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ANZ RESEARCH

NEW ZEALAND ECONOMICS ANZ PROPERTY FOCUS

December 2015

INSIDE

The Month in Review 2

Property Gauges 3

Economic Overview 5

Mortgage Borrowing Strategy 6

Feature Article: Assessing the

Demand for Housing 7

Key Forecasts 12

CONTRIBUTORS

Cameron Bagrie Chief Economist

Telephone: +64 4 802 2212 E-mail: [email protected]

Twitter @ANZ_cambagrie

Mark Smith Senior Economist

Telephone: +64 9 357 4096 E-mail: [email protected]

THE WORM HAS TURNED

SUMMARY

Our monthly Property Focus publication provides an independent appraisal of recent

developments in the property market.

THE MONTH IN REVIEW

The RBNZ has cut the OCR by 100bps this year, returning the cash rate to record lows.

While the bias is still to lower rates yet, there are now upside risks to be mindful of too,

with the economic outlook more balanced. Less pressure to cut means 1 and 2 year fixed

rates could nudge up over coming months. November REINZ data showed a further

regulation-related impact on Auckland housing activity and prices, but showed the wider

regions are being supported by historically low mortgage interest rates, and last month’s

relaxation in non-Auckland LVR restrictions by the RBNZ. Dwelling construction is trending

up, but booming net immigration makes the number of new dwellings required a moving

target. Credit growth has followed the housing market and households are re-leveraging

off already high debt levels, although mortgage approvals growth is slowing.

PROPERTY GAUGES

House sales fell further in November, with Auckland prices and sales volumes down for a

second consecutive month as the tightening in LVR speed limits for Auckland investor

borrowing took effect. House prices in Auckland look stretched relative to both incomes

and rents, but nationwide prices are being supported by lower fixed mortgage interest

rates, tight dwelling supply, and booming net immigration. Other regions look well placed

to outperform our largest city in terms of price growth from here.

ECONOMIC OVERVIEW

Momentum across the economy has started to pick up. Challenges posed by low dairy

export prices, peaking earthquake rebuild activity, capacity bottlenecks in some sectors

and some deterioration in structural metrics are being offset by supportive financial

conditions and strength in construction, non-dairy agriculture, tourism, and housing

outside of Auckland. We expect 2.5% growth in 2016; that’s respectable. There are both

upside and downside risks, whereas three months ago the downside dominated. The OCR

looks set to stay at 2.5% for a while.

MORTGAGE BORROWING STRATEGY

This month saw the 25bps cut in the OCR result in a reduction in variable mortgage

interest rates, with limited moves for both standard and special fixed rates. The cheapest

part of the curve is for the one to two year tenor, where rates are at (or are close to)

multi-decade lows. Borrowers could choose to spread fixed terms across one to two year

tenors to stagger roll-overs, but we have a preference for the two-year rate, which offers

greater certainty at a historically low rate. With no OCR rises on the horizon, longer-term

rates offer more certainty, but don’t offer the same value at present.

FEATURE ARTICLE: ASSESSING THE DEMAND FOR HOUSING

In a follow-up article to last month’s analysis of New Zealand population trends we

examine what demographic changes mean for the supply and demand for housing, for

both the country as a whole and regional areas. Dwelling shortfalls are mostly centred

in the upper North Island but are emerging elsewhere, with household formation rates

running at historically high levels. As population growth slows, the moderation in the

demand for housing is expected to be regionally broad based, but more acute in some

regions, and comparatively milder in Auckland. Population trends and technological

change will no doubt evolve very differently than is assumed here. Nevertheless, the

analysis is useful for highlighting some of the ‘big picture’ issues.

mailto:[email protected]


ANZ Property Focus / December 2015/ 2 of 14

THE MONTH IN REVIEW

OCR cut by 25bps

and easing bias

retained

Auckland softens,

but most other

regions

strengthen

Strengthening

construction

trend evident for

most centres

Net immigration

inflows are

speeding up, not

slowing

Mortgage lending

strong; approvals

growth slowing

The RBNZ has cut the OCR by 100bps this year, returning the cash rate to record lows. While

the bias is still to lower rates yet, there are now upside risks to be mindful of too, with the

economic outlook more balanced. Less pressure to cut means 1 and 2 year fixed rates could

nudge up over coming months. November REINZ data showed a further regulation-related

impact on Auckland housing activity and prices, but showed the wider regions are being

supported by historically low mortgage interest rates, and last month’s relaxation in non-

