Net migration falloff to hit house prices

In a poor sign for an already weak housing market and slow retail spending, the population gain from migration has slowed to a trickle and could soon turn negative, economists say.

Just 70 more people arrived in New Zealand than left in June on a seasonally adjusted basis, according to Statistics NZ, down sharply on the monthly gains of more than 1000 at the start of the year.

Net migration has hit its lowest monthly level since late 2008.

ANZ Bank economists said the support provided to the economy from net immigration was "clearly diminishing" with arrivals trending down while departures were rising.

On current trends the prospect of New Zealand losing more people from migration, rather than gaining them as is usually the case, "is very real", ANZ said. "This does not augur well for the housing market and domestic spending."

There has been a slowdown in the number of migrants arriving in New Zealand, with a sharp drop in work visas in the past year. At the same time more people have been leaving, especially for Australia, since the end of last year.

Migration has been a key support for economic growth, housing and retail sales. There is a link between strong migration and rising house prices and rents, while house prices tend to fall in times of migration loss, economists say.

For example, during the economic downturn of the late 1990s, more people left New Zealand than arrived for a couple of years, and house price inflation slumped from more than 10 per cent a year to zero.

The annual net migration gain was 16,500 in the June 2010 year, down from a recent peak of 22,600 in the January 2010 year, but at current monthly levels there is a risk of net migration loss, economists say.

During the latest recession, which ended a year ago, house prices fell sharply and then rebounded, with support from extremely low interest rates and net migration gains. Now migration is ebbing away and floating mortgage rates are rising.

New Zealand Institute of Economic Research principal economist Shamubeel Eaqub said the economy had grown in the past year "on the back of population growth", supported by net migration, which held up housing as well as sales of goods and services.

But with a stronger Australian economy and higher average wages, more people were crossing the Tasman to live, and net migration had slowed to "practically nothing". That trend to move to Australia was likely to continue.

"With a loss of momentum from migration and increases in mortgage interest rates in the past year, the momentum in the domestic economy is likely to fade in the balance of this year," he said.

Domestic demand was anaemic, with a soft patch likely in coming months, though he did not expect a fall back into a double-dip recession.

"It [the recovery] has been disappointing so far," he said.

NZIER has called for the Reserve Bank to hold off raising the official interest rate further next week, given the weak recovery.

The housing market has been most affected by rising mortgage interest rates recently, but if underlying demand fell because of low or negative migration, it would compound the problem. "This is yet another negative [for housing] in a dull picture," Mr Eaqub said.

With low migration, house prices were likely to go "sideways or down", especially with rising interest rates reducing affordability.

Affordability was being supported at present by relatively low interest rates, with floating rates at 6 per cent the lowest since 1965.

Housing affordability figures show it now takes almost 62 per cent of one median income to pay the mortgage on a median-priced house. That is down from more than 80 per cent at the peak of the property boom three years ago, but still well above levels a decade ago.

- © Fairfax NZ News