more broad-based slow-down against a backdrop of pure cash. In this regard, we suspect the key resides with what happens offshore, and we are closely watching US housing / economic developments, and whether the global economy remains immune and decoupling holds.

ANZPROPERTYFOCUS

Tags: anz property focus