Frank Newman: Auckland turns down and OCR unchanged

Three years after the tide turned on Auckland house prices, the headlines are finally announcing the new reality.

Only those with a vested interest in seeing prices higher are talking the Auckland market up at the moment. Of the independent commentators the optimists are expecting Auckland house prices to remain flat. Those with a less positive disposition are talking in terms of falls like Sydney and Melbourne where the decline from peak to trough is expected to be between 15% to 20% according to the ANZ.

Whatever one’s view of the Auckland market, there seems little imperative for buyers to rush, and little reason for those thinking about selling to wait. I expect the Auckland market to be weak for some time yet. It typically takes five years or more for an overheated market to settle back to sensible values, so on that count there is at least a couple of years to go.

The provinces are a still strong, although it will only be a matter of time before prices also top-out there. If I were to put a time frame on that I would guess the early warning indicators (like sale volumes and number of days to sell) are about 12 months away, but that is very much a guess and depends on a bunch of factors. Migration inflows are one of the key drivers, and it affects all aspects of the economy.

According to the ANZ, the house price booms of the early-1970s, mid-1990s, mid-2000s and the most recent, have coincided with large net migration inflows. The current migrant boom peaked at 72,400 in the July 2017. It has been in gradual decline since then and was 43,400 in the year ended November 2018. Auckland is the preferred destination of most migrants and therefore the most affected.

Having spent a weekend in the Auckland CBD recently, it is surprising to see the impact immigration has had on the makeup of the city. It was like having a weekend away in Hong Kong without having to leave Auckland, although it was Chinese New Year which may have had something to do with it.  Nevertheless there is no mistaking that many of the high rise apartments appear to be purpose build for an immigrant community accustomed to that lifestyle.

This should come as no surprise considering New Zealand has a relatively open door immigration policy. Of the 7.5 billion people in the world, 1.4 billion are Chinese, and 1.3 billion are Indian - about a third of the world's population are from these two countries alone.

The other important factor influencing our economy is interest rates.  Last week the Reserve Bank left the official cash rate (OCR) unchanged at 1.75% and indicated it was likely to remain at that level into 2021 - longer than previously forecast. This is in part due to a slowdown in the global economies. Adopting the typical Governor-speak, Adrian Orr said, "The risk of a sharper downturn in trading-partner growth has also heightened over recent months."

While overseas factors were weakening, Orr said low interest rates and strong government spending were expected to "support a pick-up in New Zealand's [economic] growth over 2019".

On the property front he acknowledged Auckland's property market was "without doubt negative" but he said a sharp decline was unlikely because, "There are so many factors that are supporting that asset class at the moment".

ANZ chief economist Sharon Zollner was less positive about the economy.  "We continue to see [risks] as skewed to the downside…In our view, growth this year will fail to accelerate to the degree that the Reserve Bank forecasts, with it gradually becoming clear that more monetary stimulus will be needed to generate a sustained lift in inflation". They expect the next OCR movement to be down.

What is clear is that economic growth will be lower than previously forecast and low interest rates are here to stay for some time.

My own view is the building sector will slow down, party because of lower immigration numbers, but also because of a host of policy shifts coming out of the Beehive, like the ban on foreign ownership, the possibility of a capital gains tax, and a shift to a "wellbeing" emphasis. Describing this policy shift, the PM said, "We want New Zealand to be the first place in the world where our budget is not presented simply under the umbrella of pure economic measures, and often inadequate ones at that, but one that demonstrates the overall wellbeing of our country and its people."

Being the first place in the world to adopt a new approach to government priorities may sound visionary but there is no escaping the reality that it is also experimental. We all know how badly the local government sector has performed since it shifted its role from property infrastructure to become the "purveyor of all well beings". I doubt that it will be any more successful at a central government level.

Frank Newman, an investment analyst and former councillor on the Whangarei District Council, writes a weekly article for Property Plus.