The latest monthly report for May from the Real Estate Institute this week certainly generated little challenging debate, as the numbers seem to naturally reflect most people’s view that whilst the market may not be as active as a couple of years ago, neither is it in free-fall with all the consequential impact that would have on household confidence.
A report issued last month by market commentator Kieran Trass on the state of the NZ property market used the analogy of a hurricane where he proposed that we were in the eye of the storm and the coming months could see us experiencing further turmoil as we endeavour to navigate through to the other side.
Although having never been in the eye of a hurricane (but I have seen those great “storm chaser” documentaries on the Discovery Channel) I am not sure that life in the eye of the storm is as calm as he portrays.
I think in making any assessment of the state of the market it is important to see the facts in context and so let me provide some valuable information and insight into the NZ property market with data from this website and other statistical sources.
The components of the property market certainly revolve around the dynamics of supply, demand and the capacity to pay. I propose here to look at the demand side of the equation as the supply side is comprehensively covered in the monthly NZ Property Report. Within this subset of demand there is both a component of volume sales and sales price, I propose to restrict this summary to just sales volumes and cover pricing in a separate commentary.
Sales Volumes
When looking at trends in the residential market, the indicator of sales volumes in general tracks ahead of the trend of pricing. This has been seen in NZ over the past 20 years. The property market reached its highest level ever on an annualised basis way back in the year to March 2004 with 121,182. Subsequently sales declined and then plateaued before peaking again in April 2007 at 106,243 before starting what became the largest decline on record – 23 consecutive months of annulaised sales fall to end at the lowest level in the 12 months to February 2009 at 53,520.
The graph below shows these sales measured on a moving annual total going back to 1993.
A very clear point to highlight from this graph is the fact that whilst the last 2 years has seen this catastrophic decline in sales, there is a very clear sign that sales volumes have turned around – remember this graph is using a measure of the 12 months moving average, and as such removed short term volatility.
What is very illuminating from the sales figures of the past 2 years is the fact that for 9 consecutive months – from April to December 2008 the monthly sales averaged just 4,378, but in no single month during this period did sales vary from this average by more than 150 sales. During a traditional 9 month period one would naturally expect to see seasonal influence.
This fact as shown in the graph above could be interpreted as the “base” level of transactions in the market – that level of activity that almost has to occur for reasons that have absolutely nothing to do with property investment or speculation – but is more driven by the 3 D’s – Death / Debt / Divorce. All factors that require action to be taken in relation to house sales that cannot be postponed “until the market improves”.
In assessing future trends in property sales it is very important to put past trends into perspective and the one piece of data that is not often noted when looking at sales volumes is how the inventory of dwellings has grown in NZ. Over the course of the past 20 years the housing stock has grown by an additional 345,000 new properties taking the total number of dwellings to over 1.53 million.
So when you recalculate sales not in absolute terms, but as a % of the number of dwellings in the market each year you can more clearly see from this graph below how much relative sales have fallen below the traditional average. This graph is based on 3 month moving average data.
The most recent 3 months of 2009 has seen sales increase – from an all time record low to a new low! not seen since 2001. The average rate of sale per month over the past 17 years is 0.52% of all houses per month – this would equate to around 98,000 house sales per year.
Based on the principle of the average of the past 17 years being a likely indicator of the future trend; then clearly we still have a while to go to reach this level (maybe another 12 to 18 months) at which point monthly sales should be of the order of 8,000 sales per month, as compared to today’s level of just 6,200.
Great analysis, thanks for the effort. Looking forward from now the suggestion of 12 to 18 months could be correct, however take a look at the area under the proportional graph vs the area above for the first 10 years – they are almost equal (an integration of the line would help) That suggests that the area under the graph for the current sales drop will have to equal the area above since 2002 before the average is fully exceeded again. My crude eye-sight guess is that with the very large reduction recorded since Sep 2007, much of that balancing area is already used up, meaning that sales may get back up a little quicker than you have suggested, though I agree it may be many months.
I look forward to your next installment.
John
Interesting observation – will look to quantify this observation and thereby maybe use it as you say for a surrogate of likelihood for the level of sales to strike up above the average in what time period.