Auckland LVR restrictions by the RBNZ. Dwelling construction is trending up, but booming

net immigration makes the number of new dwellings required a moving target. Credit growth

has followed the housing market and households are re-leveraging off already high debt

levels, although mortgage approvals growth is slowing.

RBNZ DECEMBER MPS

The RBNZ cut the cash rate by 25bps to 2.50%. A soft easing bias was retained, with the

Bank stating that it “will reduce rates if circumstances warrant” and that this will be

dependent on the flow of economic data. The 90-day bank bill profile was flat through till

the end of 2017 and the RBNZ presented four factors it is watching closely: stronger

consumer spending and net immigration on the upside, and an El Nino and a negative

export price shock on the downside. Its assessment was very balanced, which is leading

the market to reassess the probability of the OCR falling further, and is likely to result in 1

and 2 year fixed mortgage rates nudging up a tad.

REINZ, HOUSE SALES – NOVEMBER

November sales volumes fell 4.1% sa, which followed a 7.7% sa October fall. Annual

growth in sales volumes fell to 8.5%, the slowest since January. Auckland sales volumes

were down 13% sa compared to October (-14.7% y/y) and have fallen 29% since

September. Sales volumes excluding Auckland were up 0.5% sa from October (+26.2%

y/y), with strong growth evident from Waikato/BOP (+38% y/y) and Northland (+68%

y/y). The house price index rose 0.5% sa, with annual house price inflation slowing to

12.5%. Prices in Auckland fell for a second consecutive month and are down about 6% sa

since September, with changes to taxation and tighter LVR criteria for investors having an

immediate impact. The days to sell rose to an 8-month high (34.9), and a 15-month high

in Auckland (33.8).

STATISTICS NZ, BUILDING CONSENTS – OCTOBER

The number of residential dwelling consents rebounded 5.1% m/m in October from a

5.7% drop in September. Compositionally, the rebound in October was due to a lift in the

volatile multi-dwelling component, with the number of housing consents down 0.2%. In

the 12 months to December, a total of 26,450 residential consents were lodged – the

highest in a decade. The trend for the number of new dwellings consented in Auckland

was the highest since December 2004, with a strengthening trend for the Waikato, BOP,

and Northland, a declining trend for Wellington and a flat trend for Canterbury.

STATISTICS NZ, EXTERNAL MIGRATION – OCTOBER

There was a record net inflow of 6,210 PLT migrants (sa) in October, with the annual

inflow hitting a record high of 62,500 persons. Not only this, but the average inflow is still

accelerating, with the net inflow running at a record 69,300 person annualised pace.

RBNZ, HOUSEHOLD CREDIT GROWTH – OCTOBER

The value of mortgage lending to households rose 0.7% sa in October, with annual credit

growth strengthening to 7.9%. The three month annualised rate, at 8.2%, is the highest

since March 2008.

RBNZ, MORTGAGE APPROVALS – MID-DECEMBER

Approval values and numbers are 18% and 10% higher than this time last year respectively,

and are now slowing after picking up in recent months.


PROPERTY GAUGES

House sales fell further in November, with Auckland prices and sales volumes down for a second consecutive month

as the tightening in LVR speed limits for Auckland investor borrowing took effect. House prices in Auckland look

stretched relative to both incomes and rents, but nationwide prices are being supported by lower fixed mortgage

interest rates, tight dwelling supply, and booming net immigration. Other regions look well placed to outperform

our largest city in terms of price growth from here.

We use ten gauges to assess the state of the property market and look for signs that changes are in the wind.

AFFORDABILITY. For new entrants into the housing market, we measure affordability using the ratio of house

prices to income (adjusted for interest rates) and mortgage payments as a proportion of income.

