Residential property prices, like most other prices, are primarily determined by supply and demand. Dwelling consents, bank lending and net migration are three of the main factors determining house prices.
Supply, in the form of dwelling consents, dropped off sharply in 2009 in response to the Global Financial Crisis and the collapse of New Zealand’s finance company sector. The latter was a major supplier of credit for house builders and property developers.
In the four years to 2012, an average of only 14,850 consents per annum were issued compared with an average of 26,218 consents in the four years to 2008.
Consents have picked up dramatically and it won’t be long before the annual consents number exceeds 30,000. Annual consents in excess of 30,000 have only been achieved five times since records began in 1966, the record high was 39,636 consents in 1974.
The huge increase in net migration, to 68,432 for the May 2016 year, has had a major impact on demand. This represents a net turnaround of 72,085 since the net outflow of 3,653 in the May 2012 year.
However, the massive increase in lending to home purchasers has also fuelled the housing markets. There is a great deal of talk about Loan-to-Value restrictions but the lending statistics illustrate that these regulation have not been effective. The gap between the value of new loans and the value of new dwelling consents has widened dramatically in the past year.
The housing market took off a few years ago because of the very low build rate after the collapse of the finance company sector. Supply is now increasing and any reduction in immigration and/or bank lending is likely to have a dramatic impact on house prices.
Housing bulls should keep a close eye on the rising supply figures.
Brian Gaynor is an investment analyst and the Executive Director of Milford Asset Management.