NZ Housing

Confidence

Heating up

Nick Tuffley

– ASB Chief Economist – 649 374 8604 – nick.tuffley@asb.co.nz

General Advice Warning

As this report was prepared without taking into account your objectives, financial situation or particular needs, you should not take anyaction in reliance of this report without considering your particular circumstances and, if necessary, obtaining professional advice.

E C O N O M I C S 1 3 N o v . 0 9

Three months to October 2009

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Housing confidence remained upbeat over the three months to October.

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Price expectations have turned very positive in a short space of time.

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Housing market constrained by decline in available listings, but demand/supply balance will adjust.

Housing confidence remained strong in the three months to October, according to the ASB Housing Confidence Survey. Notably, the survey has seen a marked shift in house price expectations. In the three months to April a net 45% of respondents expected house prices would fall over the following 12 months: in the latest survey a net 40% expect house prices to rise. The turnaround is the largest recorded in the survey to date.In keeping with the bullish sentiment towards housing, the market itself has swung firmly back to being a sellers’ market. Time taken to sell is falling and prices are increasing as buyers compete to snaffle up houses. However,the level of turnover has stalled at below-average levels. The market is showing strong signs of being constrained by a lack of available stock for sale. The imbalance is likely to gradually correct over the next year as demand moderates through higher interest rates and renewed emigration, and as supply starts to respond.Confidence continues to lift

The ASB Housing Confidence survey suggests growing interest in housing:

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A net 40% of respondents expect house prices to increase in the next twelve months;

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A net 48% of respondents believe now is a good time to buy;

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A net 35% of respondents expect interest rates to rise in the next twelve months.Sentiment towards home purchasing has been very buoyant over the past year, and priceexpectations have turned up dramatically over the past 6 months.

ASB Housing Confidence Survey

(Source: ACNielsen)Net percent who believe(3 months to October 2009) …Good time tobuy a houseHouse priceswill increaseInterest rateswill increaseAuckland*35%36%30%Rest of North Island*48%38%34%South Island*60%46%40%

TOTAL NZ **48%40%35%

Compare 3 months to July 2009 **54%-4%3%

* sample size 200, 95% margin of error ±6.9% ** sample size 600, 95% margin of error ±4.0%

Price expectations jump

Price expectations firmed substantially over thepast 3 months. The monthly breakdown of theprevious survey had indicated a move into netpositive territory was underway from July. Overthe past quarter price expectations haveapproached the levels reached during the 2002-03and 2007 periods of extreme exuberance.Expectations are now consistent with a return todouble-digit annual price growth.A breakdown of the net quarterly figure is:

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53% expect higher prices (27% last quarter),with 13% expecting lower prices (31%);

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the difference being the net 40% plottedopposite (-4% previously);

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30% expect the same (37%);

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3% don’t know (5%).

-60%-40%-20%0%20%40%60%80%Jan-96 Jan-99 Jan-02 Jan-05 Jan-08-60%-40%-20%0%20%40%60%80%

Source: ASB

Net%

PRICE EXPECTATIONS

Net% expectinghouse prices to increase

NZ Housing Confidence

13 November 2009

Firm opinion that it is a good time to buy

Respondents still firmly believe that onbalance it is a good time to buy a house,with the net balance similar to thatrecorded during the peak of the lastboom. Confidence in housing did edgeback slightly, more so in Auckland. TheSouth Island is relatively more optimistic.The breakdown is:

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59% say it is a good time to buy (64%previously), while 11% say it is a badtime (10%);

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the difference is the net 48% plottedopposite (54%);

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26% say it is neither good nor bad(19%);

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4% don’t know (6%).

-20%0%20%40%60%80%Jan-96 Jan-99 Jan-02 Jan-05 Jan-08-20%0%20%40%60%80%

HOUSING CONFIDENCE

Source: ASB

Net%Net% who consider itis a good time to buy

But growing recognition that mortgage rates are on the way up

Interest rates are providing food forthought for prospective house buyers.Survey respondents have evidentlypicked up on the inexorable upward trendin mortgage rates. The bulk ofrespondents expect interest rates to riseover the next year.The quarterly breakdown of responses is:

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45% expect higher interest rates(27% in the previous quarter), while10% expect lower interest rates (24%)

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the difference is the net 35%expecting higher rates plottedopposite (3% in the previous quarter);

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33% believe interest rates will staythe same (38%);

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12% don’t know (11%).