SERVICEABILITY / INDEBTEDNESS. For existing homeowners, serviceability relates interest payments to

income, while indebtedness is measured as the level of debt relative to income.

INTEREST RATES. Interest rates affect both the affordability of new houses and the serviceability of existing

mortgage payments.

MIGRATION. A key source of demand for housing.

SUPPLY-DEMAND BALANCE. We use dwelling consents issuance to proxy growth in supply. Demand is

derived via the natural growth rate in the population, net migration, and the average household size.

CONSENTS AND HOUSE SALES. These are key gauges of activity in the property market.

LIQUIDITY. We look at growth in private sector credit relative to GDP to assess the availability of credit in

supporting the property market.

GLOBALISATION. We look at relative property price movements between New Zealand, the US, the UK, and

Australia, in recognition of the important role that global factors play in New Zealand’s property cycle.

HOUSING SUPPLY. We look at the supply of housing listed on the market, recorded as the number of months

needed to clear the housing stock. A high figure indicates that buyers have the upper hand.

RENTAL GROWTH. We look at growth in the median market rent as an indication of whether it is a better time

to buy vs. rent, and how rental yields are shaping up for the property investor.

Indicator Level Direction

for prices Comment

Affordability Chasing your tail ↔/↓ Houses severely unaffordable in Auckland. A period of price

catch-up in the regions is to be expected.

Serviceability/

indebtedness Hard work ↔/↓ Lower mortgage interest rates are helping, but debt servicing to

income is going up.

Interest rates /

RBNZ Drifting down ↔/↑ Recent cuts in variable and fixed rates will help support

borrowing. LVR changes should slow Auckland investor demand.

Migration Record ↔/↑ New record inflows continue to be reached.

Supply-demand

balance Akld vs Rest of NZ ↔/↑ Auckland shortages are growing, Canterbury shortages are

declining; the situation is more balanced elsewhere.

Consents and

house sales Catching up ↔/↑ Amidst monthly volatility, consents are trending up. More houses

are needed in Auckland; Canterbury issuance is topping out.

Liquidity Firming ↔/↑ Credit is rising faster than incomes. That means households are

re-leveraging from elevated levels – this can’t be sustained.

Globalisation In synch ↔ Major cities booming, other centres not so much.

Housing supply Low ↔/↑ Inventory-to-sales low in most regions, including Auckland.

Median rent Yield drop ↓ Increases in rents being outpaced by house price gains.

On balance Toppy ↔ Continued momentum, but looking for signs of a policy

impact on sentiment.


PROPERTY GAUGES

FIGURE 1: HOUSING AFFORDABILITY

0

40

80

120

160

0

10

20

30

40

50

60

70

92 94 96 98 00 02 04 06 08 10 12 14

Index (1

992Q

1=

100)

%

House price-to-income adjusted for interest rates (RHS)

Proportion of average weekly household earnings required to service a 25 year mortgage based on 2-year fixed rate and 20% deposit on a median house (LHS)

FIGURE 2: SERVICEABILITY AND INDEBTEDNESS

0

50

100

150

200

0

4

8

12

16

92 94 96 98 00 02 04 06 08 10 12 14

% o

f dis

posable

incom

e

% o

f dis

posable

incom

e

Household debt to disposable income (RHS)

Interest servicing as % of disposable income (LHS)

FIGURE 3: NEW CUSTOMER AVERAGE RESIDENTIAL

MORTGAGE RATE (<80% LVR)

-25

-20

-15

-10

-5

0

5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Floating 6 mths 1 year 2 years 3 years 4 years 5 years

Basis

poin

ts%

Change in the month (RHS) A month ago (LHS) Latest rates (LHS)

FIGURE 4: NET MIGRATION

-60

-40

-20

0

20

40

60

80

92 94 96 98 00 02 04 06 08 10 12 14 16

Net

annual in

flow

(000)

