CAN THE GREEN SHOOTS SURVIVE TIL SPRING?

Indicators showing that the residential market in New Zealand is climbing out of a hole are looking stronger as months progress. Green shoots are increasingly appearing as more economic data comes to light. Positive news came from the latest data released from the Real Estate Institute of New Zealand (REINZ) with sales activity for June 2009 40% higher than June 2008. This marks the fourth consecutive month of activity increases of over 30%. Although this level of activity remains much lower than we saw in 2005 and 2006.

 

 

The average number of days it took to sell a residential dwelling has dropped again over the last month, according to the REINZ data. Of the properties that sold in June, it took an average of 41 days to market and sell them. This marks the fourth consecutive decline in days to sell data, which is a strong indicator of the level of competition in the residential investment market.

 

 

The main catalyst for this increased competition in residential investment has come from New Zealand’s increasing net migration figures. In June2009 there were 730 more people coming into the country than were leaving, taking the annual total to 12,515 as per the Statistics New Zealand (StatsNZ) visitor arrivals survey. On the balance the figures show that the increase is fundamentally due to fewer New Zealanders emigrating, while the number of arrivals is increasing only incrementally.

In a market where housing supply is already shorter than required, a drop off in residential consent issuance has an important impact. For the last 12 months the annual total of residential building consents has declined rapidly, following a sustained period of high building activity. In the year to May 2009 there were 14,455 residential consents issued, including apartments. This is down from peaks of around 33,000 in 2004.

 

 

Given the increasing level of immigration, the number of houses available to rent or buy, particularly in major centres where immigrants tend to settle, will come under further pressure. Market reports suggest that there are more buyers coming into the market with increasing numbers through open homes and strong bidding at auction, which would explain the reduction in average days to sell property. Given the time lag between consent issuance and when those new properties can be built and brought to the market, the shortage of good stock is likely to be exacerbated if the increase in market activity is maintained throughout winter.

This combination of increasing purchaser interest in residential property and a decline in the amount of good quality property coming to market will ultimately have a stabilising effect on median prices. Any further downward movement in median house prices it will be muted.

There is still a sizable amount of uncertainty in the economy, which is going to dampen any exceptional market expansion in coming months. Issues in the labour market remain as major factor in people’s decision making processes. New Zealand’s rate of unemployment is increasing and expected to peak in the first quarter of 2010. Associated with rising unemployment is the waning wage growth.

Economic growth is expected to return to New Zealand’s economy in Q4 2009 with unemployment peaking in Q1 2010. Confidence surveys show that businesses and consumers believe we are nearing the bottom of this economic cycle.