Housing crisis lies in lack of supply, not falling prices

By | March 17, 2009

 17 March 2009

Source: NZ Herald

4:00AM Monday Mar 16, 2009
Charles Lowndes

New Zealand is facing a housing crisis, but it’s not about prices falling … It’s the lack of house supply for a growing population that is approaching crisis point.

Every market moves to the rhythm of supply and demand. When supply exceeds demand, prices will soften because fewer sales occur. Sellers chase a limited number of buyers and must drop prices to sell. This is what we have observed since the market peaked in mid 2007.

It will be many years before land and house supply recovers. Builders responded to market signals, resulting last month in a 17-year low for new house consents.

Developers preparing new sections for builders and developers of new houses have been at a standstill ever since the demise of the finance company industry and remain hamstrung by the credit crunch that followed from overseas. Simply, there is almost no funding for them to access.

Secondly, the fall in the New Zealand dollar has pushed up building material costs as house prices have fallen. That makes new construction uneconomic, at least while existing houses sell below replacement cost.

Supply-side shortage will be not be turned around this year, nor perhaps the next.

Now consider the demand side. Demand has already started to recover this year and sales volumes are beginning to recover.

As buyers start to exceed the number of houses for sale, eventually prices will rise. In the short term, prices will begin to stabilise.

For real estate agents, there is cautious confidence that those of us who have survived the 50 per cent reduction in turnover over the past 18 months have weathered the perfect storm. A Bank of New Zealand confidence survey of March 10 highlights this confidence.

So why will demand grow strongly this year? The deeper the recession gets overseas, the more New Zealand benefits!

While the jury is still out on whether measures taken by governments abroad will be enough to hold the slide at bay, we must wait to quantify the short-term benefits for New Zealand and their timing.

Population movements are the most important factor. Prolonged, deep recession will produce global population upheaval.

Fewer Kiwis are leaving for overseas, because they would rather hang on to the jobs they have than move to uncertain prospects.

Those who recently left for the “Big OE” are returning much sooner than expected.

Long-term ex-pats are returning as they lose jobs overseas, or retire cashed-up. In just one week this month, I met five separate groups of America-based ex-pat Kiwis house hunting “back home”. More in one week than I’ve seen in the past year!

Our ex-pat population is reckoned at about 1 million – more than 1 in every 5 of us. After Israel and Ireland, New Zealand has suffered the largest population ‘Diaspora’ (population dispersal) known in modern times. The effect of just one in every 20 ex-pats returning (escaping the extremes of international recession) would see our net immigration figures skyrocket to unknown levels and cause an extreme shortage of housing.

In January, the president of the European Bank said the likely depth of the recession (now looking worse than then) “will generate civil commotion in developed countries and worse in the undeveloped world”.

For professional couples looking for a secure lifestyle to raise families and enjoy the fruits of their work, Europe will look tougher and New Zealand rosier.

Expect a significant rise in the already constant flow of bright, young British migrants, many of them wealthy, and older ones following offspring who have settled here in the years since the 9/11 terrorist attacks.

Auckland has been getting some 50 per cent of migrants and has a severe land shortage.

Ex-pats returning and migrants alike are getting superb “bang for their buck”. Of the world’s most expensive cities to live in, London just dropped 19 places to 27th, but Auckland fell 29 places to 78th. Sydney ranks at 35th, not far behind London’s cost of living, the Economist reported last month.

Lastly, our own population is growing (births outnumber deaths).

From every angle, our population is set to increase quite markedly through this year and next. At the same time, our ability to house them is in severe, historic decline.

This is the true housing crisis facing us. And it is a recipe for stabilising house prices ahead of a firmer market.

* Charles Lowndes has been a professional real estate agent for 30 years, here and abroad.