Net all arrivals (3mth avg) Net permanent and long-term migration

FIGURE 5: HOUSING SUPPLY-DEMAND BALANCE

-4000

0

4000

8000

12000

92 94 96 98 00 02 04 06 08 10 12 14 16

Num

ber

of houses

Excess demand (supply) Supply (advanced 2 qtrs) Demand

FIGURE 6: BUILDING CONSENTS AND HOUSE SALES

3000

4000

5000

6000

7000

8000

9000

10000

11000

800

1200

1600

2000

2400

2800

3200

92 94 96 98 00 02 04 06 08 10 12 14 16

House s

ale

s, 3

mth

avg

Consents

issued,

3 m

th a

vg

Building Consents (LHS) House sales (adv. 3 months, RHS)

FIGURE 7: LIQUIDITY AND HOUSE PRICES

-15

-10

-5

0

5

10

15

20

25

30

0

5

10

15

20

90 92 94 96 98 00 02 04 06 08 10 12 14 16

%

Annual %

change

Annual change in PSC to GDP ratio (RHS) House prices (LHS)

FIGURE 8: HOUSE PRICE INFLATION COMPARISON

-20

-10

0

10

20

30

90 92 94 96 98 00 02 04 06 08 10 12 14

Annual %

change

New Zealand Australia US United Kingdom

FIGURE 9: HOUSING SUPPLY

0

5

10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Num

ber

of m

onth

s t

o s

ell

all lis

tings

Auckland Nationwide

FIGURE 10: MEDIAN RENTAL, ANNUAL GROWTH

-4

-2

0

2

4

6

8

10

12

14

92 94 96 98 00 02 04 06 08 10 12 14 16

%

3 month rolling average

Source: ANZ, Statistics NZ, REINZ, RBNZ, www.interest.co.nz, QVNZ, Nationwide, Bloomberg, Barfoot & Thompson, www.realestate.co.nz,

Department of Building and Housing.

http://www.interest.co.nz/

http://www.realestate.co.nz/

ANZ Property Focus / December 2015 / 5 of 14

ECONOMIC OVERVIEW

SUMMARY

Momentum across the economy has started to lift. Challenges posed by low dairy prices, peaking earthquake

rebuild activity, capacity bottlenecks in some sectors and a deterioration in structural metrics are being offset

by supportive financial conditions and strength in construction, non-dairy agriculture, tourism, and housing

outside of Auckland. We expect 2.5% growth in 2016; that’s respectable. There are both upside and downside

risks, whereas three months ago the downside dominated. The OCR looks set to stay at 2.5% for a while.

Real GDP growth sits around 2%. That’s soft and insufficient to stop the unemployment rate moving up.

However, there are concrete signs momentum has started to pick up and a turning point has been

reached. Confidence has lifted sharply off lows, firms’ own activity expectations are recovering (and on the

strong side of average) and our Truckometer has risen for three months in a row. Job ads have also started to

rise again. Growth in the second half of 2015 and early 2016 looks to be on reasonable ground.

Key factors behind an improving outlook include:

Monetary policy at work. This has buoyed interest rate-sensitive sectors. But prudential policy changes

(looser LVR restrictions) in the regions are also helping. Capital is flowing into the regions.

A sizeable loosening in financial conditions courtesy of the lower NZD and OCR. Non-dairy-aligned

exporters continue to fare well. The overseas perception may be that New Zealand simply milks cows but

the truth is that the economy is far broader than that.

Some structural factors (i.e. housing shortages in Auckland) that will require years of

investment to address.

Notable buoyancy in some key sectors. Tourism and construction are standouts.

More people is equalling more spending power. An annual net migrant inflow of 62k is huge.

Recovering dairy prices, which, while still low, have helped remove some pessimism and extreme

downside risk. And falls in other commodity prices (i.e. oil/petrol) are boosting disposable incomes too.

We continue to place considerable importance on small dynamics across the economy, that whilst

hard to quantify and often subjective, add to the economic portrait. Witness the continued surge in airlines

flying to NZ (and the size of planes) and what this implies for visitor numbers going forward.

We are still cautious in some areas.

We are starting to see signs of borrow-and spend style growth again. That’s fine as a temporary

phenomenon. But it’s disconcerting to see the household saving rate dipping close to the red and credit

growth outstripping income growth at a time house prices are already extended. The combination makes it

a point of vulnerability.

