For better or for worse?

Like any relationship, the love affair New Zealanders have with property always has some ups and downs. The tensions between supply and demand, buyer and seller, state of the market and finance affordability and availability all add to this mix.

But if you are a follower of daily media comment about the property sector it’s conceivable you can easily be polarised to either a position of ‘better’ or one of ‘worse’.

That’s because that commentary or reporting usually only provides a ‘snapshot’ of events, or comment at any given time; it is seldom the full story of cause and effect, mostly just a record of particular consequence. And, like a small tiff in a relationship, it can easily grow out of all proportion if the wider perspective is not taken.

Take recent building consent figures that show third-quarter results were better than many were anticipating. In a flurry of reaction, various reports have taken that to mean that the recession is nearly over.

Reserve Bank governor, Alan Bollard has even been quoted as suggesting that the fall in economic growth associated with recession may well be bottoming out. And there are any number of economists who have already nodded sagely at that suggestion.

That, perhaps, is a ‘better’

But from a wider view, residential building activity is still down and expected to continue that trend well into the first quarter of next year. In fact figures show that consents for dwellings have fallen to levels not seen since the start of the 1990s.

But whether that’s for better or worse still depends on an individual perspective.

Some positives perhaps, are the fact that petrol prices have and are likely to continue to fall over the next few months. Interest rates, which have already fallen sharply over recent weeks look likely to fall some more. Economists reckon food prices are also likely to ease back, both because of seasonal supply and in response to some big falls in international food prices. Then there is another round of tax cuts kicking in from April next year.

All of which markedly increases household cash availability.

Ironically, in different circumstance, these ingredients would more likely indicate an impending property boom and not a property gloom.

The Bank of New Zealand, in a weekly overview December 2008 offered some key forecasts. Dwelling consent numbers to fall from 24,500 in the year to March 2008 to below 18,000 in the year to March 2009, with a slight recovery to March 2010, then above average activity after that as attention turns to a shortage of dwellings in late 2009.

Real Estate sales falling from 77,130 in the year to April 2008 to between 55,000 and 65,000 come the end of this year then recovering back to 65,000 in calendar 2009 with further growth over 2010.

House prices down 5-10% by the end of 2008, flat over 2009, rising slightly over 2010.

This suggests, given that a property relationship is fundamentally sound and any ‘tiff’ can be put into perspective or managed, that there is more likelihood of better and not worse on the mid-term horizon.

What may be even more encouraging are the (admittedly still tentative) suggestions from a growing brigade of expert commentators and economists that the current fall-off in residential construction will result in a dwellings shortage perhaps as early as mid-2009.

It will be interesting to see the expert interpretation of already existing greater household cash-flow, greater finance affordability through interest rate reductions and greater house price affordability, when that is all mixed in with a growing and unsatisfied demand for housing stock come next year.

Then will sentiment turn to richer, not poorer, for better not worse?

The state, or fate, of the New Zealand property market appears almost to depend on the view of the most recently quoted economist, analyst or even real estate agent.

But on a couple of points there is pretty much universal agreement; the impact of the so-called credit crunch and the ensuing global recession, the demise of the second-tier lending market (Finance companies) locally and a reaction-driven fall in the value of property, all add up to a bumpy and uncertain ride ahead.

Westpac chief economist, Brendon O’Donovan for one, reckons the local property market is only about half-way through a period of correction.

Ordinarily, that would suggest a current, downward, trend in values would continue well into next year, easing in its decline only towards the end of the 2009 and settling at a new, lower, pricing benchmark.

But against that is his consideration that New Zealand has no great stock of unsold residential property and any new residential property development is grinding to a halt through lack of development finance.  O’Donovan is indicating that residential construction will be down around 20percent this year with a predicted smaller fall in 2009.

That so, he says, we may well see a shortage of residential housing stock availability sometime next year. If that happens, and the supply:demand ratio changes – even slightly- then we could expect to see some upwards pressure on house prices.

But that may be an ‘upside’ scenario.

The Real Estate Institute reports that national house sales are down by a near 50percent on the corresponding period for last year, and so far any recovery in sales that may have been predicated on falling interest rates, even the October tax cut, have not eventuated.

Part of the reason for this, industry commentators say, could be the lag time between cuts in the Official Cash Rate (OCR) being announced and the major lenders reflecting the effects of those cuts in their mortgage lending rates. That, together with a bout of falling market and consumer confidence.

But with average bank fixed rates moving from 9.22percent in July to around 7.5 percent as at [1 December], and the prospect of further cuts in the not too distant future,  buyer interest could be piqued and in consequence some modest rebound in house sales numbers could be seen over the traditionally buoyant ‘summer-selling season’.

If that rebound occurs and is strong enough – and some Real Estate agents consider that only small increases in sales numbers are enough to influence it in today’s market – then that could be enough to halt the downward pressure on house prices and could even be enough to see a modest rise in selling prices. At least in the short term.

National house sales over the last few months have averaged around 4000. Just 1000 to 1500 more a month could make the critical difference, and at that level, some upward pressure on prices could well emerge.

While a reasonably consistent immigration flow has provided a good deal of momentum for new building and house prices over the last few years, that influence is likely now to diminish further.

While some see immigration as a tool that could stimulate domestic demand in housing and in the economy, it is not likely to be one used to any great extent by the new National-led Government.

The unemployment rate is already rising here and is predicted in some quarters to reach higher than 7percent in the first quarter of next year. One of National’s policy priorities is to retain skilled workers and attract overseas Kiwis back to New Zealand. That just doesn’t mesh with opening the immigration door wholesale.

However, with further tax cuts booked in for April next year, the prospect of rising unemployment in Australia and, given the global recession, Kiwis looking at uncertain prospects in other countries, we may well see both National’s policy fulfilled and in consequence, housing demand increase.

With no, or very little, new housing stock coming to market over this period any increase in demand will have a corresponding impact on both sales volumes and prices.