Adjusting to a new normal in the property market

by Alistair Helm in

The latest monthly report from tracking the supply side of the property market headlines a story that has been consistent for well over 2 years now. Step back to December 2011 and the report headlined "Active property market still favours sellers". The fact is we have been experiencing a property market with what we constantly describe as a shortage of supply for close on 3 years now. 

At some point you have to ask are we merely living in an aberration of the norm, or is this the norm?

The chart below ably demonstrates the supply constraints which the market has experienced as measured by the availability of houses for sale set by the number of weeks it would take 'in theory' to sell all the current stock based on current rate of sale per week.

Inventory Nov 13.png

We certainly experienced a period when inventory levels exceeded a full year and topped 60 weeks back in 2008, but for the period of the last two and a half years the level of inventory has settled to around 6 months levels.

The fundamental problem we face in analysing the property market is access to data. In regard to sales data we have through the Real Estate Institute sales data by month going back to 1992 which allows us to identify the cycles of the market - the highs of the mid 90's, the lows of the late 90's the bubble of the mid '00's and then the crash and subsequent recovery. However when it comes to supply data we are limited to the past 7 years as the database of only really became reliable from January 2007.

It is therefore somewhat risky to assume that the levels of inventory below the 26 week level is exceptionally low and assume that the 7 year average of 37 weeks is the norm. It is quite likely that the norm may actually be 26 weeks and the 50+ weeks levels the aberration. In fact from a cursory reference to some overseas markets 26 weeks seems to be the norm.

Supporting this proposition is a further analysis I have undertaken on available data examined the trending of both sales and listings across the country over the past 5 years using a 12 month moving average to eliminate any seasonality and look to see a long term trend. The insight is valuable.

NZ sales & listings trennd Nov 13.png

This chart highlights in grey the fact that the variance trend in sales is more significant than that in listings - not surprising to some extent as listings volumes have tended to be around twice the number of sales, but what is very interesting is the past 6 months right up to November where there has been effectively no growth in the 12month average number of listings yet sales continue to growth on a moving annualised basis of over 10% - so we continue to see sales rising far faster than listings.

With this as an interpretation of the status of the property market it would now seem to be illogical to constantly scream that listings are in short supply - are they really?!

I am now more than ever convinced that what we are really seeing here is a maturing of the interpretation of the data around listings and inventory such that in overall terms I judge that the NZ property market is actually pretty well balanced with 26 weeks being the norm and the current level of 24.8 weeks being right on the norm. After all if this was a supply constrained market would we not expect to see either of growing listings or erratic buyer behaviour (although I suspect some would argue the rise in price is just such an erratic behaviour).

Clearly taking this approach to a new norm would mean that some regions are actually in buyers' markets whilst other are actually less likely to be in severe sellers' markets. In terms of the Property Dashboard could this actually be a truer reflection of the NZ property market?




Property is all about supply and demand

by Alistair Helm in


Property as we all know is at its core, a fundamental of Maslow's Hierarchy of Needs, the primary need for shelter. Far more important than even safety and self-esteem and self-actualisation.

For this reason property exhibits the same fundaments of economics of supply and demand. When the supply of a good (in this case property) is limited, price go up as we have seen in Auckland as supply of property for sale has been constrained whilst demand has grown faster than supply and the access to finance has been relatively easy and cheap. These latter two components also impact the economics of property as does the substitution of property options between renting and buying.

If the cost of buying becomes affordable and the access to finance is available then people will buy, equally if it is cheaper to rent and finance becomes less accessible rental demand will grow and consequentially rents will increase. 

This is all logical. Let's now examine these principles when applied to the constant media story of 2013 - the dire housing shortage in Auckland. We hear weekly how Auckland needs 20,000 or maybe 30,000 new homes to be built almost immediately as well as 350,000 homes over the next 25 years to solve the housing crisis.

If the housing crisis is so dire and is the reason why property prices of houses for sale are growing at double digit levels, then why is it that rental prices of property in Auckland are not growing.   

This is very clearly seen in the chart below which tracks Auckland's stratified median house price over the past 4 years on an index basis with the red line; as compared to the index of mean rents based on bonds submitted to the Dept of Housing & Building with the grey line - the index is Jan 2009 = 100

Akl rent sale price Aug 13.png


The chart clearly shows that whilst property prices have increased by over 45% since the start of 2009 rents are up just 15% and the past 18 months have barely seen any change. 

If Auckland really had a housing crisis then rents would be increasing - it's the same economics of supply and demand. To look for proof, look at the same chart for Christchurch below. The fact is that Christchurch has a real housing crisis. There are too few available properties to meet demand as a consequence of the earthquake and the subsequent rebuild programme. In that market both rents and prices are rising, almost in alignment. 

Chc rent sale prices Aug 13.png


Now look at Wellington, a market that is not suffering a shortage of property and we see an alignment of rental price appreciation to property sale price appreciation. 

Wtn rent sale price Aug 13.png


This analysis would seem to support a view that the recent appreciation in property prices in Auckland have been fuelled by speculation.

With easy access to low cost finance over the past 2 years people have returned to property assets, this has been especially true of rental investment and property re-development. Investor growth has actually increased the supply of rental properties, which has as a consequence has maintained fairly stable rental prices at and contributed to a further tightening in the property-for-sale market through effectively taking home-owner stock out of the market. To this has been added inbound migration demand into the region from both domestic and international sources which has often been accompanied by higher equity capacity which has only further stoked the property price inflation.