The long expected slow down has finally arrived as the housing market is cooling rapidly after a prolonged period of growth. This is evidenced by the significant fall in sales volume which is down 30% from last years levels. The number of days to sell a house is also lengthening. The current median number of days to sell sits at 31 and this has risen from an average in recent times of 28 days.

As we stated in our last newsletter “interest rate hikes will eventually kill the market”. Well, this has come to pass with the much softer sales activity. Average sales volume throughout 2006 and early 2007 has been 3,000 sales per month or higher, however activity now is sitting at around 2,000 to 2,200 sales per month. This is in direct response to the continued hikes in interest rates that have occurred, weaker immigration numbers plus fallout and uncertainty as a result of the collapse of a number of second tier lenders .

Despite the cooling in housing sales activity, this has not yet translated into any sign of house prices falling. But there is an expectation the housing boom is now over, having lasted nearly six years and which has seen prices increase by over 10% annually. Auckland’s median price has remained around $445,000 for the last few months, a sign of the flattening in activity and confidence. With current levels of activity we will likely see the end of house price inflation for the next few years. Past experience of these cycles would indicate a price correction of 5% to 10% may be expected through this time.

A correction of this level is understandable given that New Zealand house prices have been increasing well above their longrun average for some time and housing affordability is at its worst ever level. It now takes 80% of a median income to fund a median priced house and this index figure has doubled in the last three years. This could make New Zealand house prices the least affordable in the world and extremely vulnerable to any further interest rate hikes.

The only saving factor from a potentially sour outcome is the tight labour market coupled with increasing pressure on wage growth which will mean households can service their obligations and reduce the risk of a rash of mortgagee sales. This along with the prospect of tax cuts next year.

There is however, even some risk to strong incomes supporting the housing bubble. Improving disposable incomes are being undermined by high inflation in food prices and petrol plus the high levels of taxation Kiwi’s are forced to pay.
But with the ever increasing probability of tax cuts in 2008 or later, this should provide some relief to households’ income and debt servicing abilities. Lets hope any tax cuts do not simply get eaten up by further hikes in interest rates.

It seems unlikely that the housing market will be saved by immigration which has long been one of the main drivers of house price inflation and the catalyst for past booms. Net migration has fallen rapidly throughout this year with a current annualised gain of only 5,000 compared with an average of 12,000 seen for the last 16 years. New Zealanders appear to be pouring into Australia in droves and in fact New Zealand has overtaken the United Kingdom as Australia’s main source of immigrants.

The risk of a serious collapse in the market this cycle is probably low unless we are hit by some major calamity or international shock. The economy is still performing okay and with wage and job growth plus low unemployment giving high job security there is likely to be enough confidence to maintain the property market’s momentum. The housing market seems to be in for a soft landing through this phase of the cycle but with some risk of price falls if interest rates increase any further.

By Gordon Edginton

Gordon Edginton, the author of the Residential and Commercial Property Review, is a Director of Prendos. He is a Registered Valuer and has a Bachelor of Commerce degree from Lincoln University. He has been the author of this newsletter for the past fourteen years and is the principal compiler and analyst behind the graphs produced. Gordon regularly makes presentations and advises various major lenders on the state of the Auckland property market. Gordon completed a Certificate in Plant Machinery Valuation which he passed with distinction.