New Zealand’s housing market has picked up over the second half of this year – something we were forecasting a year ago. But some of the commentary appearing suggesting that the rise is unsustainable and that it is being fuelled by accelerating lending growth and speculative pressures is 100% off the mark.

My analysis of the housing market since the second half of 2004 has been centred around the simple fact that unlike countries such as the United States, Ireland and Spain we did not enter the 2008 recession with an over-supply of dwellings. Plus, since then construction has been very weak so a large under-supply has appeared. In fact whereas on average over the past ten years 23,200 consents have been issued each year for the construction of new dwellings (22,300 is the 20 year average), in the year to October only 13,648 were issued. One year ago that total was 15,991, two years ago 13,867, three years ago 20,089.

We think that awareness of the worsening under-supply is growing and this is encouraging young home buyers in particular to enter the market. Many have delayed household formation since 2008 because of worries about employment, a desire to reduce debt, hopes of house prices falling, and wanting to build a bigger deposit. Now these people are wanting to get on with their lives and the canny ones are moving now before an improving labour market next year draws the majority of these delayed nest-leavers into the market.

In the absence of any data series actually splitting housing market activity into different groups we can still get good evidence that first home buyers are moving by looking at our monthly BNZ-REINZ Residential Market Survey. When the country’s over 10,000 licensed real estate agents are asked if they are noticing more first home buyers in the market they overwhelmingly say yes. The yes vote was a net 29% positive in December, 28% in November, and 29% in October.

Why do we believe these results are valid? Because when we also ask agents whether they are noticing more investors in the market a net 1% this month said no, they are noticing fewer. A net 5% said fewer in November and a net 3% in October. Therefore what is changing in the housing market and causing improving activity is rising demand from first home buyers – not investors.

In addition we can easily challenge any contention that speculative forces are in play by looking at the bank lending data. In seasonally adjusted terms in October bank lending to households was up only 0.1% for the third month in a row. Lending was only 1.2% higher than a year ago.

For the record, the rise in the housing market could easily be seen in this week’s release of monthly turnover data by the REINZ. In seasonally adjusted terms dwelling sales rose by 4.4% in November to record 1.1% growth for the three month period ending that month. The trend in turnover is upward but it is not rapid. The median quality-adjusted dwelling price rose 1.1% in November to lie 2% ahead in the three months to November from the three months to August and 2.6% ahead of a year ago. Prices are rising but at a fairly mild pace.

These are very early days in the upward leg of the housing cycle. The interesting phase will come in the second half of next year when we expect interest rates will still be very low but the housing shortage will be even worse and awareness of it much stronger, and the labour market will be firmer. By then the investors are likely to have become more active and a lot of attention will turn to the country’s ability to increase housing supply rapidly and cap price rises. But we won’t be able to because the builders will already be in Australia, will be retiring, or will not have been trained since the downturn of 2008.  hence prices rise – the economics is very simple. Could we be wrong? Only if Europe collapses. 

My analysis of the housing market since the second half of 2004 has been centred around the simple fact that unlike countries such as the United States, Ireland and Spain we did not enter the 2008 recession with an over-supply of dwellings. Plus, since then construction has been very weak so a large under-supply has appeared. In fact whereas on average over the past ten years 23,200 consents have been issued each year for the construction of new dwellings (22,300 is the 20 year average), in the year to October only 13,648 were issued. One year ago that total was 15,991, two years ago 13,867, three years ago 20,089.

We think that awareness of the worsening under-supply is growing and this is encouraging young home buyers in particular to enter the market. Many have delayed household formation since 2008 because of worries about employment, a desire to reduce debt, hopes of house prices falling, and wanting to build a bigger deposit. Now these people are wanting to get on with their lives and the canny ones are moving now before an improving labour market next year draws the majority of these delayed nest-leavers into the market.

In the absence of any data series actually splitting housing market activity into different groups we can still get good evidence that first home buyers are moving by looking at our monthly BNZ-REINZ Residential Market Survey. When the country’s over 10,000 licensed real estate agents are asked if they are noticing more first home buyers in the market they overwhelmingly say yes. The yes vote was a net 29% positive in December, 28% in November, and 29% in October.

Why do we believe these results are valid? Because when we also ask agents whether they are noticing more investors in the market a net 1% this month said no, they are noticing fewer. A net 5% said fewer in November and a net 3% in October. Therefore what is changing in the housing market and causing improving activity is rising demand from first home buyers – not investors.

In addition we can easily challenge any contention that speculative forces are in play by looking at the bank lending data. In seasonally adjusted terms in October bank lending to households was up only 0.1% for the third month in a row. Lending was only 1.2% higher than a year ago.

For the record, the rise in the housing market could easily be seen in this week’s release of monthly turnover data by the REINZ. In seasonally adjusted terms dwelling sales rose by 4.4% in November to record 1.1% growth for the three month period ending that month. The trend in turnover is upward but it is not rapid. The median quality-adjusted dwelling price rose 1.1% in November to lie 2% ahead in the three months to November from the three months to August and 2.6% ahead of a year ago. Prices are rising but at a fairly mild pace.

These are very early days in the upward leg of the housing cycle. The interesting phase will come in the second half of next year when we expect interest rates will still be very low but the housing shortage will be even worse and awareness of it much stronger, and the labour market will be firmer. By then the investors are likely to have become more active and a lot of attention will turn to the country’s ability to increase housing supply rapidly and cap price rises. But we won’t be able to because the builders will already be in Australia, will be retiring, or will not have been trained since the downturn of 2008.  hence prices rise – the economics is very simple. Could we be wrong? Only if Europe collapses.