-60%-40%-20%0%20%40%60%80%Jan-96 Jan-99 Jan-02 Jan-05 Jan-08-60%-40%-20%0%20%40%60%80%

Source: ASB

Net%

Net% expecting higher interest rates

RATE EXPECTATIONS

Market conditions swinging back to a sellers’ market

Survey responses consistent with an upbeat market

The latest survey results are consistentwith responses normally seen during avery upbeat housing market. Optimism ishigh and a clear majority of respondentsexpect prices to rise over the next year.In a number of respects the housingmarket is looking in strong shape.However, the level of activity remainsrelatively subdued. The main issue in themarket is supply constraints.It is certainly becoming a sellers’ marketat present. Houses are selling quiterapidly again, back to the low times takento sell that prevailed during the years ofthe housing boom.

MEDIAN DAYS TO SELL

(seasonally adjusted)

202530354045505560Jan-97 Jan-00 Jan-03 Jan-06 Jan-09

Source: REINZ, ASB

No.Average 92-09

The market has moved back into the stage in which house buyers have to act fairlyquickly if they want to secure a property. Prospective buyers face competition forhouses, a contrast with a year ago. Consequently, prospective buyers are bidding uphouse prices to secure properties. Prices have risen in 8 out of 10 months to date thisyear and are now around 9% above their absolute low in January.

Buyers moving quickly

NZ Housing Confidence

13 November 2009

But sales turnover is constrained…

Yet despite the evident competition,sales turnover has stalled at a below-average level. In seasonally-adjustedterms turnover lifted very swiftly overthe 3 month period February throughApril. However, turnover has gonesideways ever since, and the level itselfremains below the average of the pastdecade and a half.Prices are up, buyers are making theirdecisions swiftly, yet sales turnoverremains modest.The reason lies in the marked dropsince the start of the year in listings ofproperties for sale.

MONTHLY DWELLING SALES

(seasonally adjusted)

350055007500950011500Jan-97Jan-00Jan-03Jan-06Jan-09

Source: REINZ, ASB

No.Average 93-09

…by a relatively low level of property listings

A glut of listings built up as the housingmarket slowed over 2007 and 2008.But the rebound in sales earlier thisyear quickly whittled down theoverhang. But, once inventory levelsreduced substantially, sales alsolevelled off.The market not quite as tight as it wasduring the peak of the boom. But thereis enough of a shortage of propertiesmeeting the criteria of buyers to bothcap turnover and send overall priceshigher.Tension in the market will remain untildemand abates or the supply of listingscan increase to better meet buyerdemand.

MONTHS OF INVENTORY

05101520Jan-96Jan-98Jan-00Jan-02Jan-04Jan-06Jan-0802468101214161820

Source: Barfoot & Thompson, REINZ,realestate.co.nz, ASB

months.NZ: inventory at current sales ratemonthsAuckland : inventory at current sales rate

Demand will be reined in over time Supply will rise in response to higher prices Legislative action also a possibility

Outlook: squeeze in the short term, but not sustainable

House prices are likely to continue rebounding into early 2010. But changes on both thedemand and the supply side will sap the momentum of prices.Demand has been given a firm lift this year by very low mortgage rates. However,mortgage rates will rise steadily over the next couple of years. Long-term rates havealready risen substantially, but once the RBNZ starts lifting the OCR there will be noplace to shelter from higher rates. The uptick in population growth via net migration isalso likely to abate. The relatively low outflow of New Zealanders emigrating is likely topick up next year as the Australian economy’s prospects entice people to fly west oncemore.Supply, on the other hand, is likely to rise over time. Though prospective sellers aresitting on their hands at present, higher prices will eventually attract greater numbers oflistings onto the market. Furthermore, construction will start to pick up from very weaklevels, bringing fresh supply on tap. Dwelling consent issuance has started to graduallyrise, signalling the start of the construction upturn is close to hand.One left-field factor property investors should keep front of mind is a strong desire withinGovernment and the RBNZ to tilt the playing field to discourage residential propertyinvestment. Officials are concerned about households putting all their investment eggsin one basket, the resultant channelling of resources away from the productive sectorand added dependence on foreign borrowing, and the lack of tax paid by propertyinvestors. Various changes have been mooted by either government officials orcommentators, including: capital gains tax; land tax; interest rate deductions forresidential property investment; levying tax on a risk-free rate of return.3