Dairy prices remain low. Cash-flow is tight. A host of dairy farmers are making material losses and

dairy price signals are subdued. A likely 15% peak-to-trough fall in the goods terms of trade (a measure of

a nation’s purchasing power) is enough to knock 2.5 percentage points off GDP growth over the subsequent

two years. New Zealand is indeed more than cows alone, but we have rather a lot of them.

We remain wary of the downstream implications of the Fed lifting rates. All eyes are on China, our

key export market. It leveraged heavily after the GFC. Weakness in commodity prices around the globe is

giving an ominous signal about China. We are also starting to see some movement across credit spreads

akin to what happened prior to the GFC.

The impact of an El Nino event.

The NZD has firmed. Some is warranted given economic improvement, but further increases risk

undermining the outlook.

We expect real GDP to rise 2.5% over the coming year. That will be sufficient to see the unemployment

rate (which has risen of late) eventually start heading down again. It is also consistent with the OCR likely

staying around 2.50% for an extended period. There are clear candidates to take the OCR lower; low

inflation, and export prices that are vulnerable to global weakness. But there are upside risks too. Households

are threatening to return to their borrow-and-spend ways. The sensible middle ground looks like the OCR

staying at current levels.


MORTGAGE BORROWING STRATEGY

SUMMARY

This month saw the 25bps cut in the OCR result in a reduction in variable mortgage interest rates, with limited

moves for both standard and special fixed rates. However, with expectations towards further cuts being pared

back, there is now pressure for 1 and 2 year fixed rates to move up. The cheapest part of the curve is for the

one to two year tenor, where rates are at (or are close to) multi-decade lows. Borrowers could choose to spread

fixed terms across one to two year tenors to stagger roll-overs, but we have a preference for the two-year rate,

which offers greater certainty at a historically low rate. With no OCR rises on the horizon, longer-term rates

offer more certainty, but don’t offer the same value at present.

OUR VIEW

The December 25bps cut in the OCR has

resulted in a corresponding reduction in

variable rates for major lenders. Floating

mortgage interest rates are at their lowest level

since prior to the March 2014 round of OCR

hikes.

Fixed mortgage rates were mostly

unchanged this month, with the introduction

of a new 2 year special rate by one lender

pushing down the average rate offered by the

four major lenders to 4.40%, close to the 4.37%

average 1 year rate. Rates offered are at multi-

decade lows.

This year has seen the RBNZ wind back the four

2014 OCR hikes, with the OCR now back to

2.5%, a record low. Our estimates suggest that

since June, the average rate has fallen by 40-

130bps for specials and 60-100bps for standard

rates. While variable rates are back where they

were at the start of last year, fixed rates are one

to two percentage points lower as the borrowing

curve has flattened.

Our view is that a period of stability in the

OCR is likely, but that the risk profile is

skewed towards a still-lower OCR. With

market expectations implying a 40% chance of a

25bps cut by next September, the question is;

how much of this is currently factored into

current mortgage rates on offer, and what would

it take for fixed rates to move lower still?

So what should borrowers do? This will depend

on individual circumstances, but our

breakeven analysis is useful in comparing

various options. For those able to access

specials, one and two-year terms (top

table) look the cheapest. Borrowers could

choose to spread fixed terms across both tenors

AVERAGE CARDED MORTGAGE RATES^

Current rates

4.00%

4.25%

4.50%

4.75%

5.00%

5.25%

5.50%

5.75%

6.00%

0 1 2 3 4 5

Special (20%+ equity) Standard

Years

Special Mortgage

Rates

Breakevens for 20%+

equity borrowers

Term Current in 6mths in 1yr in 18mths in 2 yrs

Floating 5.78%

6 months 5.04% 3.70% 4.52% 4.62% 5.35%

1 year 4.37% 4.09% 4.51% 5.02% 5.70%

2 years 4.40% 4.55% 5.11% 5.49% 5.94%

3 years 4.86% 5.02% 5.46% 5.66% 5.86%

4 years 5.19% 5.27% 5.52%

5 years 5.29% #Average of “big four” banks

Standard Mortgage Rates Breakevens for standard

mortgage rates*

Term Current in 6mths in 1yr in 18mths in 2 yrs

Floating 5.78%

6 months 5.17% 4.53% 5.15% 5.35% 5.33%

1 year 4.85% 4.84% 5.25% 5.34% 5.38%

2 years 5.05% 5.09% 5.32% 5.40% 5.45%

3 years 5.16% 5.21% 5.38% 5.48% 5.55%

4 years 5.25% 5.32% 5.48%

5 years 5.35% *may be subject to a low equity fee

to stagger rollovers, but because of the additional certainty afforded, we have a preference for locking

