Property market slowdown could hit NZ economy

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We have seen a change in the Auckland housing market.

Sales volumes have dropped compared to last year’s statistics, while the number of days to sell has been creeping higher. Furthermore, the number of properties going to auction has more than halved, while cumulative price rises have ground to a halt.

What’s fuelling the slump?
So what’s causing the NZ property market to balk? Election uncertainty is probably a key factor, the latest round of mortgage restrictions will also be felt, as is the growing acceptance that interest rates will likely rise.

China has also tightened its credit conditions during recent months, which could also be a strong driver of the changing dynamic. While in the past China has indulged in something of a credit binge, cash is now harder to come by. Previously, there was a marked trend for Chinese investors to move their cash to places like Auckland and park it in residential real estate. Now, the authorities are clamping down on capital outflows which is having a knock-on effect on the NZ property market.

While it is the slowdown we’ve all be hoping for, there is still possibly cause for concern. The rampant property market has had a big effect on the strength of the local economy over the last several years, particularly in hotspots like Auckland and Queenstown, with this extending to smaller cities and regions such as Hamliton, Tauranga or Northland.

pexels-photo-210607As well as businesses involved directly in real estate, construction and trades, a strong property market tends to boost buyer confidence. Retailers, car dealerships and hospitality are just a few sectors that benefit, as consumer confidence fuels an increase in spending that benefits the entire economy.

If the trend of recent months crystallises into an ongoing decline the stimulus from this wealth effect could reverse. Essentially, falling house prices spur consumers to put their wallets firmly back in their pockets and adopt a more risk adverse attitude to spending. In turn businesses are respond by deferring investment decisions, holding back on hiring new staff and reducing overtime.

New Zealand set to hold its own
The good news is that thanks to a strong tourism market and an agricultural sector in a healthier position than last year, the New Zealand economy could probably handle it. Low government debt provides options, the NZ dollar has plenty of room to fall if required, and the Reserve Bank of New Zealand is in no hurry to increase interest rates.

Ultimately, the housing boom has been a double-edged sword. While many Kiwis have enjoyed the rewards in the form of rising personal wealth, a strong economy and increased job security, others have been priced out of the property market. Therefore, the high housing prices have led to the social issues we are experiencing today such as inequality and poverty.

By Mark Lister, Craigs Investment Partners

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Craigs Investment Partners Limited is an NZX Participant Firm. Mark Lister  is Head of Private Wealth Research at Craigs Investment Partners; Adviser Disclosure Statements and Product Disclosure Statements are available on request and free of charge. Please visit Craigsip.com for more information. This information is general information only and Craigs Investment Partners Limited has not taken into account the investment objectives, financial situation or particular needs of any particular person. Investments are subject to risk and are not guaranteed. Before making any investment decisions, Craigs Investment Partners recommends you contact your investment adviser. Craigs Investment Partners do not accept liability for the results of any actions taken or not taken upon the basis of this information.