Saturday, August 10, 2019
Frank Newman: When the music stops
The property party is over. The revellers are returning home. The party house is falling quiet.
The latest report for property data provider, CoreLogic, shows that cities that have had the biggest sustained gains are now on the decline - Auckland, Tauranga, Hamilton, Rotorua, Napier, Wellington, and the Queenstown Lakes District.
Other areas, typically low value regions like Whanganui, Gisborne and Invercargill, are still positive. The mid-zones like Whangarei have stalled at $547,000. Whangarei house prices are now at their lowest growth rate in four years.
Their report points to $540,000 as a critical level - a crude affordability threshold and the point at which a house becomes out of the reach of most households.
Given house price inflation over the last five years or so has risen much faster than household incomes, it is inevitable that at some point houses will become unaffordable and the demand falls. That is the new reality.
What we are not yet seeing in the figures, which obviously lag what is happening at the coal-face, is how quiet the market has become.
Last week a major builder in Whangarei remarked that they are now building half the number of houses they were two years ago - 50%! He said the turning point was when the Taxation Working Group released its report prosing a capital gains tax. The government's backdown on that proposal did not reverse the sentiment, and business confidence is continuing to decline.
That is of course flowing through to the trades and there are anecdotal reports that subbies or builders are available to start in a matter of days rather than weeks or months as was the case a year ago. A painter I spoke to recently said they had not had a single response to their newspaper advertising for two months. For some the pipeline of work ahead has slowed or stopped completely. That spells a problem for the tradies with the hire-purchase utes and high overheads, and could turn ugly very quickly. In my view it's not a matter of could but will turn ugly.
The quiet times are also flowing through to residential property investors. A property manager in Whangarei summed it up, "We have noticed a huge slow in renting properties. There are also signs that rents are starting to reduce as well as the demand is not as high at this point in time." The time "to let" signs are now remaining outside properties supports that view.
We are now in a new property cycle. This raises a challenge for the Reserve Bank given it is running out of room to reduce interest rates further. The OCR is already at historical lows and lowering it further is unlikely to provide a stimulus. One also has to question the wisdom of the Reserve Bank Governor of encouraging an already highly indebted nation to borrow more.
The stimulus will have to come from central government in the form of increased government spending.
Frank Newman is an investment analyst and former councillor on the Whangarei District Council.
at 10:06 AM