in a greater portion for two years. Locking in for terms longer than 2 years would provide more certainty

still, but borrowers would be paying for the privilege. Of the standard rates, the one-year fixed rate looks

preferable, given it would have to rise from around 4.85% to around 5.25% to make it more attractive to fix for

two years. With the OCR not set to go up in 2016, this seems unlikely.

^ Average of carded rates from ANZ, ASB, BNZ and Westpac. Sourced from interest.co.nz



SUMMARY

In a follow-up article to last month’s analysis of New Zealand population trends we examine what demographic

changes mean for the supply and demand for housing, for both the country as a whole and regional areas.

Key conclusions:

In recent years, stronger rates of household formation, coupled with a period of reasonably modest dwelling

construction, have resulted in a growing dwelling shortfall. This is mostly centred in the upper North Island

(primarily Auckland), but shortfalls are also emerging in other centres (notably Wellington). In the South

Island, growing dwelling oversupply reflects growing supply of dwellings and a reduced shortfall in

Canterbury.

Household formation rates are running at historically high rates at present, with this expected to continue

over the next few years in the absence of a sharp slowing in net immigration. The outlook is for slowing rates

over the next 20 or so years as population growth slows.

The accompanying moderation in the demand for housing is regionally broad based, but expected to be more

acute in some regions – for example, the West Coast and Gisborne – whereas the slowdown in household

formation is expected to be comparatively milder in Auckland.

We emphasise that this analysis is a snapshot; the future is uncertain and population trends and technological

change will no doubt evolve very differently than is outlined here. Nevertheless, the analysis is useful for

highlighting some of the ‘big picture’ issues.

LOOKING AHEAD

Current population growth may be the highest in a decade courtesy of record net migration, but

population ageing and lower fertility rates are expected to drive a slowdown. Population projections

for New Zealand and broad regional areas suggest a regionally widespread moderation in resident population

growth, with population levels actually falling in some regions over the next 30 years or so.

What does this mean for the demand for dwellings? Historically there has been a positive relationship between

changes in population and rates of dwelling construction, although the latter is not as variable.1

FIGURE 1. DWELLING NUMBERS & ANNUAL POPULATION GROWTH

-10

0

10

20

30

40

50

60

70

80

90

0

5

10

15

20

25

30

35

65 70 75 80 85 90 95 00 05 10 15

(000)

(000)

New dwellings (LHS) Population change (RHS)

Source: ANZ, Statistics NZ

Obviously a lower rate of population growth translates broadly into fewer dwellings being

constructed, but the swing variable is the number of persons per household, which can partly

absorb cyclical movements. It also trends: since the 1960s, the number of people per dwelling has been on

1The coefficient of variation of swings in annual population growth is about twice that for annual dwelling construction since 1965.



a downward trend given the decline in fertility rates and the ageing of the population structure. Social facets

(i.e. more divorces) also come into play. Based on baseline demographic projections, this ratio is likely to

decline further, both nationwide and across most regions. It is apparent, however, that this ratio has not always

declined in a straight-line fashion over time. The early 1990s, and the last decade or so, has seen this ratio

level off.

FIGURE 2. PERSONS PER DWELLING

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

65 70 75 80 85 90 95 00 05 10 15 20 25 30 35

Actual Baseline

Forecast


There are regional facets to this, with the numbers of households being formed in each region

sometimes outstripping that of the number of dwellings being constructed. Our demand and supply

balances are approximate, but provide a reasonable framework for analysis. Stronger rates of household

formation in the top of the North Island relative to the pace of residential construction have resulted in a

growing dwelling shortfall. This is mostly centred in the Auckland region, but is also noticeable in some other

upper North Island regions, including the Bay of Plenty. In the lower North Island, a rising dwelling shortfall in

Wellington is being offset by growing surpluses in other centres. In the South Island, growing dwelling

oversupply reflects growing supply of dwellings and in particular, a reduced shortfall in Canterbury.

