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Market decline unlikely

February 12, 2017

Figures released yesterday by Statistics New Zealand shows there was record migration in 2016 – with our population increasing by a massive 70,600.

 

Juxtapose this information with talk of our property market going into decline, and the two do not marry up.

 

As I’ve said before, the key forces that have fuelled the market so far – high levels of immigration and low interest rates – remain unchanged.

 

Immigration is particularly key when you look at the Auckland market. Approximately 60% of migrants stay in Auckland when they arrive in New Zealand. That’s about 42,000 people requiring houses. What that translates to is a need for 14,000 houses a year for an average household occupancy of three. That’s on top of an estimated existing shortage of about 20,000 houses.

 

At current levels of construction there are no indications that supply will begin to meet that demand, and no sign from the government that immigration will begin to tail off.

 

It’s important to reiterate it’s not purely immigration fuelling the market around the country. Our economy has grown 17% since 2007 and continues to grow. That in itself generates confidence and activity.

 

However, we have seen a fall in the number of property investors in the wake of the tougher loan to value ratio (LVR) restrictions introduced in November.

 

With investment dropping away a little, will the market remain at the same speeds that we have seen in 2015-16?

 

It has felt like that for much of 2016 market commentators and observers were willing the strong, highly active market to fall over dramatically, particularly in Auckland. At this point, however, that seems unlikely to happen any time soon.

 

First, it’s important to remember that a market cooling, isn’t the same as saying a bubble is bursting. It’s just merely returning to the healthy activity levels of prior to 2014-15. What we should be left with through this year is a more balanced market across the country that still allows room for growth, but perhaps doesn’t move so far so fast, shutting some out altogether. 2015 was an unusual year and coming back a little from those levels of sales and inflated prices does not mean disaster.

 

Interest rates are the unknown quantity. Banks are beginning to raise rates and we’re likely to see the Reserve Bank adjust the OCR. Will it be enough of offset the thirst for property still in the market? That is highly doubtful given our net migration levels and resulting demand.

 

 

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