IS THAT LIGHT AT THE END OF THE TUNNEL

Residential sales activity has picked up quite considerably over the last two months, according to latest figures released by the Real Estate Institute of New Zealand (REINZ). Typically a busy month, the number of sales completed in March was 6,694, 31% more than the preceding March. While activity remains much lower than what we became used to throughout the middle part of the decade, it marks a definite improvement upon last year’s residential market movement.

 

 

The major driver behind the increased activity throughout March was the market expectation that interest rates had reached their lowest point following the March Monetary Policy Statement. In the announcement the Reserve Bank of New Zealand (RBNZ) made the comment that further easing of monetary policy would be much more muted than previously observed. At the time of writing the official cash rate (OCR) was 3.0%, the lowest rate since its inception, following nine months of continual reductions, however, market commentators suggest further easing of the OCR by between 25 and 50 basis points is likely at the 30th April OCR review.

Also helping to fuel activity in the residential market is New Zealand’s rising net migration. In the year to March 2009 there was a net inflow of 7,480 migrants coming to New Zealand. The increase over the last three months is a result of an increasing number of people coming into the country combined with fewer departures. This situation will be exacerbated as the prospect of employment off shore worsens and New Zealand continues to look more appealing.

 

 

BNZ have forecast that the number of people arriving in New Zealand will exceed those departing by 15,000 per year by the end of 2009, and suggest that the potential for net immigration to reach 30,000 is increasing. While there are associated time lags, the flow-on effect this will have on the housing market is immense as new immigrants look to secure accommodation through either the rental market or buying property. This surge in new demand for property will take time to be met by a building sector recording low activity levels and could affect prices in the medium term.

Unemployment has acted as the handbrake to growth in recent months and the increasing rate continues to hamper the prospect that the residential market has indeed turned a corner. Statistics New Zealand (StatsNZ) recorded a December quarter unemployment rate of 4.7%, up 1.3 percentage points over the year. This is expected to peak at around 7.0%, varying between economic commentators.

Increasing unemployment will continue to prove a hurdle for residential market resurgence on two counts. Firstly, it will make potential investors consider the implications of a long term financial commitment. Secondly, in an already risk adverse credit environment, the long-term viability of a mortgagor will be an influential factor in the bank’s loan approval process.

On balance, it seems that interest rates are most heavily influencing the residential property market at present. Further drops in interest rates are expected with an OCR cut likely at the April review, which will be in keeping with the RBNZ outlook for long-term interest rates. The decreased interest rates will continue to assist the levels of activity, maintaining interest to levels we’ve seen over the last two months.