Property price correction doesn't change shortage

OPINION: Nobody does an MBA and has the lecturer say to them the success of their business will depend upon the state of the economy, writes Tony Alexander this week.

Business outcomes are almost always going to reflect management decisions. But sometimes the state of the economy will have a clear impact on businesses either for the better or for the worse and that is where economists come in.

We can provide insight into whether the broad external environment businesses are operating in will provide unusually good opportunities for profit growth or will contain an unusually large number of threats. We can also use our economic analysis to provide insight into risk management decisions such as regarding interest rate exposure and sometimes exchange rate flows.

With regard to the housing market, the insight we economists offer is hardly ever worth following by somebody contemplating buying or selling. Individual decisions about house purchases almost always reflect individual circumstances regarding job security, lifetime family plans, availability of finance, and so on.

But sometimes people should pay very close attention to what economists say about the housing market and we have just come through such a period.

We have all seen stories of house prices falling sharply overseas and there have been strong concerns expressed by a few uninformed people that house prices would also plummet in New Zealand. Through last year and the early part of this year we were at pains to point out that the economic fundamentals affecting the housing market in New Zealand are completely different from those overseas and it would be unreasonable to expect anything remotely approaching 30 per cent to 40 per cent declines in prices happening in some other countries.

Now we have seen our expectations play out, with average house prices in New Zealand down only 9 per cent in the past year. Monthly numbers are showing a surge in turnover since March with renewed interest from investors and also some first home buyers coming back into the market. It looks like prices have stabilised.

Given the fact we can see some signs of life in the world and New Zealand economies, and taking into account the upturn in the housing market, we have now passed the point where people need to pay a lot of attention to what we economists say about the housing market.

The housing market has done its decline and now we are simply looking at an environment over the next few years where prices rise relatively gradually under pressure from above-average population growth, below average interest rates for the next 12 to 18 months, and a shortage of dwellings.

The opportunity for investors to pick up an absolute bargain has by and large passed, although there will still be some opportunities as rising unemployment forces more of the inexperience and undercapitalised small investors to quit the properties they purchased over the past three years hoping for a quick capital gain.

The time for first-home buyers to sit on their hands has also passed now that prices have stabilised. Sad to say, from an analyst's point of view, the interesting part of New Zealand's housing cycle has now been and gone. Over the next two to five years our housing market commentary is going to be along the lines of how wonderful it is that New Zealand escaped the price crashes overseas, how house prices are still overvalued, how price gains will be present but limited, and one other thing which is soon likely to dominate housing policy.

We have a housing shortage in New Zealand which is getting worse and worse. As accelerating population growth bumps up against housing construction at its lowest levels in decades, big concerns about housing affordability are going to reappear. How long before another select committee review of the problem?

» Tony Alexander is the chief economist for the Bank of New Zealand.

- © Fairfax NZ News

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