Via David Hargreaves at Interest.co.NZ comes a new research report from First NZ Capital examining New Zealand’s housing market.
The report notes five demand-side factors supporting New Zealand housing values, namely:
- Strong net migration
- Demand pressures coming from the destruction of the Canterbury housing stock
- Low interest rate settings
- Increased investor activity, and
- A backdrop of an Auckland region under-build.
There has also been a sluggish dwelling supply response, with “government estimates suggesting that it takes around eight years for the housing market to respond to a shock to demand”.
First NZ Capital estimates a current excess of demand for housing in the June 2015 quarter of around 12,000 houses (see below), which will likely persist as long as net migration remains strong.
Turning to valuations, First NZ Capital notes that New Zealand housing values are near all time highs relative to net worth and GDP (see below charts). This “further underlines the heightened exposure to the NZ economy to any sharp decline in the housing values and the associated potential negative effects on perceptions of their household wealth”.
First NZ Capital is also concerned that “the recent sharp acceleration in quarterly house prices has not been accompanied by a rapid pick-up in GDP growth rates. In fact, recent trends in both GDP and GDP per capita growth have shown a general softening in growth rates (figure 17 & 18)”.
In particular, housing valuations in Auckland have reached extreme levels:
And house price to income ratios are increasingly “stretched”:
Indeed, “using this metric, national house prices are tracking around 30% overvalued, while in the Auckland region this divergence stretches out to around 57% above its long-term average”.
Moreover, “real house price inflation is currently tracking significantly above its long-term average – currently around 2.2 standard deviations above from its long-term quarterly average”:
Whereas NZ real house prices are around 26% overvalued when compared against their log-linear trend:
Worst of all, New Zealand’s “house price-to-rents ratio has continued to increase and is currently estimated to be around 82% above its average level” (figure 44).
And house prices are also highly inflated against incomes:
Overall, First NZ Capital believes that New Zealand house prices are 30%-40% overvalued.
First NZ Capital has also undertaken a range of forecasting scenarios under various assumptions and utilising past downturns as a guide, and comes up with a “medium house price scenario” assuming a downturn duration of 10 quarters from peak to trough, along with a real decline in housing values of 11% from peak-to-trough.
