Auckland, January 26, 2018
People often get lost in the detail when considering housing markets, placing too much emphasis on things from the past such as old average rental yields and old average ratios of house prices to incomes, or scaring people with stories of soaring interest rates.
Such analysis has failed to allow for the structural changes in our housing market which we have discussed at length.
These include structural changes in construction quality, house size, household incomes, financing costs, investor cohorts, inspection regimes, materials costs, section costs, demographics, the labour market, migration flows and so on.
Or people focus too much on what ‘should’ be and, taking a stand that eventually their version of “sanity” will prevail, forecast a change to what they would like to see.
Lefties tend to do this.
My preference is to ignore monthly and even quarterly developments, pay only scant attention to old ratios and affordability measures, concentrate on the key large factors which have the greatest influence, and ignore completely what I would like to see in an optimal world.
Here are the major factors to consider plus a few hangers-on in no particular order of importance.
Job growth strong
Labour Market Jobs growth has been strong in many countries over the past few years, unemployment rates have fallen away, but wages growth remains highly elusive on a generalised basis though strong in some particular sectors – such as construction in New Zealand.
Since the low-point of our labour market in 2009, almost 450,000 new net jobs have appeared of which 85% have been full-time.
The employment rate, which measures the proportion of the working age population in a job sits at a record 67.8%.
This labour market strength (without average wages growth acceleration) has been one factor supporting retail spending growth and housing in New Zealand.
Will it continue?
The recently released NZIER survey showed that although businesses are on average pessimistic, a net 49% say they cannot find the skilled staff they want and 31% say unskilled people are hard to find.
These measures are well above averages of 19% and 3% easy respectively.
Skills shortage continues
Labour is in short supply. A net 12% of businesses in the NZIER survey plan hiring more people. This is down from 19% three months ago and 27% mid-2016 but above the average of 6% and probably biased downward because of the business sector’s distaste for Labour governments.
The NZIER measures taken in conjunction with the already high employment and participation rates, the outlook for continued strong economic growth, and the improvement in Australia’s labour market dragging some Kiwis away, says to us that Kiwi householders will remain confident in their employment sustainability and prospects.
That is positive for the housing market. Immigration Which brings us to a big influence on the NZ housing market – Auckland more so than anywhere else – net migration flows.
Many things influence net flows of people in and out of New Zealand and government policy changes are only one of them and in fact one of the lesser important drivers of flows.
Mitigating factors
Policy changes largely cannot affect outflows and the impact on inflows is mitigated by these factors: 29% of gross inflows are Kiwis and Aussies
18% are students who drive a strong export sector worth perhaps $4.5 billon.
Slashing numbers there is unlikely to be a strongly pursued goal of the new government because of the impact on export receipts and employment numbers.
12% come in on resident visas and they have only grown 3,000 since the low-point of the migration cycle in 2012.
Another 5% are long-term visitors.
That leaves just over one-third of the migration inflow as people on work visas.
They are likely to be the target of policy changes which will tighten the labour market further. This effect will provide some offset to the negative population effect on housing.
Nonetheless, the tide seems to have finally turned on net migration flows which late in 2012 we picked to soar from -4,000 to 35,000 but ended up at 72,000 a few months back.
The annual flow is now 70,400 and it seems quite reasonable to expect this number to decline over the next three or so years.
Let us say that back to the ten-year average of 28,000 by the end of 2021.
Australian Labour Market
One driver will be the strong improvement in Australia’s labour market over 2017.
Over 400,000 extra jobs have been created and this is relevant to our migration flows because the turning in the net flow with Australia from -40,000 in 2012 to +2000 just over a year ago was a big driver of the overall flow change.
We do not expect to head back to -40,000 in the next few years. But a return to the 20-year average of – 19,000 by the end of 2021 seems a reasonable assumption.
All up then net migration flows have turned and look like turning further.
But because we expect them to remain firmly positive for some time, we think it is still valid to include net migration flows on the list of factors supporting housing turnover and prices on average over the next four years.
Interest Rates
Historically interest rate hikes have been the cause of housing market weakness in New Zealand. But every single forecast of a decent jump in interest rates since 2009 – often used as justification for a forecast of big house price falls – has been wrong.
Globally, interest rates have stayed far lower than expected for almost a decade as inflation has proved less reactive upward to accelerating economic and labour market growth than has ever before been the case over the past few decades.
We got another example of that in the form of the December quarter Consumer Price Index rising only 0.1% rather than the 0.4% almost all analysts had predicted.
Annual inflation has now slipped to only 1.6% from 1.9%.
Core inflation using a measure I like – the CPI excluding food and energy – has fallen to 1.1% from 1.5%.
Looking ahead we see a world of accelerating economic growth and tightening labour markets which in theory will drive higher wages and business pricing ability.
But in practice we do not fully understand why around the world wages and prices have not responded to faster growth and that means one cannot strongly conclude that things have finally changed back to the way they were.
Frankly, even though our examination of indicators like pricing intentions, economic growth, and capacity measures says to us that inflation and therefore interest rates will rise, we have to be cautious.
Tony Alexander is Chief Economist at Bank of New Zealand based in Auckland. The above is an edited version. For full text, please visit www.tonyalexander.co.nz/topics/sporadic/
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