No boom equals no gloom

Dwelling consent numbers have not grown at all since November and are only just above the four-decade low reached in September last year. Photo / Paul Estcourt

The world has just experienced its greatest financial crisis since the 1930s, with international credit availability all but ceasing for a period late in 2008. Economies have had their deepest recessions in decades, unemployment rates have soared, and governments and central banks have responded with huge spending and bank support programmes.

In some countries house prices fell well over 30 per cent. Yet here in New Zealand, house prices only declined 11 per cent at their worst - not the 40 per cent falls some punters were still picking just a few months ago.

Understanding why prices did not collapse here is important, because it helps put into perspective the temporary nature of the current mild downward pressure on prices associated with more changes expected in the May 20 Budget.

In a nutshell, we did not have a house building boom in New Zealand, whereas countries such as the United States, Ireland and Spain did. In these countries, there are literally hundreds of thousands of houses sitting empty as councils and banks debate how best to demolish them. That is not the case in New Zealand, as evidenced by the Commerce Select Committee over 2007-08 investigating a shortage of affordable housing.

Various estimates suggest we need, at a very conservative minimum, some 23,000 dwellings to be built each year to handle population growth and demographic changes such as falling average occupancy per dwelling. But in the year to January, dwelling consent numbers were just 14,655. They have not grown at all since November and the total is only just above the four-decade low of 13,616 reached in September last year.

Yet, at the same time as construction is the weakest in decades, population growth is above average. The net migration gain was 22,588 people in the year to January. The 10-year average gain has been 13,000. On top of that, the export education sector is picking up - more foreign students need somewhere to stay - and the future holds some interesting restraints on construction recovering strongly.

First, financing of residential subdivisions has come significantly from finance companies in recent years. But the finance company sector is shrinking rapidly as depositors back away and the Reserve Bank exercises strong prudential oversight.

Second, although there is an over-supply of skilled tradespeople at the moment, that won't last. The attraction of Australia for Kiwis has always understandably been strong and soon we expect a veritable flood of skilled people to cross the ditch seeking higher wages in a fast-growing economy underpinned by a new minerals boom.

Third, to the extent the coming Budget makes returns from investing in residential property less attractive, fewer investors will seek to build houses to rent out.

The upshot is that for the moment we think the fall-off in dwelling sales associated with uncertainty about the tax changes will depress prices - though it is difficult to estimate by how much, as little information exists on how many investors may want to quit the market permanently. We suspect not many.

But come late this year or early 2011, we expect increasing awareness of the slowly growing shortage of property in the larger metropolitan areas will start to extract a prices response. That is even though by then we expect floating mortgage rates to be slowly rising and the net migration gain to be ebbing as more people cross the ditch.

For investors with long memories who have always based their purchases on positive cashflow targets rather than tax-assisted capital gains, the market is moving into a position likely to favour astute buying. The opportunities are unlikely to be as stark as this time a year ago, when prices were embarking on a near 9 per cent average rebound. But they will appear nonetheless. For first home-buyers, opportunities also present themselves - especially to avoid what we think could be strong upward pressure on rents in the next few years.