Housing shortage worries? Not yet

Guest Post by Tony Alexander

There are a lot of factors which go into determining the degree of strength in a country’s residential real estate market. Interest rates are a biggie, as are population pressures, house supply growth, employment growth and security, legislation affecting investor returns and land availability, and general sentiment.

That last factor is the hardest one to pick

Do people feel optimistic about themselves and their future, or do they feel pessimistic? It is impossible to predict sentiment shifts. But there is something else in play making property predictions even more difficult and there is a corollary with exchange rates which I have spoken and written about these past four decades.

Theoretically, it looks like it would be possible to predict exchange rate changes if one knew what the changes would be in each of the factors which drive exchange rates such as interest rate differentials, relative economic growth rates and trade flows, and so on. However, what I have learned is that even if we knew how all these things would change, we still couldn’t predict exchange rate changes because we never know when the markets in general will decide that a particular factor is a matter of moment.

That is, it is impossible to pick when markets will switch from feeling interest rate differentials drive exchange rates to trade balances, or politics, or employment data. The corollary with the housing market is this.

We know that in the long term, house price levels will be determined by growth in house supply relative to growth in demand, the costs of house construction, regulation and land, interest rate levels, tax regimes and so on. But we never know when people, buyers largely, will collectively decide that a particular thing matters, and they need to act or not act.

The specific factor I have in mind is not interest rates, tax changes, or potential urban planning changes.

Instead it is shortages.

One thing we were all reminded of during the earliest days of the pandemic was that if we hear talk of something being in short supply, our worries about not having it will cause us to rush to grab it, and quickly the supermarket shelves are bereft of flour, toilet paper, or frozen chips.

As an economist I am looking at the data flows and leading indicators of activity levels and seeing a problem developing with house supply in New Zealand.

Shortages are on the cusp of appearing

Our population grew almost 3% last year and will grow more than 2% this year. Yet at the same time as fundamental demand for housing (rented or owned) is rising, new house construction is falling.

The annual number of dwelling consents being issued has fallen from a peak under a year ago of 51,000 to 37,200 now. The feedback I am getting from developers is that buyers are in very short supply. With pre-sales hard to get, banks won’t provide financing and that means plans for building are being canned.

MBIE have predicted that come the end of this year consent numbers will be around 32,000. The risk is of a number much lower than that, especially with the extra worries about interest rates which have arisen early this year.

At some stage there will arise talk of housing shortages, and the talk will likely be strongest in Auckland but by the looks of it Wellington also, where the falling away of construction seems particularly rapid. When media discussion of shortages grows, people will start bringing forward their purchases of existing properties, listing numbers will fall, and FOMO (fear of missing out) will jump.

When might this happen?

As noted above, my experience tells me it is impossible to forecast such a sentiment shift. But I suspect it won’t happen until worries about interest rates have dropped away substantially. Going by the Reserve Bank’s comment’s this week that rate falls still lie a long way down the track, shortage discussions and worries may not even appear this year. But that just means when they do, the talk and the market reaction will be greater than if such talk were to arise now and extra buyers appeared to purchase the new-builds in particular which for the moment developers are struggling to raise interest in.

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