Demand will increase property prices

Say what you will, in my mind you cannot ignore the old adage when demand outweighs supply then the price will increase.

This month I will therefore look at some of the factors that drive demand and supply and why I predict property prices will keep increasing in Auckland, despite the recent RBNZ rules coming in to play.

Demand Drivers

Pent up demand: After the global financial crisis there were two main groups of people. One group experienced financial difficulty due to the credit crises and could not afford to buy a home and the other group could afford to buy a home but didn’t want to buy in uncertain times. Gradually the economic conditions improved but the fear of purchasing was still prevalent. In my mind, from 2008 to 2011, this cause a significant amount of pent up demand. First home buyers, investors and migrants held off buying, to avoid making the wrong financial decision.

Much like a child who has been locked up indoors for 3 days due to bad weather who rushes outside to play the second the sun comes out, three years of pent up purchasers have suddenly come flooding onto the market.

Availability of Credit: We also saw a big decline in the availability of credit due to the financial crises. Many finance companies started going out of business and banks began tightening up their credit policies. Between 2008 and 2011 it became very difficult to obtain a mortgage. From 2011 onwards the credit requirements have slowly but surely decreased and in the beginning of 2013 were at their lowest level for many years.

Cost of funding: From 1985 until 2013, the NZ interest rate averaged 8.2%, therefore current interest rates are still significantly below the average. This means that more people are finding themselves able to get on the property ladder. The Reserve Bank has given its’ strongest signal yet that rates will be increasing next year with an estimated increase of 2pc over the next 2-4 years. Traditionally, the increase in interest rates takes a bit of time to take effect in the market place and if predictions are correct then we are 2-3 years away from NZ’s average.

Net Migration – Having been in ‘net loss’ territory for some time, net migration has also been a key driver to the increase in property prices. Since 2011 there has been a huge increase in migration to NZ, with Auckland being the destination for the majority of these migrants.

Confidence & economic conditions: At the moment, general confidence in housing is very high, and our economy is doing very well compared with the rest of the world. Naturally this is a key driver as well. The RBNZ rules might dampen this confidence, but in my opinion, they will not be enough to bring prices down in Auckland.

Supply

Builders going into hiding or liquidation: On the other side of demand lies supply. Builders ran for cover when the recession hit – more so than in any other recession we have on record. Building consent levels were at the lowest they have been since the 1970’s. The banks avoided building finance wherever possibly, right up to the end of 2011. To obtain finance, proof of two years of profitable trading was required. When no trading has been happening, it becomes very difficult to meet that criteria. Because building was not taking place, once demand picked up, the supply just wasn’t there.

Shortage of Housing: The shortage in housing is well published and all the plans the current government is putting in place to ease the shortage are not going to happen overnight. The unilateral plan and its’ effects are going to take years to implement as the consultation process will carry on for a long time. Even if it all kicked off today, it would still take at least five years for all the building work to make a difference.

Is there a quick and easy solution? The government and housing minister Nick Smith have announced a few big property developments out West, North and South of Auckland but admitted that even with these houses, there would be a struggle to supply enough housing. In August 2013 alone there have been 2100 migrants into NZ.

Cost & speed of building: The cost and speed of building is also going to be a big factor as with the Christchurch rebuild in full swing there will be a shortage of builders outside of Canterbury. This will likely increase the cost & duration of building projects.

RBNZ speed restrictions: This will certainly have an effect on house prices and affect the availability of credit, but in my opinion it will only slow the increase in property prices down and not cause it to decrease in most Auckland suburbs. If property prices start decreasing I am fairly certain that they will remove these restrictions to allow credit to flow again.

Conclusion: In summary, in the current NZ economic environment, I believe that the demand for housing outweighs the supply. I forecast increases in property prices for the foreseeable future, particularly over the next 2-5 years.

** Note: I am not an economist and the views above are only my opinion. Please consult with your respective advisors before making a decision. These views are also based on information held as of October 2013 and cannot predict any major future events like the U.S. Economy going into stalemate. This also focuses on Auckland's property market.