Circling the square: House price lift and high unemployment
On Breakfast this morning I heard the presenters querying why house price growth is so strong (5.7%pa in October) while unemployment is at a 13 year high (7.3% in September). What is especially perplexing is that the house price growth is primarily in Auckland (with Canterbury also important – but this is due to the earthquake reducing the stock of property) so has the increase in unemployment!
How can this be?
Well I’d note a few things:
- House price growth is strong in Auckland especially the old Auckland City.
- Growth in rents is relatively strong in Auckland.
- We know there has been very little building in Auckland.
- Occupancy rates have been pushed up in recent years at a relatively rapid rate.
- Credit growth is still slow (albeit picking up).
- We suspect that job loses are focused in Manukau and Papakura, given the weakness in wholesale trade and manufacturing employment.
- Although jobs have been lost, underlying “real wage” growth has been good relative to recent years – giving households with income a bit more money to spend. Banks are competing like there is no tomorrow to give out mortgages.
- House sales volumes relative to population are still “low” relative to history – even after rising sharply.
Now, the lift in house prices is starting to boost building activity in Auckland, as you would expect. However, there is a significant supply shortage. In the face of that, houses are more scarce and so we would expect prices and rents to rise. Furthermore, there are people with jobs and with access to credit at very low interest rates who are interested in moving or changing house – while there are people with houses who are relatively unwilling to sell in the face of uncertainty and the knowledge that there are “too few houses”.
In many ways this doesn’t look like, or at least is largely not, a bubble – as borrowing and investment in housing is still so low, and so is turnover. Instead this is an indication of the supply issue in Auckland.
This does not mean that we should expect rapid house price growth going forward, or that unemployment and house prices aren’t linked – it just tells us that there are other factors going on that explain the difference, other factors that indicate the importance of supply side constraints in the building industry.
I would also add wealthier immigrants favoring Auckland and bidding crazy prices at auctions. However i have no way to prove this beyond what you read and hear. I imagine its near impossible to reliably work this out with the available data as well.
Not that i have a problem with immigration rates, i’d just prefer to have property to benefit from it.
Indeed, if people are moving here and paying high prices they are transfering a bunch of wealth to people who owned the land previously – I wonder what they’re doing with it?
New mortgage lending is up 40% on 2010 figures. http://rbnz.govt.nz/statistics/monfin/c16/data.html
If you run the “value of approvals” data back to the start of the last housing boom we are surely at the start of another bubble.
Yar – although one thing to keep in mind is that the value rises with the price of houses, so if we want to discuss turnover we need to look at the volume data, which is not as strong.
However, this doesn’t invalidate the point, it is true that new mortgage lending has risen a lot. But at the same time, the doesn’t tell us how much NET mortgage lending has risen – it just tells us that people have been transferring their mortgages, and buying more houses. In order to see if we are seeing a strong lift in household investment in housing we need to look at net mortgage lending – as otherwise people may be paying off mortgages.
And that data is sitting here:
http://www.rbnz.govt.nz/statistics/monfin/c6/data.html
Net mortgage borrowing in September was up 2.5% from a year earlier. Still a very weak rate of growth.
So we know that sales numbers, outside of Auckand, are very low from the REINZ data. We know that building activity is historically very very low from Stats NZ. And we know that, even with interest rates debt growth by households is still very low – as they are not building houses, or using the wealth from housing to buy other consumer goods.
This all tells us that we are facing a very different beast to the previous housing boom starting in the early 2000s – when house sales figures were very high, building activity was relatively high, and net mortgage borrowing was rising in double digit rates.
This isn’t to say something funky might be going on in Auckland in reality – but on top of all this we know there is a massive shortage of property, and we know that credit conditions have been easing in recent months. From here, the lift in prices will hopefully lead to a sharp lift in building in the region – and if price growth is maintained after that, then we may be concerned – and that is the point when the RBNZ may consider things such as LVR’s.