The New Zealand Budget, released yesterday, forecasts further house price growth on the back of ongoing strong immigration.
Specifically, house prices are projected to grow by:
5.1% in the year to June 2017;
7.8% in 2018;
3.9% in 2019;
3.1% in 2020; and
2.2% in 2021.
Below are some key extracts:
Rapid population growth and low interest rates increase demand for housing. In the near term, indicators including building consents suggest that real residential investment and house price growth will remain around current levels owing to a range of factors that are judged to be largely temporary. Factors explaining the recent slow-down in residential investment include the impact of tighter loan-to-value ratios, uncertainty around the Auckland Unitary Plan, capacity constraints in the construction sector (particularly for skilled labour) and tighter credit conditions (particularly for developers).
Further out, most of the temporary headwinds are expected to subside and pent-up demand for housing returns to the fore (given rapid population growth and relatively low interest rates), resulting in a further pick up in residential investment. House price growth is anticipated to pick up once more in 2018 then ease from 2019 onwards as supply increases to meet demand.
The recent slow-down in residential investment growth explains much of the lower momentum in near-term growth in the forecasts…
Housing market developments have been reflected in growing household debt, which reached a new high of 168% of household disposable income at the end of 2016. If income growth were to slow significantly or if interest rates were to rise sharply, debt servicing could become difficult for some households. This has the potential to constrain GDP growth as households adjust by reducing consumption and residential investment…
Annual population growth has increased significantly since 2012, from 0.6% in 2012 to 2.1% in 2016. This growth has been underpinned by net migration and has resulted in strong demand for housing…
Consents began declining in Auckland in September 2016. The AUP [Auckland Unitaru Plan] is currently ‘operative in part’, meaning parts are subject to change if appeals against it are successful. In the short term this has added uncertainty for developers, who may have postponed plans until there is more clarity… Once fully operative, the AUP is expected to increase development activity in Auckland as it increases flexibility for developers…
We expect many of the factors currently holding growth back to diminish, while some, such as increasing certainty around the AUP promote supply to meet demand from existing and future population growth…
Net migration…
The current net migration upswing is significantly larger than usual, which is adding to uncertainty around the economic outlook (Figure 3.4).
Migration inflows are supporting consumption and housing demand and adding to the risk of increased non-residential construction activity and public infrastructure investment, including on education and transport networks.
Net migration inflows may prove to be higher than assumed in the main forecast if the relative attractiveness of living and working in other locations, particularly Australia, is weaker than expected. However, stronger growth internationally, or shifts in domestic factors, may lead to sharply lower migration and slower GDP growth than projected in the main forecast.
Meanwhile, CoreLogic yesterday released its latest Property Market and Economic Update for New Zealand, which showed that Auckland received 35,772 net migrants over the past year, around half of New Zealand’s total, whereas total Auckland population growth was 44,500, again around half of New Zealand’s total:
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Meanwhile, dwelling construction in Auckland is lagging badly, with just 10,000 dwellings consented over the past year:
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As noted by CoreLogic:
“The latest monthly building consent data shows a continuing flattening or downward trend across the whole country.
The downward trend in Auckland is particularly troubling in light of the need to massively increase house building in Auckland for the next few decades to meet projected population growth.
Our own analysis has shown that while Auckland consents increased to under 10,000 in the past year, the housing stock only increased by around 6,000 dwellings.
There are many reasons why the construction industry in Auckland is struggling to build houses fast enough, and the problem is not easily or quickly solved”.
Accordingly, Auckland’s housing shortage continues to grow, adding to the estimated existing shortfall of at least 30,000 homes in the region. And this shortfall will place further upward pressure on Auckland’s already absurd house prices:
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Where more than 100 suburbs have an average property value of more than $1 million:
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Blind Freddy can see that it is the Government’s mass immigration program that is primarily responsible for causing Auckland’s chronic housing shortage. The solution, therefore, requires cutting New Zealand’s mass immigration program back to sensible and sustainable levels.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
