House Building Boom to lead NZ’s Economic Recovery

By | September 21, 2009

 19 September 2009

The views of Westpac Bank’s chief economist, Brendan O’Donovan, were recently aired at the Transtasman Credit Summit in Wellington.  His optimistic perspective was that a migration-driven housing construction boom would fuel New Zealand’s economic recovery, with Auckland leading the way.

O’Donovan’s point of view is unlikely to be welcomed by New Zealand’s Reserve Bank and Treasury, who are hoping for an export-led recovery complemented by housing market restraint.

Internationally, O’Donovan noted leading indicators were pointing to a strong recovery in global manufacturing activity in the next 9 months with uncertainty after that time.

However, he was more positive about New Zealand’s recovery where the “big story” was the ongoing migration turnaround.  Last year net inward migration was just 3500 but net migration in the year to July 2009 is 14,500 and it is expected to be headed for 25,000.  The average for the past 10 years has been 11,000.

This increase in net migration can be attributed to the sharp fall in numbers leaving New Zealand, particularly a reduction in the mass exodus of Kiwis to Australia seen in recent years.

This migration turnaround was a key factor in what O’Donovan saw as an impending housing shortage.  At present the housing build rate is a very sluggish 12,000 per year, “it should be running at about 20,000”.

“Given current build rate and migration, you’d actually need about 30,000 houses built to close the gap, it’s just not going to happen.

“The upside in terms of this construction cycle is huge.

“This migration and housing shortage story is certainly enough to sustain the New Zealand growth story for a good few years, three years or so.”

He said that this pick up in housing activity would translate into greater home equity withdrawal and actually spur consumer spending.  This is not what the RBNZ would like to happen as they want to see New Zealand’s recovery export-led, like it has been in most other recoveries.

However, Westpac is optimistic about a “permanent sustained lift in export receipts” driven by improved commodity prices.
O’Donovan also believed Auckland, which fell into recession earlier than the rest of the country last year due to its higher debt levels, was “leading the country out of recession”.

“Super high interest rates last year hurt Auckland more than any other part of the country, the lower interest rates this year are benefiting Auckland more than most.”

In respect of the rest of the country, prospects are also looking brighter.   When dairy prices fell they began to feel the pinch but thankfully a turnaround in dairy prices means that the worst is going to be averted.

O’Donovan anticipates that we will see all parts of the economy starting to lift by the beginning of next year.

Ref: NZ Herald