7 signs house prices are riding the upward wave

Guest Post by Tony Alexander

Here is a summary of the key things currently underway in New Zealand’s housing market which, in my opinion at least, make a very clear case for where prices are headed over the next three years — firmly upward.

First, growth in new house supply is slowing

The annual number of dwelling consents issued around the country has fallen from a record 51,000 in May last year to 42,000. Soon that number will head towards 35,000 if we extrapolate the most recent monthly numbers. This is still a long way from the 13,500 consents issued in 2011, and from where numbers peaked during the migration rush of the early-2000s. So, it would be wrong to say construction is collapsing. Instead, what we can say is that it is nowhere near close to keeping up with our second major factor in play.

Second, demand for housing is soaring courtesy of a sharp acceleration in population growth

The annual net migration flow has shifted from a net loss exceeding 20,000 early in 2022 to a record gain of over 110,000 people. That is a 2.1% boost to the population onto which we add extra demand factors such as an aging population, people’s desire to have their own space as a result of experiences in the pandemic, and a two and a half year queue of young people who have delayed buying but now want their own place.

Third, the foreign education sector is recovering well but has a lot further to go

Tourism numbers are also rising firmly, and both factors are encouraging properties to be shifted from the long-term rental pool into short-term and student accommodation. There is a reduction in rental supply underway in some areas. In Auckland, this has been covered up temporarily by developers unable to sell thousands of new townhouses putting them out to rent for a while rather than accept less than desired prices. But that situation will change, and rents will face extra upward pressure.

Fourth, the house price cycle in New Zealand turned upward in June

So far, prices on average nationwide have risen by 2.8% or 8.5% annualised. Auckland prices have recovered 3.9%, Wellington 4.7%, and Canterbury 2.6%. House price cycles have upward legs tending to last about six years. We are four months into this one.

Fifth, prices are rising despite the absence of investors buying and with mortgage rates at cyclically high levels

Once interest rates fall, and if the election result produces policy changes attractive to investors, then extra upward pressure beyond the recent annualised 8.5% rate will follow.

Sixth, the costs of construction continue to go up

This does not just mean materials. It includes ever-increasing standards required for earthquake resistance and energy efficiency.

Seventh, infrastructure costs continue to soar

The feasibility of installing new infrastructure to service more far-flung suburbs and satellite cities is not as great as people might think. Intensification will have to be pursued but the pushback against that will, especially with a potential change in government, limit new supply growth in many urban areas.

The upshot is this

House prices on average in New Zealand fell 18% from their peaks in late-2021 to June this year. So far 2.8% of those falls have been erased. Come some point in 2025, probably before the middle of the year, average prices will be back above those late-2021 levels.  

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