FIGURE 3. REGIONAL HOUSING BALANCES

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

90 92 94 96 98 00 02 04 06 08 10 12 14 16

(000)

South Island Top North Island Lower North Island

SurplusSurplus

Shortage




A shortfall does not necessarily mean people will not have a roof over their heads. It simply means

that more people live in each house, on average. Dwellings constructed today are on average around

185sqm according to consent data, versus 130sqm constructed 50 or so years ago. But given unequal access to

housing, it is probably fair to say that when economic times are tough, some houses can become very crowded.

LOOKING AHEAD

Table 1 shows projections for the number of households based on demographic projections from Statistics New

Zealand. The growth in the number of households (and hence the demand for dwellings) is currently running

slightly above that of resident population growth, both nationwide and in most regional areas.2 Rates of

household formation are likely to slow from current rates but not as quickly as the slowing in

population growth, with the number of persons per dwelling set to fall in all regions.

TABLE 1. HOUSEHOLD PROJECTIONS

Persons per HH Average annual growth rates by year

2013 2038 2013-18 2018-23 2023-28 2028-33 2033-38 2013-18

Northland 2.50 2.20 1.2 0.8 0.7 0.5 0.3 0.7

Auckland 2.90 2.80 2.4 1.8 1.6 1.5 1.3 1.7

Waikato 2.50 2.40 1.5 1.5 1.5 1.5 1.5 1.0

BOP 2.50 2.40 1.2 1.0 0.8 0.7 0.5 0.8

Gisborne 2.60 2.40 0.7 0.6 0.4 0.4 0.0 0.4

Hawkes Bay 2.50 2.40 0.9 0.6 0.4 0.3 0.1 0.4

Taranaki 2.40 2.30 1.2 0.7 0.6 0.6 0.4 0.7

Manawatu/Whanganui 2.40 2.30 0.6 0.4 0.3 0.2 0.0 0.3

Wellington 2.60 2.40 1.1 0.8 0.7 0.5 0.4 0.7

Nelson/Marlborough 2.43 2.30 1.2 0.8 0.7 0.5 0.2 0.7

West Coast 2.30 2.10 0.9 0.4 0.3 0.3 0.0 0.3

Canterbury 2.50 2.40 1.9 1.1 1.0 0.9 0.7 1.1

Otago 2.40 2.30 1.1 0.8 0.7 0.6 0.4 0.7

Southland 2.40 2.20 0.8 0.3 0.3 0.2 0.0 0.3

New Zealand 2.60 2.50 1.6 1.2 1.0 0.9 0.7 1.1


Table 2 (overleaf) shows the number of residential consents issued for new dwellings for the September year,

alongside baseline projections for the number of households formed over the current five-year period (2013-

18). Strong rates of household formation – around 26,800 new households per annum – are expected through

to 2018, slightly above that of the current rates of consent issuance. Dwelling construction in about half of

the regions – most notably Auckland and Wellington – is still insufficient to meet population needs

over the next few years. For Auckland and Wellington, this implies rising housing shortages, adding

to the current shortfall of around 4,000 dwellings in Wellington and 26,000 dwellings in Auckland. In

Canterbury, rebuild-related consent issuance is still well above that of the number of households

being formed, particularly with our estimates showing a sharp closing in housing shortfalls for the region in

recent years.

2 Table 1 of last month’s Property Focus feature article has respective rates of population growth for NZ and regional areas. It shows

growth in resident population is expected to average 1.3% per annum over the 2013/18 period, averaging 0.9% per annum through

till 2038.



