There is a very strong likelihood that house prices will start rising again:
– Immigration is up
– NZ likely to become haven for climate refugees
– We aren’t building enough houses
– Building consent numbers are down
– Ever increasing cost of compliance
“It is always tough to know when house prices will start rising again. But given the powerful long-term forces at play, I suspect they will. Get ready.” Sam Stubbs, Simplicity.
See full article from Stuff below:
By Sam Stubbs
Sam Stubbs is founder of KiwiSaver provider Simplicity and a regular opinion contributor.
OPINION: Some economists predicted that increased Covid-related spending would find its way into house prices. And so it did.
In hindsight, their predictions were logical – a lot more money was suddenly chasing the same number of homes. But times change. Higher mortgage rates have hit house prices – even though they are still well above their Covid lows.
And for the first time in a generation, some homeowners owe more on the mortgage than their home would sell for in the current market. So there is justifiable anxiety about the direction of the housing market. But where to from here?
I prefer to see through the immediate fear and noise, and focus on the powerful long-term forces at play. So what’s the bottom line for house prices?
There is a very strong likelihood that house prices will start rising again.
Why? Because while short-term the housing market is a voting machine, long-term it’s a weighing machine.
That means that emotions, predictions and speculation will shape the housing market short term, as per usual. But long term, the fundamentals will win out. And the fundamentals point to house prices rising.
The first fundamental is tax.
For generations, our tax system has advantaged home-buyers, making homeownership the surest long-term path to wealth.
And nothing that either major political party is now saying gives any reason to believe this will change.
The Government has flirted with both capital gains and wealth taxes and promptly dumped them. Nor are National or ACT in favour of them.
So in spite of what the Greens or Te Pati Maori may wish, a wealth or capital gains tax is very unlikely for the foreseeable future.
That means homeownership will stay one of the best ways to make money because any capital gains will be largely untaxed.
And even with bright-line tests for investment properties, all you have to do is wait 10 years for all the gains to be tax-free.
The second fundamental factor impacting house prices is supply.
Relative to our population, housing consent numbers last year were below those in 1980. For more than 40 years now, New Zealand has been building fewer homes per person than we did in the previous 40 years.
Much of this lack of supply of new homes is due to successive Governments failing to build enough state houses to meet demand. We simply didn’t build enough homes.
And we aren’t building enough now. The rate of building consents per 1000 people has improved, but remains well below what we used to do, or need now.
The conclusion is obvious. Back in the good old days, house prices were lower, because there were lots more of them.
Nor should higher building consents over the last two years give comfort that enough homes are actually being built to meet the rising demand.
Many projects recently consented are unlikely to turn into actual homes until prices rise again and they become profitable for developers to actually build. That is not the case right now.
And after a brutal year, many developers and construction companies are only just holding on.
More of them are likely to fall over in the next year- further slowing our ability to build the homes we need.
So expect further stress in the building industry over the next 12 months, and the ongoing shortage of homes to be reflected in stronger prices.
And do not be fooled by all the cranes and building sites right now, especially in Auckland. They are mostly just finishing off what was sold before Covid. Little new, and of any scale, is under way.
The third fundamental factor impacting home prices is demand.
Much is made in the press about people leaving New Zealand. But the latest numbers show strong net migration has returned. 96,500 left New Zealand in the year to March 2023. That’s up 31%, hence the scary headlines about people leaving in droves.
But 161,900 arrived over the same period, meaning we now have 65,400 more people to house than we did last year.
Go figure. If Governments do what they usually do to stimulate growth ie. turning on the immigration taps, we need homes for them all.
And if enough homes aren’t built, the prices of the existing ones go up.
This is not rocket science, it’s Economics 101. If supply does not meet demand, prices go up.
And get ready, because New Zealand is ever more likely to become a haven for climate refugees from all over the world. Some commentators are picking our population will rise to over 15 million from the pressure of climate refugees.
The last fundamental impact on the housing supply is the cost of compliance.
This is not only in terms of development charges to put in the infrastructure for more homes, but also the ever-rising delays in getting consent from more cautious councils. When it takes longer to get permission to build than it takes to actually build, it both delays and discourages the building of new homes. And it also makes them more expensive.
Delays of one or two years while waiting for resource consent is now the norm for most large-scale housing developments. To solve this, Resource Management Act reform is required.
The tragedy of rising house prices is obvious to those that can’t afford them.
And it can mean lower growth in the overall economy if more money spent on housing takes investment away from other industries.
But unless the housing supply increases dramatically, nothing will stop the inexorable long-term rise in demand for homes – forcing up rents and house prices.
It is always tough to know when house prices will start rising again. But given the powerful long-term forces at play, I suspect they will. Get ready.
