How will the property market behave in 2015?

New Zealand’s housing market in aggregate has had a strong run since 2009 with average prices ahead by 34% since early-2009. But this measure clouds the fact that Auckland has advanced 62%, Christchurch 43%, but the rest of the North Island 12% and the non-Christchurch South Island 18%.

WHY THE JUMP IN PRICES IN AUCKLAND?

Mainly because of what we warned about in 2008 – a shortage of houses caused by weak construction due partly to shortages of labour plus hefty planning costs and delays. Christchurch’s rise is explicable by the shortage created by the earthquakes. But there is also something else at work here which almost certainly will not change in the next few years.

Growth in New Zealand’s regions outside our two largest cities which account for 46% of our population has generally been weak since 2009 if not longer. The manufacturing sector has been shrinking, farms are getting larger, and New Zealand is predominantly developing new jobs in the services sector – in line with most other countries.

In fact from early 2009 to early 2014 when total employment grew by 67,000 people, all the gains have come in the services sector apart from a slight lift in jobs in construction, dairying and petroleum production. These services include computer system design, management consultancies, and architecture and engineering. These tend to be city-based occupations.

THE RISE AND THE RISE OF THE CITY

More than that, the world is increasingly urbanising and although the internet allows many of us to telecommute, we still prefer face to face interaction, group working and so on. Technology is bringing people physically closer together rather than pushing them apart. Perhaps this helps explain why between 2013 and 2043 Auckland’s population is forecast to grow 50%, Christchurch 30%, Waikato and Bay of Plenty 22% and 18%, Taranaki 15%, Wellington 13%, and all the rest of the country just 8%.

WILL THE HOUSING GAP WIDEN FURTHER?

Population trends, work type trends, and even migration trends argue in favour of a widening gap between average house prices in Auckland and Christchurch and the rest of the country. There are and will be second-tier housing growth markets either enjoying the spill over from Auckland’s rise and growth such as Tauranga and Hamilton, or enjoying benefits of some location shifting by retiring people such as Nelson.

Now more recently we have a new factor to place into this mix – low interest rates for a long period of time. The outlook for NZ interest rates has shifted in less than six months from common expectations of 2% rises to nothing or even reductions later this year. This reflects worries about global deflation pushing interest rates to record lows overseas, plus low inflation of just 0.8% here in New Zealand assisted by a downward oil price shock.

HOUSING: THE NEW PENSION PLAN

Low interest rates will boost investment in housing as an aging population retiring without enough savings and expecting to live longer than previous retirees seeks income earning assets other than decreasingly remunerative term deposits. These investors will naturally favour their home markets, but they will also look to get better yields than in our two big cities by purchasing in the regions. Thus, just because we expect prices to keep rising and turnover to hold up in Auckland and Christchurch does not mean we will not see some strength in the regions this year and next – subject however to whether an extended full-blown drought sets into place.

TO SUM UP

Overall, with low interest rates, economic growth near 3%, low unemployment, strong immigration, shortages in some locations, offshore buying, and a growing backlog of frustrated young buyers reaching deposit targets, practically all regional housing markets will be strong this year – though Auckland and Christchurch will again move ahead further.

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This article is written by Tony Alexander, Chief Economist at the Bank of New Zealand.  The views expressed are the writer’s own and do not necessarily represent those of BNZ or its related entities.