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Troubled Waters

Recent housing market data has been stronger than was expected yet many commentators are not convinced that the positive signs will last, discovers Miriam Bell.

By: Miriam Bell

1 July 2020

Those trying to make sense of the housing market at the moment are likely to be struggling. That’s because the latest round of market data has not looked too bad: sales are down year-onyear but rising, listings remain tight, and prices appear to be holding steady.

At the same time, while commentators now say the economic fallout from Covid-19 may not be as severe as originally predicted, they continue to emphasise that forecasts remain grim. It’s all a bit confusing and it shows that uncertainty prevails.

Perhaps it’s best to focus on the fact that news on the housing front is, at this stage, not bleak. In fact, some say there are positive signs worth taking note of.

Prices A Far Cry From Predictions

First up, it seems Covid-19 has not diminished the price expectations of those selling property, with Realestate.co.nz’s latest data revealing that average asking prices hit record highs in seven regions in May.

It also has the national average asking price up by 10.3% year-on-year to $724,058 in May. The Auckland region also saw a decent annual increase of 9.9% which left its average asking price at $961,686. Just one region (Central Otago/Lakes) recorded a decline in average asking price.

Realestate.co.nz spokesperson Vanessa Taylor says asking prices indicate what vendors are expecting to get rather than what properties are actually selling for.

“But they are a good indicator of what will happen with sale prices. It’s promising to see these asking price highs around the country during what is a challenging time globally.”

Trade Me Property’s May data also showed average asking prices holding firm, with strong year-on-year growth across all regions and some record-high prices. Both Realestate.co.nz and Trade Me Property’s releases noted that demand remains high, with big spikes in viewing activity and enquiries.

This situation does currently appear to translate into actual sales prices and values. QV’s latest House Price Index has the average national value essential businesses, including construction sites. up by 2.4% over the past three months and by 7.7% year-on-year, leaving it at $739,539 in May.

In the Auckland region, values also increased. The region’s average value was up by 2.7% over the last quarter and by 5.4% year-on-year to hit $1,086,223. In a similar vein, markets around the country saw value growth of varying degrees annually.

Most also saw some growth over the past three months, although it was negligible for some. That means that while Hastings had 4.6% and Whangarei had 4.4% quarterly growth, Queenstown Lakes had just 0.5% and Rotorua’s values remained flat on 0.0% over the quarter.

The REINZ data tells a similar story. It has median house prices nationwide up by 6.9% year-on-year to $620,000 in May, as compared to $580,000 in May 2019.

In Auckland, there was an annual increase of 7.1% in median house prices in May. That took the median to $910,000, which is the third highest price on record. Eleven out of the 15 regions saw monthly increases in median price, with Waikato, Taranaki and Tasman all hitting record median prices in May.

REINZ chief executive Bindi Norwell says May’s price data was more reflective of a global pandemic, in that there was some volatility in prices with five regions seeing prices fall from April to May.

“But what continues to surprise us is the fact that there are still regions with increases in median price and that there are still regions experiencing record median prices – a far cry from some of the doom and gloom predictions that were touted when Covid-19 first hit the country.”

It may be too early for price declines to be showing through, she says. “But the reality is that the majority of regions saw median price increases from April to May and all bar one (Gisborne) saw annual increases in price – likely a continuing effect of demand for good properties outstripping supply.”

Sales Down, But Not Out

However, while the price data looks solid, the story becomes more complex once the sales data is considered. For example, QV general manager David Nagel says their data is skewed towards the earlier stages of the three-month period when sales volumes were much higher.

“When we look at just the April and May transactions in isolation it shows a definite impact with post lockdown sales on average down by around 5% on pre-lockdown levels. We’re seeing regional variations as the various locations are impacted differently, depending on their reliance on tourism and other employment impacted by Covid-19.”

The key point is the gradual decline in quarterly growth in May, with 14 of the 16 major cities monitored showing a reduction in the rate of growth since April, he says.

“This trend is likely to continue as a greater proportion of post-lockdown sales are used in the HPI calculations.”

While early post-lockdown market signs have been positive, with a shortage of listings helping to maintain a level of scarcity for buyers, Nagel puts it down to pent up demand from lockdown.

“We’re now seeing buyers exercising caution with many expecting greater volumes of listings to come on stream later in the year as the full impacts of the economic downturn start to bite.”

The downturn in sales activity is evident in the REINZ data. Sales volumes nationwide were down by 46.6% yearon- year in May.

However, there were also some more positive signs in the data. There was a strong monthly uplift with sales nearly trebling from April to May. They rose from 1,371 to 3,990, which is a 191.0% increase.

‘There are still regions experiencing record median prices – a far cry from some of the doom and gloom predictions that were touted when Covid-19 first hit the country’ BINDI NORWELL

So while no regions saw annual increases in sales in May, all regions saw sales volumes increase from April. A good example can be found in the country’s biggest market, Auckland. It had sales down by 44.5% year-on-year (from 2,013 to 1,117) in May, but up by 98.8% on April.

Norwell says the annual decrease in sales is not surprising given the alert level three restrictions were in place for the first 12 days of May. “It was a positive sign to see a good uplift in sales activity from April to May, with 15 out of 16 regions across the country seeing triple figure percentage increases in their month-on-month sales activity.

“But we’re still seeing a shortage of new listings come to the market, which continues to impact sales volumes. Hopefully, as people’s confidence starts to lift the listings shortage will start to change.”

Recession Outlook

Turning to the economists makes for bleaker reading. For Westpac chief economist Dominick Stephens, the reality is that New Zealand is staring down the
barrel of a severe recession.

He says the number of house sales in May was only about half of what it was a year ago.

“It wasn’t much different to what it was during the 2008 recession and I doubt the seasonally adjusted monthly number of sales will lift much from here for two reasons.”

One reason is that migration in and out of New Zealand will be extremely low for some time and this will reduce the need for house transactions. The other is that during recessions people are less likely to move region, upgrade their house, or invest in property due to fear of what might happen in the economy.

Stephens does admit though that there are a couple of silver linings in the house price outlook. “First, it is starting to look like the economic fallout from Covid-19 will be less severe than we initially expected, thanks to the early move to level one. And second, interest rates are extremely low, and that tends to boost asset prices.

“But while we acknowledge these upside risks, we think that our forecast of a 7% house price decline is consistent with the economic outlook and the data so far.”

ASB senior economist Mark Smith also points out that sales activity remains weak as Covid-19 restrictions continue to impact, with the days to sell rising to a record high for Auckland.

They expect the housing market to creak back into gear in the coming months, he says. “Pent-up demand and lower mortgage interest rates will instill more confidence from buyers. But we don’t expect this to persist given the mounting economic toll of Covid-19.

“So any bounce in the next few months is likely to prove short-lived. Net immigration is highly unlikely to scale the heights it has done in the last few years, with rising unemployment and rising housing supply hanging heavy over the market.”

They expect a 5-10% fall in house prices from here, although government and Reserve Bank action will limit the downside to some extent, Smith says. Meanwhile, independent economist Tony Alexander sounds a slightly different note.

There is a correlation between changes in the unemployment rate and in average house prices, and with the unemployment rate not set to rise until the latter part of this year, that suggests time exists for house prices to pull back a bit further, he says.

“But the extent of price declines will be limited by a great number of factors. They include record low interest rates, money printing, spare cash from not travelling overseas, and net migration not falling by as much as people might think.”


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