KEY POINTS:
Real Estate Institute figures for June, released yesterday, show that the downturn in the housing market has entered its second year showing no signs of abating.
The first indication of a softening appeared in June last year when sales declined by 11.3 per cent compared with the same month in the previous year and the median price dropped to $347,500 from $350,000 in the previous month.
Since then the downturn has been fairly sustained, particularly in volume terms. National sales have fallen from 52,865 in the first half of 2007 to 39,236 in the second half and only 29,613 in the first six months of the current year.
Sales volume in the past three months was down 47.3 per cent compared with the April-June 2007 period. Prices have held up relatively well although June's median price of $340,000 was 2.2 per cent below June 2007 and 3.4 per cent lower than the all time high of $352,000 in November last year.
Past experience shows that volume falls first followed by prices. This indicates that the outlook for housing is not positive for the remainder of the year and into 2009.
New Zealand is not on its own as most of the Western world's housing markets have experienced the same boom and bust conditions with the US and Ireland being the worst.
US house prices have fallen 15.3 per cent over the past 12 months and by 9.5 per cent in Ireland.
The recent housing boom and bust has been a direct consequence of the massive expansion in international credit and the subsequent contraction following the sub-prime crisis. Recent data shows that bank lending growth has dropped dramatically in most countries, including New Zealand, and this is having a negative effect on housing markets.
Although credit expansion and contraction has a big influence on residential property the impact of the post-World War II generation - those born between 1946 and 1964 - often goes unnoticed.
This baby boom generation, which is often described as "a pig passing through a python", has had a massive impact on residential housing over the past 40 years.
The accompanying table shows the breakdown of New Zealand's population by age since 1950 and the projections to 2040 based on medium fertility and medium mortality rates.
In 1970, before any baby boomer had reached 25, the percentage of the population under 25 years of age was a phenomenal 49.1 per cent. In the same year the under-25 age group represented 46.3 per cent of Australia's population and 45.6 per cent in the United States.
A major housing boom occurred throughout most of the Western world in the 1970s as the first of the post-World War II generation reached their mid-20s, the age when individuals start buying their first home.
In the past 40 years the under-25 age group has dropped from 49.1 per cent to 35.8 per cent of the population while the 25 to 64 age group, generally considered to be the house buying age, has increased from 42.4 per cent to 52.0 per cent.
Earlier forecasts predicted baby boomers would start downsizing once they reached 50 but the opposite has happened. As this group entered its 50s, which is usually the maximum income earnings age, a massive worldwide credit boom has dumped huge sums of money into residential property. Boomers took advantage of this to spend up large on upgrading or buying a better property.
The combination of a dramatic increase in the 25 to 64 age group, this age group moving into its premium income-earning years, and the credit boom have fuelled residential housing in recent years.
In 2011 the first wave of baby boomers will reach 65, generally considered to be the age where individuals start becoming net sellers of houses. This selling occurs for a number of reasons including: individuals move into a retirement village; they move in with one of their children when a partner dies; they sell their urban dwelling and live in the holiday home; or they downsize after moving to a warmer climate.
If we look at the 25 to 64 age group and over-65 group over the past 35 years, and the projections for the next 35 years, we get a very different picture:
* Over the past 35 years a net 930,000 individuals enter the house buying 25 to 64 age group with a net 260,000 leaving on reaching 65 years of age.
* In the 2005-2040 period a net 340,000 individuals are projected to enter the 25 to 64 age group with a net 680,000 leaving after reaching 65.
This trend is expected to occur throughout most of the Western world as the baby boomer generation ages. In Australia the 65-and-over age group is expected to increase from 13.1 per cent of the population in 2005 to 23.5 per cent in 2040 while in the US it is projected to rise from 12.3 per cent to 20.5 per cent over the same period.
There have been a number of reports published on the baby boomer/housing issue in the US but there has been little comment on this issue in New Zealand.
A recent paper in the Journal of the American Planning Association by Dowell Myers and SungHo Ryu, called "Ageing Baby Boomers and the Generational Housing Bubble: Foresight and Mitigation of an Epic Transition" highlighted this issue.
Myers and Ryu believe that the ageing baby boomers will have a negative influence on residential property but there will be winners and losers. They argue that the younger generation will benefit from a fall in prices that will make housing more affordable. This should also boost home ownership rates.
However, they believe the baby boomer sell-off could stretch the current downturn from a traditional three to seven years to a decade or more. Baby boomers with a high percentage of equity in their home could be particularly badly affected.
When the baby boomers are taken into account the New Zealand residential property market - and housing in most Western countries - face two major cycles. These are the short-term economic cycle, which is dictated by the recent credit boom and bust, and the medium and longer-term demographic cycle, which will be strongly influenced by the post-World War II generation.
The short-term outlook is not great because the residential property market has experienced a price bubble and credit conditions will remain tight over the next year or so. The medium-term outlook will be influenced by the baby boomer generation, particularly when they start hitting 65 in 2011.
As this pig passes through the python it is likely to have just as big an impact on the housing market as it did when it began its journey in the early 1970s.
This places a great deal of importance on immigration policies. If we can attract a large number of young highly skilled immigrants then they will be important house buyers in the years ahead. If not, housing affordability won't be a problem for today's teenagers.
Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.
