Bernard Hickey wrote an interesting piece in the NZ Herald entitled “Abnormal the new norm“.
In it, he describes what he sees as a new normal in the property market borne of more stringent controls on banks by the Reserve Bank policy requiring more stable and longer-term sources of funding, with less reliance on “cheap hot money from overseas”. A consequence of this he believes will be a continued shift from fixed rate mortgages to variable rate mortgages. Currently 30% of mortgages are on variable rates – a trebling over the past 3 years. This shift will likely see a closer alignment of base rates to mortgage costs and therefore the impact on the property market.
Whilst I agree with the principle of what Bernard states in his piece, that we are unlikely to see what many had considered to be normal level of market activity in terms of price increases and strong sales as was witnessed over the period of 2005 to 2008; the important question is though, what is going to be this new true normal in the property market.
To assess this requires a view of the historical perspective on the NZ property market. Fortunately the data of the market is comprehensive going back to 1992 through data published by the Real Estate Institute. The data covers both sales volumes and median price. Whilst historical data of sales can provide insight to the future, when it comes to pricing as we have seen in the past 18 months – historical pricing trends are no forecaster of future trends, and it is a brave person to state whether property prices are going to rise or fall.
Looking for trends in historical sales data, the chart below tracks the historical property sales in NZ since 1992 measured as a percentage of all residential property in the market at the time. The key here is that in 1992 when the data began there were 1.18 million residential properties and annual sales at that time were 63,270. Over the course of the past 18 years the number of residential properties has grown to 1.55 million – an extra 370,000 properties.
However as the chart shows the percentage of all properties sold each month has varied greatly – peaking at over 0.75% in 2004 before falling to the recent lows of the past 2 years, well below long term average of 0.52% and barely half the level of 2004.
The key consideration here is what is likely to be the new norm for the property market. Bearing in mind the comments of Bernard Hickey the period of the mid 2000′s should be seen as abnormal. Interestingly though is the fact is that in the period of 2005 to 2008 the average sales as a percentage of all properties was 0.495% – below long term averages. In fact if you might consider the 1990′s fairly normal – during that period the average monthly sales represented 0.52% of all properties.
Based on these statistics it might be safe to call a normal market around 0.5% of all properties selling in a month. That ratio based on the current number of residential properties at 1.55 million would mean an average monthly sale of 7,727.
The last time the monthly sales of residential property in NZ exceeded this level of 7,727 was November 2007 – 27 months ago. The most recent 12 months of sales total just 69,390 properties an average of 0.37% of all properties per month.
The fact is that based on the current state of the property market sales would need to rise by 34% to just reach what we might call normal. To help provide some guide to recent sales levels as to how close to the new “normal” this market is the table below can be thought of as a ready reckoner. If 2010 was a new normal year (ie 0.5% sales per month) then these are the monthly sales we should be expecting to see.
Clearly this year, just two months in, is showing we are no where near a normal sales level – in fact with only 8,695 sales in the first two months this market is 43% behind the mark. The latest sales for March will be published on the 16th April and it will be interesting to see how they look as compared to a normal market.
Alistair,
Very interesting piece, particularly the chart. Something has changed from the 2002 to 2007 period, but you make the good point there was a world before the boom.
My point is that I think this level of activity is likely to remain at ‘sub-normal’ levels for some time (and I reckon it could be up to a decade) while the household sector deleverages from its 150% plus debt to disposable income levels to closer to 100%. That either requires a significant repayment of debt or a long grind of income catching up without much new debt being added.
Given it’s the credit that fuels the market, this new ‘sub-normal’ could last for an awful long time.
cheers…
Bernard
Perhaps the question is “did the easy availability of credit bring forward house sale volumes”?
I personally don’t think so –> the majority (all? – do you capture new houses, eg spec?) of the reported stats are transactions of existing houses, and thanks to population movements and trading up/down there is likely a natural level. So I don’t think its brought forward demand.
However, I do think access to credit is an important driver of volumes, so put me somewhere in the middle of the Helm and Hickey views…
IanC
Thanks for that additional view. The issue for me is was the 1990′s a period of easy credit??
During that period of 8 years 1992 to 2000 the average per month was 0.52% per month – actually higher than the whole of the decade of 2000′s which was a rate of 0.51% per month.
The current level of sales is what might be seen as “unrealistically” low – I am not trying to “talk up” the market merely laying out the facts of the statistics to see what ideas it generates in people’s minds.
Interesting graph. I’m struggling to understand it in light of an oft-quoted rule of thumb that people sell their house on average every 7 years. If the sales rate is currently 0.37% per month, that means each existing dwelling sells on average only every 22.5 years. Even adding in the approx 20k new homes built each year in NZ, would get to a rate of once every 17 years (although that ignores the fact that new home sales most likely also result in a sale of an existing dwelling). What’s missing? Do we really on average stay in the same house for about 20 years?
AndrewC
Very good question – the rule of thumb of 7 years was substantiated in this research carried out recently by QV.
So why the difference? – in terms of mathematics there is either something wrong with the data from the numerator (number of sales) or the denominator (number of dwellings).
In terms of dwellings – the total used is all private dwellings – this does include landlord owned rental properties, but then again so does the data of sales. It could be said what is the best calculation would be the number of owner occupier sales per month as a % of owner occupier dwellings – neither set of data is available.
In terms of sales – this data set is from the Real Estate Institute who collect the data from licensed agents. Historically and anecdotal information says agent sold properties account for c. 90% of all sales.
As we await the March sales stats all signs are that real esate agency’s in New Zealand who upsized in the false boom period of 2003 – 2007 (more branches and more agents) and who now await the return of the normal market to return to profitability are in for a fast and painful awakening or bankruptcy.
Alistair,
Great work, that certainly puts the current state of the market into context.
I wonder whether the number of real estate agents has increased in-line with the number of properties. Just wondering whether that chart reflects the current income levels.
Steve
“The issue for me is was the 1990’s a period of easy credit??”
I was a bank treasurer in NZ at the time and I can assure you it was, in particular from ’94 to ’97 (inclusive) private sector credit growth was consistently over 10% (thanks ‘Easy’ Don Brash) and in the banks we were aggressively pushing fixed rate mortgages well below floating rate levels.
Carlos
Appreciate that perspective and respect your insight.