More concerns about limited building activity
The Dom post has two articles on the potential shortage of property in New Zealand, one on builders capacity (the labour force of traders) and another on the response of rents to the undersupply.
Now we have talked about this before. Structural factors have prevented developers and builders from getting funding (go credit rationing) which has lead to a collapse in house building activity. However, a fall off in building will help to support prices by making property more scarce.
In the short term the recent drop in residential building will prevent a free-fall in prices. The question then is, how many of these structural factors are temporary (credit rationing) and how many are permanent (constraints on land use, RMA?)?
If we only have temporary factors keeping down building then we can expect a sharp decline in prices once this has worked through the system and the “undersupply” has been dealt with. If there are structural factors (which National and Labour both believed) then there will be some support to prices until these factors are dealt with.
Another thing I would point out. There is a feeling out there that house price falls=bad, greater housing affordability=good. However, house price falls=greater housing affordability – so unless bad=good I think this is a factor we have to keep in mind when discussing the housing market …
“House price falls = bad” - I think for households who own properties, there is a “wealth effect” here. Falling house prices means shrinking total assets to those households. This is likely to affect their consumptions – how much are they going to spend when they feel they’re not as rich as a few years ago? Take this to a macro level, reduced consumption = not that good, although the amount saved might flow to business investment. If you’re after some justifications for “house price falls = bad”, this might be one of them.
However, house prices falls can be good or bad; but prices falling from elevated level to a more balanced point, better reflecting the relationship between demand and supply, is good.
Jiani – I think the link between house value and consumption is pretty tenuous, just because my home is worth more or less doesn’t affect my general consumption except in the specific area of spending on that asset to increase its value. Home value would affect consumption only in terms of how much money can be raised against the asset and most commentators say that we are borrowing too much so a decrease in borrowing should be good.
Greater housing affordability is only good for first home buyers (and politicians). For existing home buyers the relative affordability between areas is the issue ie when I have to move house can I sell my existing home for enough money to be able to buy (and borrow) in my new location. For investors/landlords the issue is the relationship between rents and market value.
If, as the DomPost suggests, rental properties are going to be scarce then rents will increase and the return on a now lower value asset will improve. As the returns improve more investors will enter the housing market causing prices and building activity to increase. The permanent structural factors and available builders will then be a key issue.
Hi Jiani and Grant,
With the wealth effect I believe Jiani is correct for the New Zealand economy – given the strong relationship between house prices and New Zealander’s expectations of lifetime wealth (which in turn shows up in the consumption data). That is the primary justification for why “house price falls=bad”. If this was the US then the data would support you Grant, so I completely see where you are coming from.
Now in the post I wasn’t arguing that house price falls and housing affordability were good or bad things – I was just saying that house price falls were required to increase housing affordability. Since the public seems to view one as good and one as bad there is a contridiction methinks.
“Greater housing affordability is only good for first home buyers (and politicians). For existing home buyers the relative affordability between areas is the issue ie when I have to move house can I sell my existing home for enough money to be able to buy (and borrow) in my new location. For investors/landlords the issue is the relationship between rents and market value.”
Very true – housing affordability is primarily as issue for first home buyers. So the relationship with the disposable income of young people an immigrants should be the primary area to look at methinks.
Even so – there is still a trade-off between prices and affordability.
“If, as the DomPost suggests, rental properties are going to be scarce then rents will increase and the return on a now lower value asset will improve. As the returns improve more investors will enter the housing market causing prices and building activity to increase. The permanent structural factors and available builders will then be a key issue.”
True again. It would be interesting to know “how much” these structural issues are holding up prices …