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.