There wont be any housing led recovery in NZ anytime soon

As we discussed in “Green Shoots? – Don’t believe the hype”, we believe comments coming from world and central bank leaders and economists that the worst of the recession may be behind us are likely very premature.

They’re still coming though.  For example here in New Zealand, BNZ bank economists recently stated that the housing market may drive the first stages of economic expansion after an 18-month-long recession that may be all but over.    Housing has fallen enough to spark a “significant bounce” in activity in the next 12 months, BNZ says. But that will come through a rise in house building, not another house-price boom.

If house prices did take off again, it would be a “bad sign” for the economy, suggesting few had learnt the lessons of the past.  The leading indicator for housing is sales turnover, which slumped by two-thirds to about 4000 in May. Sales have since improved to more than 6000 a month. That is still about half peak levels, but the demand for housing is buoyed by rising net migration, which could reach 30,000 over the next year, BNZ says.  At the same time, house-building approvals are down to record lows, suggesting not enough homes are being built to meet demand.  House building should also get a boost because the cost of debt is falling and shorter-term interest rates are expected to stay low until late next year.  Household spending usually follows house building. Retail spending should start to creep up late this year, supported by tax cuts and net migration, BNZ says.  That will be offset by the impact of unemployment rising to just under 8 per cent and higher savings rates.

So BNZ believe – as do many – that rising net migration and record low new building approvals will lead to growth in the property market.  Albeit in construction rather than house prices they hope.

However a recent interest.co.nz report shows that currently there is an oversupply of rental property with high vacancy rates and rents actually decreasing.  It is hypothesised that this is due to people downsizing, reducing work travel distances or moving into shared accommodation.  Also that students may be moving back in with Mum and Dad.  All likely solutions in tougher times we should think.

The “net migration causing housing market growth” argument seems to ignore the fact that in a struggling economy it is possible that these people returning to or migrating to NZ may struggle to find employment themselves.

We reckon this may even be happening already.  Last week ASB reported on the latest unemployment numbers (emphasis added ours)…

The unemployment rate increased sharply to 6% from 5%, despite the number of employed holding up better than we expected. Rather than job losses, the increase in unemployment reflects an increase in the number of job seekers.  The pool of job hunters increased due to growth in working age population. Also contributing to the increase was the rise in participation. The size of labour force increased 0.6%, and, combined with a 0.4% loss in employment, pushed the unemployment rate up a full percentage point. The last time unemployment jumped by a full percentage point was in September 1988.

So while there are not as many job losses, (if you believe the numbers – read our previous article here for why you shouldn’t) there is an increase in the number of people looking for work.  ASB go on to explain how usually in a weak labour market there is a drop in the number of people actively looking for work as they give up searching or else study instead.  This isn’t occurring and they surmise this may be due to “the higher indebtedness of households compared to previous recessions.”   No kidding – if you’ve got a monster mortgage you most likely won’t say “Forget this looking for work malarkey, I’m going off to get a student loan”.

But could it also be that “net migration”, the supposed salvation of the New Zealand property market, is also adding to the numbers looking for work?  We don’t see it as being too long a bow to draw that the numbers looking for work are also going up due to migrants arriving and not finding work in a down economy.  And if the green shoots of recovery wilt as we believe will happen in the not too distant future, then it’s not going to get any easier for migrants, or anyone else for that matter, to find work.

So our argument linking these stories together – patience, we are getting there slowly –  is that…

If the “net migrants” can’t find work, they may also struggle to afford to purchase a home.  Given that the disparity between the cost of buying versus renting is still so great, and there is a surfeit of rental accommodation, it would seem a reasonable argument that a portion of this increase in population may end up renting not necessarily by choice, but by circumstance.  The “housing shortage” is only a shortage if there are enough people looking to buy.

This would make the BNZ and many in the mainstreams argument of any housing led recovery null and void we reckon.  Therefore a temporary blip up in house prices now, but more pain to come in the form of higher unemployment and more house price declines in the near future.

Do you agree?  Leave a comment below.  We like a good argument discussion!