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First View - Can’t get enough (housing)

• We can't get enough. We are short 130,000 affordable homes in New Zealand. And the challenge is proving so high, Kiwibuild can't get over it.
• Auckland's housing market is stabilising, while the regions remain robust, and ridiculously attractive in terms of real rental yield.
• High rental yields are attractive in a world of falling interest rates. And with soft growth and weak inflation, the RBNZ are likely to cut in August.

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Here’s our take on current events

Last week we published our latest property insights report. A key aspect of the Kiwi housing market is a supply and demand imbalance. And NZ has a chronic shortage of affordable housing. We wanted to quantify the shortage (again). We've updated our model and our estimates now show a significant shortage of 130,000 affordable homes . If things continue the way they are, the shortage will balloon to 150,000 this time next year. However, we expect the housing shortage to shrink in time. We see a rising run-rate of building consents. And importantly, net migration, the key driver of population growth, is trending lower.

The bulk of the housing shortage is in Auckland, but many of the regions are feeling the pinch too. Auckland's property market has proved to be a reliable, but loose guide for the regions. The dramatic run up in Auckland house prices between 2012 and 2016 has filtered down into the regions. Because several cashed-up, or disheartened Aucklanders are moving for more affordable lifestyles. The great migration out of Auckland has boosted regional house prices. But the slowdown in Auckland will eventually feed into the regions.

With everything going on in the property market, we're cautiously optimistic. Fundamentally, we can't get enough affordable housing. The key word here is 'affordable'. Because 'unaffordable' housing will help a few, but is unlikely to unlock the pent-up demand sitting within the rise in the people per household. We expect the city of sails to experience further price declines, in the magnitude of another 3-5% into 2020. But given the chronic shortage, continued population growth, and slow supply, prices should stabilise next year. Affordability issues will keep an anchor under future price gains thereafter. Across the fast-paced regions, we expect a significant loss in momentum into 2020/21. Across the nation, prices will rise a little this year. And we expected aggregated price gains to pick up towards 5-6% into 2021. It's a mixed picture, as it was this time last year. And as it will still be this time next year. What we worry about, is the potential restriction in mortgage credit growth into 2020, as the banks prepare to load more capital. A likely outcome is a segregation in pricing and availability. One of the major banks has already singled out lending to indebted agriculture. Maybe we see more differentiation in pricing across new home buyers (lower rates), investors (higher rates) and high LVR (much higher rates).

Switching to the main data release of last week, June quarter inflation came in bang in line with both market expectation and RBNZ forecasts. So, on the surface there wasn't much to see, and markets barely moved on the news. Inflation came in at 0.6%qoq thanks to a jump petrol prices and housing-related inflation. On an annual basis CPI inflation moved to 1.7%yoy from 1.5%yoy in Q1. We expect the rise in annual inflation to be a temporary spike that will unwind in the September quarter. Petrol prices have already stabilised so are unlikely to feature as prominently in Q3's figure.

Of more concern for future inflation is the weakness seen in forward indicators of economic growth. The cost pressure firms complain of, is not being passed on to consumers. And that's a sign of weakness. The RBNZ is likely to look through today's inflation report. And in our view, the RBNZ will deliver a 25bp cut in the OCR to 1.25% in August. The chance of a further move below 1% is increasing and is not far from becoming our central forecast.

Our chart of the week: shows regions are playing catchup.

For a few years now there has been a notable divergence between Auckland and the rest of NZ. Now large parts of NZ are playing catch up, as Auckland housing market activity cools and prices fall. Following a long period of exuberance, affordability in our largest city was stretched to breaking point. For many who wanted to get a foothold in the market, the price was too much to bare.

There are truckloads of anecdotes telling of the migration of Aucklanders into the regions, from retirees to disheartened first home buyers. Mangawhai was the example we used last year. And the number of Auckland commuters and retirees living in the Northland town continues to grow, rapidly.

Investors have also looked to the regions for a better return. Last year, we highlighted the (ridiculously beautiful) rental yields in Whanganui. At 9%, according the REINZ data, Whanganui stood out. Now, only 1 year later, rental yields in Whanganui have dropped. Rents have risen. So yeah, prices in Whanganui have skyrocketed 14%yoy. The same can be said for the mighty Hawke's Bay, Gisborne, Palmerston North, Northland and other regions.

See our full report here.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, lower is more likely.

"Like an aging heavy weight boxer that keeps getting up from the floor, so is our rates market that keeps trying to sell-off only to get clobbered to the floor on unsteady legs. Once again, the week started with optimism only to finish on a whimper, a common theme over the past months. NZ CPI and/or Aussie jobs failed to ignite market interest that came from offshore moves, reescalation of trade tensions and Brexit worries ensuring the hunt of yield remains strong. Back in NZ, short-end yields are anchored until we hear from the RBNZ in August, and with 75bps of cuts priced into the US Fed this year we really need to see action before any more are priced. On that note, Fed's Williams last week said, "when you only have so much stimulus at your disposal, its pays to act quickly to lower rates at the first sign of economic distress ". That prompted a rate cut of 35bps to be priced in for the FOMC meeting at the end of the month compared to 30bps prior. However, market moves soon unwound as the Fed published clarification that saw us back to 30bps of cuts once again. Importantly the resulting USD weakness has sent the NZD to a 3-month high of $0.6783, the TWI sitting roughly 1.3% above RBNZ forecasts, which will not sit well with a inflation focussed central bank. With issuers again in the Kiwi market (e.g. $600m Supra deal last week) the receivers in the mid curve will remain the dominant force which will limit any steepening, tight ranges remain in the short end as expectations for an August RBNZ cut are steadfast at 20bps." - Ross Weston, Senior Portfolio Manager
In rates, lower is more likely.

"A steady grind higher was the overarching theme for the New Zealand dollar last week, though it might be fairer to describe the week as one of US dollar weakness. Either way, the Kiwi advanced, running out of steam as it approached $0.6800. Looking ahead, the coming days are notable for a lack of NZD/USD data drivers, at least until the latter part of the week - US GDP during the early hours of Saturday morning is the next "big thing" in terms of economic releases. From a headline perspective, US-China will remain front and centre, though geopolitical noise, specifically relating to Iran, may also serve to fuel Greenback sentiment - one way or the other. We may actually see a little more action in the Kiwi-crosses this week. RBA governor, Philip Lowe, is speaking; the ECB are likely to provide a little more colour on their monetary stimulus plans; and from the UK, the political leadership wrangle may be concluded, bringing Brexit back under the spotlight. Coming back to the NZD/USD, we expect advances to be slowed by technical resistance around $0.6800 in the near term. Conversely, dips should find support at the 200-day moving average - currently $0.6722, or there about." - Mike Shirley, Senior Trader

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