Issue 67 - Home Truths - October 2010

Just where is the housing market likely to head in the next few months?

To consider the possible direction of the housing market over the next, say, 18 months, means it is necessary to consider a number of factors:

In no particular order, I would see these as:
Incomes, both earned and so-called ‘unearned’
Nett disposable incomes
Inflation
Taxation
Net migration
Interest rates.

Incomes: Total incomes are likely to rise but only by a modest amount. As the economy starts to grow again, the first thing to happen will be better utilisation of existing workers. Initially, this will mean that productivity will increase without further costs to business, as the slack is taken up by workers retained as a means of retaining skill-sets.

Following that, will be an increase in working hours for those already on the payroll, where short-hours have been instituted. This will start the increase in total earned incomes. Then, overtime hours will start to be worked – all this before new workers are likely to be employed.

As the community as a whole starts to receive more disposable dollars, there is the likelihood that consumer demand will increase and this will necessitate more workers being taken on. Until there are skill shortages in the various sectors, however, there will not be any substantial incomes increase in those sectors and the time-lag for this effect will differ from sector to sector.

Obviously, the Canterbury earthquake is going to impact on a number of sectors and it is likely that there will be some re-distribution of workers from outside the Canterbury area relocating there if only temporarily, to assist with the rebuilding/refurbishment programme.  Although the earthquakes have resulted in a loss of collective wealth, the other side of that coin is the resultant expected increase in GDP in the order of 0.5%. Likely effect – small price increases possible.

‘Unearned income’: By its very nature, most of the population does not have access to large amounts of unearned income. Unfortunately, many of those who did have income from interest, particularly, have suffered a tremendous loss of capital and its attendant income from the melt-down of the finance industry. Because a large number of people have been affected, we may see some down-sizing by people wanting to free-up cash. Likely effect – slight increase in supply in some price-ranges.  Not much effect overall.

Inflation: While there will be some inflation caused by, amongst other things, the rise in GST, this should be matched by a decrease in taxation for most people. It will mean, however, that the price of a new house will rise, thereby making existing homes even more competitive than they are at present.
If anything, likely to have an mildly upward effect on prices.

Net migration:  PLT (Permanent/Long Term) Arrivals have been trending down since their 2010 peak in January 2010. Despite a sharp increase in July 2010, (the latest figures available), as a result of New Zealanders returning home, it is expected that net migration will continue to trend down over coming months. The reason for this is that PLT departures of New Zealanders going to Australia have risen in recent months.

Increased population will put some pressure on housing, whether rented or owner-occupied. Recent indications in our area indicate that there is presently pressure on rental accommodation, which will result in rising rental rates (but constrained by wage levels) and the possibility of multiple family occupancy of some properties, both because of the shortage and lack of affordability. This may kick-start a modest increase in house prices.

Interest rates: After what is likely to be a brief pause, it is expected that interest rates will start to be increased again at the slightest hint of demand-induced inflation. Likely effect: A dampening effect on volumes of sales and on prices.

Finally, what may affect things more the anything else, is the change in home buyer / investor attitudes to residential property purchase. There appears to be a new mood of wanting to consolidate present positions that may lead to potential sellers putting off the day when they change properties.

All-in-all, therefore, I suggest that we are going to be in for a period of (very) gradually rising prices and only small increases in volumes.