No turning point in housing

It is interesting to see the real estate blog calling a “turning point” in the housing market. For the sake of completeness, I’m going to attempt to call the opposite – namely I am going to put down the case for why the housing market will continue to remain slow.

Note that I am stating that it continues to remain slow – rather than making the even more specific argument that it will slow further. In order to defeat the idea that we have an upswing in the property market coming, I merely have to show there will be no upswing – after all it would be harder to record lower house sales volumes then we currently are 😉 . First, I will face up the facts that the real estate blog has put forward for an upswing, and then I will add a few more issues that I think will keep the real estate market depressed.

Also ultimately, the “heating up in the property market” appears to imply two things on the real estate blog, namely:

  1. Sales rising to normal levels,
  2. Steady house prices.

I will attempt to look at these issues separate – and I will discuss how these may trade-off.

House sales are heating up!!!

July was a surprisingly “strong” month for house sales – and the real estate blog did pick that (view this comment). However, it is important to look at this month in context.

It was still down 32% on year earlier levels – when a year earlier sales were already dropping. Even if sales rose by another 25% (in seasonally adjusted terms) the real estate market will still be running cold, as sales have fallen off a cliff!

A 35% increase (in SA terms) would have us back inline with what might be seen as a normal housing market – for this to be a turning point in the housing market, it must look like sales are going to head up by these types of levels over the rest of the year. Personally I can’t see annual house sales of much over 60,000 over the year to March 09.

Now the three indicators that the real estate blog is suggesting show that house sales will turn back to “normal” territory are:

  1. Rising website activity,
  2. Falling inventories,
  3. Rising purchasing enquiries.

The first factor does not seem terribly relevant – the real estate site is becoming more popular as the result of interest in the housing market overall, rather than an improvement in the market. However, the second and third factors could well be very important.

The third factor does not seem to match the market particularly well. Enquiries were well up over the March quarter of 2008, but sales were very poor over this period. This is a series I would like to see some more historical data for – and as a result it doesn’t have me convinced.

Now the second factor, the inventories, is the important one. A decline in inventories gives the impression that the market is clearing, and as a result the value that the buyers and sellers place on property is coming closer together. In this type of situation, sales volumes will head back to normal levels.

However, we have to ask why inventories have fallen. Inventories fell back while house sales were still weakening – suggesting that sellers were taking properties off the market after realising that their valuations were not being met. Ultimately, if inventories are falling because buyers and sellers are placing restrictively different values on property, then we will not see any uptick in sales as a result.

There is an indication that this is infact what is happening, as the rental stock in NZ appears to have increased, as “accidental landlords” have moved away from trying to sell there old property and just lent it out. This is part of the reason why rents have fallen. At some point these properties will have to be sold – however, it is unlikely to occur unless the sellers are willing to take significantly lower prices (which they currently appear unwilling to do).

But are there any indicators that suggest the market will stay down!

Well, one major factor is the days to sell which is still rising at a remarkable rate. According to REINZ it took an average of 58 days to sell property that was sold in July – the longest period of time since February 2001. The increase in days to sell indicates that momentum in the property market is incredibly slow – it is taking buyers and sellers a long time to agree on the value of property.

Furthermore these low sales levels have occurred in the face of record arrivals. The net migrant inflow 5,200 people was tiny, but the number of permanent arrivals has gone through the roof. The current arrival level is unsustainable, especially given the NZ governments cap on arrivals – as a result, demand for property is going to dry up further!!!

With renting remaining a cheaper option given current house prices, and with the rental stock looking reasonable robust in most places, there appears to be no fundamental factors sparking up that would drive a recovery to a normal property market.

But if prices fall!

Yes, if prices fall back (especially given that they are 30% “overvalued”) then sales will push back – however this requires sellers being willing to accept these lower property prices. As the real estate blog says, inventories are falling, this is a factor that will help to keep house prices elevated – thereby reducing housing market activity.

Ultimately, something has to give. Either house sales will stay in the doldrums for a while yet and inflation will eat the difference between buyer and sellers valuations, or house prices will tank and the market will be able to clear. I’ve long been a proponent of the first outcome – although the weight of evidence is definitely pointing the other way now.


Good on the real estate blog for going out there and calling a turning point – if they are right then it will be a very good thing 🙂

However, I’ve tried to have a look over the points, put them in some context, and state why I don’t think house sales levels will pick up over the coming months – without a significant dip in prices.

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  • Michael Kluge

    I work in construction and I think the residential construction industry still has a way to fall before it starts to rise again – and I think much the same about real estate.

    We had an agent stop into our office this morning and mentioned the same ‘turning point’ indicating that he was finally starting to move some houses again. But I think some of this is actually seasonal, IE spring is upon us and people often start looking around at homes at this time of the year. I think volume of sales may pick up a little over sping, but I wouldn’t be expecting a large turn upwards in price. There’s also more people looking around for a ‘bargain’ now – but that’s just it, they’re looking and as you say in your post there is still long periods of negotiation going on that often results in no sale. I’ve seen a lot of this first hand through my job – the same number of enquiries but less people willing to commit to a sale and many people are scaling back the size of their construction instead of abandoning it all together (but this has been happening too). I believe interest is picking up slightly but I don’t think it equates to the whole market turning and prices rising. I don’t actually follow real estate that closely (odd for my job) but if I had to give a judgement, I’d say house prices are still over valued if anything.

