What to make of NZ’s housing market decline

There were some worrying stats released this week concerning the NZ housing market both in terms of prices and activity – I will get into the numbers shortly.  What is more important though is what these numbers mean now and for the medium-term economic outlook.  All around the Western world the housing sector and housing activity are seen as important indicators of both the current health and state of an economy as well as a useful and accurate indicator of things to come, and it’s no different here in Aotearoa.

“The housing market remained in grim territory in August…” was the introduction from the Real Estate Institute of NZ (REINZ) this week when discussing the August home sales data released earlier in the week.  Residential sales of 4,891 were down 18% on the number recorded in August 2021 – itself subdued because of coronavirus related restrictions – and down 20% on the level seen back in August 2019.  Prices continued to slide too.  The median sale price was down 6% on that from August last year and 13% from the peak in November 2021, with the REINZ pointing out that prices in August were “weaker than expected” and the price decline is “…the greatest six month drop in prices experienced since REINZ records began in 1992”.  Grim indeed!

Unsurprisingly, the soggy housing market is not a feature unique to NZ as many countries are beginning to see the effect of easy money of the past few years coming to an abrupt end.  Over in Australia, notwithstanding prices are on average still above where they were a year ago, they’re down some 3% over the past three months with the trend line looking like further falls.  In the USA at the end of July, average house prices remain around 14% above those a year earlier but price increases have stalled over the past six months or so.  Prices fell in July by a little under 1%, the first monthly fall in three years and the biggest monthly fall since 2011.  It was far worse in the US new-home market, with sales of new builds falling 30% over the past 12 months.  Now over to the economists whom I’m afraid to say are not painting a particularly rosy picture either.  Goldman Sachs forecasts NZ property prices to fall 21% top to bottom, Australia’s 18%, and Canada’s by 13% arguing that these economies all saw unrealistic booms in real estate pricing during the pandemic.  Regarding our latest numbers in NZ, most economists said these falls are expected and are in-line with their forecasts:  Westpac said it expects prices to fall 15% in total over 2022 and 2023, Kiwibank sees a 13% fall this year with ASB calling a 12% top-to-bottom decline.  I thought ANZ made a curious comment that “…a robust household sector [really?] and strong wage growth will put some kind of floor under the housing market…but…where that floor lies, and how strong it is, is highly uncertain.”  Huh?

Why then does the housing sector matter and should we be concerned at the stats outlined above and the current, sombre state of play?  Generally, and particularly in New Zealand, a healthy or buoyant housing market does indeed tend to be a reasonably reliable indicator of good economic prospects and a healthy economy ahead.  The effect on the economy from buoyant housing activity goes far beyond the real estate transaction itself:  a house purchase has a feel-good effect and often leads to additional investment and spending.  Renovations and/or redecoration, new durable goods purchases etc.  Purchasing newly built houses has an even wider ripple effect with new home construction involving the likes of builders (of course), plumbers, electricians and all kinds of tradespeople as well as engineers, architects etc.  The opposite of course also holds true in that subdued housing activity is a reasonably reliable indicator of poor economic prospects – as the above is not happening as much – and perhaps a weaker economy ahead.

Our most recent downturn was in and around the GFC back in 2007/8.  House price were increasing at an annual clip of approximately 13% in late 2007 but these price increases fell off a cliff and by mid-2009 were actually declining by around 10% pa.  House prices in fact remained at best staying sluggish and at times negative through to late 2011 (post GFC).  At the same time sales volumes fell well below the long-term average of just under 7,000 per month not really recovering above this level until 2015 following some price recovery.  The broadest measure of economic activity, GDP growth, went negative late 2008 and only really recovered to healthy levels of 3% plus in late 2014.  Without delving too far into the numbers the same happened in the late 1990s and in to the early 2000s:  falling house prices and sector activity and declining GDP.

So, the weak housing market figures detailed above which really are a continuation of what we have been seeing all year and should be of concern to Central Government, Treasury and the Reserve Bank of New Zealand Te Putea Matua (RBNZ).  However, if you were to read RBNZ Governor Adrian Orr’s recent comments following last month’s visit to the Jackson Hole Economic Symposium attended by, among others, all the world’s central bankers, you could be mistaken for thinking these housing market stats are of no major concern.  Governor Orr was quoted saying ‘”Monetary policy can smooth the pain through time, or shift it between sectors, but it can’t avoid pain being met” and “markets will be markets” (what does that mean?)

NZ’s bankers and politicians in Wellington know that weak housing equals either a current or coming weak economy or both.  Neither is good particularly for the Government coming into an election year as weak economies tempt spending and deficit acceptance from Governments.  Neither is good for the RBNZ especially at a time when inflation is running high, despite its Governors seemingly ambivalent tone.  The RBNZ’s main job is to tame inflation by slowing the economy with its only tool being tighter monetary settings and mainly higher interest rates.  But if the economy is slowing or is about to slow – as indicated by the current state of play in the housing market – surely even higher interest rates will only slow things further and make matters worse?    As I said last week: hunker down!