*|DATE:|* | Investigate Spring 2017 Issue
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The Things Which Drive Housing Turnover

Basically interest rates, then credit controls, then migration, then economic/jobs growth, then housing supply growth.

Lets ignore Trumpit this week and take a look at the housing market, starting with a few things which interested people need to take into account, just for the record. First, no forecast of a substantial decline in NZ house prices has been correct for the past four decades. When bad times come prices ease back a tad then the market sits still for a few years as sellers do nothing and an inevitable easing of monetary policy quickly reduces cash flow pressures on mortgaged people. Average prices fell 4% during the 1997/98 Asian Crisis recession and 10% during the GFC. Second, paying attention to what rents are doing is a poor indicator of where prices will go. For years analysts have been developing models based upon what is considered a reasonable yield in the context of investments other than housing, and concluding that either rents will shoot up (they only ever rise slowly apart from some seasonal bumps) or prices will fall. But there are a lot more motivating factors involved than a simple yield comparison with equities, corporate bonds, and term deposits. Third, people do lose money investing in residential property – and that is the irony of popular discussion about the sector. The stories of loss are invariably broad-based, semi apocalyptic and couched in implied terms of seemingly greedy people getting their comeuppance. Those who actually lose money are usually average non-greedy but inexperienced and under-capitalised people who don’t talk about it. They just quietly fade into the background partly because in an NZ cultural context it is not done to talk about failure. Fourth, housing markets do move in cycles and we try to pick them using our forecasts of things we will outline below such as changes in interest rates, migration, supply, credit controls, employment growth, consumer sentiment etc. However as noted above, models of the housing market invariably fail and it is changes in what we sometimes call “animal spirits” which really kick a housing market up and down. Picking big changes in what average (usually poorly informed) buyers and sellers will do is often ignored by forecasters, difficult to do, but not impossible if you have been around for a few cycles or hang out with someone who has. Lets now illustrate some of the factors which move the housing market, measured in this instance by the thing most relevant to real estate agents, mortgage brokers, bankers, decorators, lawyers and moving companies which is not price but turnover.

2004 - 2007

Back in early-2004 annual turnover by licensed real estate agents nationwide peaked at 122,000. Come the end of 2007 (before our NZ recession and the GFC) turnover had declined to 92,000. This happened in spite of the unemployment rate falling from 4.7% to 3.3%. What happened?
Interest rates Rates rose with the average floating mortgage rate going from 7.2% at the start of 2004 to 10.5% come the end of 2007.

Net immigration

Flows eased with the annual net inflow falling from 43,000 in the middle of 2003 to 5,000 by the end of 2007.

Jobs growth

Net employment growth slowed down from 3.4% early in 2004 to near 1.5% by late-2007. Or we can proxy this with the annual pace of GDP growth which slowed from near 4.5% to 3.0%.


Supply growth eased. (New houses have to be sold.) The number of dwelling consents issued fell from a 12 month total of 33,000 in early-2004 to below 26,000 by the end of 2007. Note that late in 2003 a net 22% of people in an ASB survey felt that it was a bad time to buy a house. This was 0% late in 2007. Measures of what people think give no reliable guide to where the housing market is going to go. Why? Because the overwhelming majority of people are not thinking about transacting a house so don’t give a hoot really, and average consumers cannot predict asset market changes. They are the herd. They follow and can be taken advantage of by those who understand their behaviour.

2007 - 2009

The next decent change in nationwide dwelling sales came as the GFC hit with turnover falling to just 53,000 early in 2009. Asking why this large decline happened is not interesting really because the answer is obviously the combined effects of our own recession in the first three quarters of 2008, the extra recession caused by the GFC, interest rates almost hitting 11% early in 2008, and the extreme focus on collapsing housing markets offshore. The more interesting question is why did annual sales recover to almost 70,000 early in 2010?

2009 - 2010

Average mortgage rates plummeted to below 6%, net migration flows jumped to almost 23,000 at the same time, and consumer confidence improved using the Westpac McDermott Miller quarterly measure to 117 from 82 mid-2008. But as the graph on our first page shows, turnover then collapsed again back to 55,000 in early- 2011. Why this big decline when things had been turning upward?

2010 - 2011

The Reserve Bank tightened monetary policy and average floating mortgage rates rose to 6.4% from 5.9%. Net migration flows fell from 22,000 to near 6,000 again. The consumer confidence reading fell from 117 to near 98, and dwelling consent numbers fell from 16,500 mid-2010 to near 13,000 mid-2011.