    Basically, I agree with the senitment that the market is going to stay flat for a while longer – possibly even dip further at some point.

    As I go have a beer or two tonight, I’m going to be happy that I’m debt free, renting and saving (for other investment, not a home) in this current economic climate.

  • Hi – Alistair Helm here at the <a href=”Link Text“>Unconditional blog author of this blog post to which you refer.

    Firstly I commend you on a typically detailed and professionally objective review of the piece I wrote.

    A couple of comments to your analysis – I would certainly agree that this is going to be the worst year for real estate sales for over 20 years, your figure of 60,000 for total annual sales is pretty close to my estimate, and compares pretty poorly to 2007 at 92,000.

    However the level of sales is always relative – a figure of say 5,000 for for August would be seen by the industry as a major lift, but in reality would be the lowest August since 1993, a figure of even 6,000 which would get agents dancing in the street would still be the lowest August since 2000. That was very much my view – a relatively brighter period after a very low period.

    In terms of the email enquiries, I would agree a data set over a longer period would provide a greater richness, however due to the technology platform prior to the launch of in late 2006 we can only reference the past 20 months. As to the spike and then collapse of enquiry in the first 3 months of this year – this can be explained by a massive lag effect before consumer sentiment and media interest impacted consumer confidence in property around the end of March. What we are seeing in these figures is an objective measure of lead enquiry rising over the past 6 weeks, as to its impact on sales that will have to be a matter we wait and see.

    Overall for me the exciting element of this is the fact that we are able to have an intelligent and objective discussion with data that thanks to the web we now have as lead indicators as opposed to the past when we have had to rely on very slow lag indicators.

  • Dave

    Well you know what they say about picking bottoms. Inventory is only down 8% from peak and represents about 13 months supply at current sales rates. But I am all for talk of a recovery, as this will encourage the usual surge of new listings in spring, and unless these are cleared (unlikely IMHO) supply will continue to greatly exceed demand, and rents will continue to fall as refugees from negative equity continue to put their properties out to rent.

  • John

    Good on the real estate blog for going out there and calling a turning point – if they are right then it will be a very good thing 🙂

    Wouldn’t it be a better thing if they fell to a better affordability level (eg) 3 times the average wage?

  • Rising interest rates and a falling demand may dent the realty market in India. However, the long-term prospects for the sector continue to be good, feels the industry. There are around 21 India-dedicated real estate funds that are raising money in the international market. In the next nine months, nearly $7 billion will be entering the country through various India-dedicated funds. While long-term players are looking at India, short-term players based in the US and Europe, such as the hedge funds and private equity players, are more interested in their local markets.For more view-

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  • “Wouldn’t it be a better thing if they fell to a better affordability level (eg) 3 times the average wage?”

    Well that depends on whether society values the welfare of those that don’t own property more than those that do – as fundamentally it is just a transfer.

    The reason I said it would be a good thing is because it would imply that the downward correction in the housing market would be slower and longer – rather than sudden and sharp. A slower correction would have less of an impact on consumer confidence – and as a result would not push the economy into a recession (by causing a sudden sharp reduction in aggregate demand – hard out Keynesian style).

  • Hans Brough

    Thanks for writing this piece. As a recent arrival to NZ from the SF Bay Area my general impression is that housing is not a good buy here and now. Interest rates are high, and housing is expensive relative to local wages. That’s a shame because the quality of life here in many respects is outstanding. If housing was 30% below it’s current level then it would be a no brainer to stay here and I’d gladly hand over my tax dollars for the many services provided by the government.

    One issue I didn’t see addressed above is the decidedly un-commodity like nature of housing. It’s a slow moving beast driven in large part by emotion – nothing like the forex market or oil futures etc etc. As we saw in the U.S. home owners tend to hang on to outdated ideas of how much their home is worth irregardless of what the market is saying. If they can and do hold on long enough then perhaps the market will agree with them eventually. Perhaps this is contributing to the lower amount of stock available as owners sense its a buyers market and prefer not to list.

    Another issue worth exploring is at what point housing becomes affordable within a given metro area based on median household income. We cant just keep selling each other our homes in order to make a continual profit (again as we saw in the US) at some point the pool of potential buyers drys up and the market stalls.

  • “If they can and do hold on long enough then perhaps the market will agree with them eventually”

    Indeed – at least in nominal terms, as inflation will eat away at the real value of the property anyway.

    As a result, the movement in the housing market will depend on a number of factors, such as how much financial stress homeowners are under, and what proportion of property is owned by investors.

    “We cant just keep selling each other our homes in order to make a continual profit (again as we saw in the US) at some point the pool of potential buyers drys up and the market stalls”

    Which is what we are seeing around the world now – ultimately prices have moved out of line with fundamentals, and we are going to see some sort of downwards movement (in real terms).