Mixed economic prospects won’t stop the rise of housing

Some people retain a negative view on the housing market on the basis of an expectation that the economy is stuck in recession. Actually, the recession ended two months ago and there is little chance of it returning then morphing into a depression – an undefined concept but generally taken to mean a few years of shrinkage.

A recession is defined as two quarters in a row of economic decline. Our economy shrank in size by 1.6% during the March quarter, and when the June quarter numbers come out on September 17, we will see further shrinkage of somewhere between 8% and 15%. Australia just shrank 7% in their June quarter, the UK 20%, Europe 12%, US 10%.

We already know that our economy is growing again. We can see it in the monthly estimate of activity which Treasury calculates and which I discussed here two weeks ago. We can see it in the value of spending using debit and credit cards rising by 73% in May, then 15% in June, and another 1% in July.

The number of filled jobs around the country grew by 12,000 in May, 20,000 in June, then another 5,000 in July.

These measures are however not what we call leading indicators of economic activity, and those are still mixed – but not so mixed as to make me expect that recession will return. Business sentiment remains poor – though the ANZ’s monthly survey shows that the announcement of Auckland’s lockdown early in August did not have much impact.

My own monthly survey of people’s Spending Plans shows a fall in the net percent of respondents planning to raise their spending, from 19% in July to 12% in August. But this is still above the 7% results for May and June, and suggestive of continued strong growth in spending on home renovations and domestic travel in particular.

The survey also shows that people remain strongly interested in purchasing both investment property and a house to live in. And that is where the long-term picture which I focus on comes into play.

Some people – though not as many as a month ago – still feel that house prices are set for some big falls.

With our economy already developing some upward momentum and the outlook for interest rates getting even better for borrowers, the chances are now very slim that average house prices will fall from current levels.

The chances are high that the rises I’ve been expecting to commence early in 2021 now start before then.

A key driver of rising prices will be sustained low interest rates bringing more investors looking for better returns than now possible on bank term deposits. Anticipation of a return to strong net annual migration inflows once the borders reopen will be another factor – though perhaps not until we get dates set for vaccination of people around the world (assuming this happens) and picking of the month when our borders reopen to the big stimulus which foreign visitors bring. My pick in that regard is early-2022.

To this mix we can add banks slowly easing their home lending criteria. But there is perhaps one factor which needs taking away from this collection of price-positive forces.

Increasingly it looks like the reduction in house building stemming from the Covid-19 shock will be relatively small.

House builders report a surge in people signing contracts for construction, giving up on hopes of buying an existing house amidst intense shortages, and opting for construction instead. And monthly numbers for the issuance of building consents around the country are tracking slightly above pre-Covid levels. This is good news for carpenters and the many businesses which benefit from house building, and one reason why house price gains nationwide next year may come in closer to 5% rather than above 10% - not that anyone is predicting such a high number as yet.

To sign-up to either my free weekly Tony’s View publication, or weekly Tview Premium plus extras, go to www.tonyalexander.nz

The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Squirrel shall not be liable or responsible for any information, omissions, or errors present. Any commentary provided are the personal views of the author and are not necessarily representative of the views and opinions of Squirrel. We recommend seeking professional investment and/or mortgage advice before taking any action.

To view our disclosure statements and other legal information, please visit our Legal Agreements page here.