TABLE 2. ANNUAL HOUSEHOLD FORMATION AND ANNUAL CONSENT ISSUANCE

Consents Growth in Households New households per annum (2013-38)

2013-18 2033-38 Central Low High

Northland 805 800 220 488 168 836

Auckland 8,721 12,140 8,880 10,164 6,660 13,648

Waikato 2,691 2,460 1,240 1,764 892 2,696

BOP 1,649 1,260 660 984 336 1,668

Gisborne 64 120 0 76 -8 168

Hawkes Bay 342 560 40 288 -28 628

Taranaki 491 540 220 344 100 608

Manawatu/Whanganui 474 600 20 316 -128 788

Wellington 1,544 2,080 800 1,384 448 2,380

Nelson/Marlborough 703 700 140 420 116 756

West Coast 119 120 0 52 -20 128

Canterbury 7,007 4,240 2,000 2,792 1,156 4,496

Otago 1,323 900 380 620 160 1,100

Southland 250 320 0 132 -52 336

New Zealand 26,185 26,840 14,600 19,824 9,800 30,236


Population projections depend on a whole range of factors, including trends in net immigration, fertility and

mortality. Different assumptions cumulate to sizeable impacts over time. It gets trickier still when looking at

rates of household formation, given the number of economic, social and demographic factors behind this. As an

illustration, Table 2 also includes different estimates of the number of households formed in each region each

year over the next 20 or so years:

The central scenario, which uses the baseline population projections.

The “high” scenario, which uses the upper population estimates (high migration, higher than usual fertility,

low mortality).

The “low household” scenario, which uses the lower population projections.

The central projection indicates that around 20,000 households nationwide, on average, will be formed each

year over the next 20 or so years. This is roughly on par with historical averages, but is about one quarter

lower than current rates of household formation and the current rate of consent issuance in the regions. As

Table 1 implies, rates of household formation are expected to progressively slow over the next 20 or

so years, which in turn will have implications for the provision of dwellings. As Table 2 shows, in the

central scenario around 15,000 extra households will be formed per annum over the 2033/28 period, slightly

more than half of the number of new households formed at present. Slower rates of household formation are

uniform across the regions.

There is considerable variation around these estimates, with anything from 10,000 to 30,000 new

households formed each year, on average, over the next 20 years. These are not at the extreme ends of

ranges – household formation could be stronger or weaker than outlined in the scenarios – but the numbers in

the table highlight a plausible range of outcomes, which will cumulate to substantial differences over time. In

the high-population scenario, for example, the number of households being formed in 20 years’ time will be on

par with current rates, whereas under the low-population scenario only about 3,000 new households will be

formed each year, with household numbers increasing in Auckland and the Waikato but falling in other regions.

The extent of slowdown will also vary by region. In 20 years’ time the sharpest falls are likely to be in

Southland, the West Coast, Hawke’s Bay and Manawatu/Whanganui, where the number of households formed

each year is forecast to be about half that of current rates. By contrast, Auckland and the BOP are the only two

regions in which the moderation in rates of household formation is less than 25%, below the nationwide

average. The upshot is that while slower rates of household formation will occur, proportionately more

residential construction sector resource will be needed where the slowing in household formation is milder – in

this case, the Auckland region.



Looking at a 20-odd year time horizon, the table suggests that anywhere between 6,700 and 13,600 dwellings

per annum will need to be built to meet population needs in Auckland. This cumulates to huge differences over

time. Auckland – which has just over 30% of the nationwide dwelling stock and one third of residential issuance

at present – is likely to account for anything from 45% to 67% of new nationwide households formed. The

strengthening seen in Waikato and BOP issuance has been consistent with longer-term demands, whilst

Wellington is underbuilding in terms of meeting future needs. Canterbury, which currently accounts for about

one quarter of residential issuance, is likely to account for anything from 11-15% to household formation. In

Southland, the West Coast and Gisborne, current building rates are either above or towards the top of likely

future ranges.

These figures are illustrative and future events can turn out quite differently. Balance sheet

considerations need to be taken into account as the bungy cord of regional Auckland house price

outperformance has become taut. A period of relative underperformance is warranted for Auckland. Internal

migration from Auckland to the rest of the country could intensify, and hence shift the demand for dwelling

construction to other centres. We are also mindful that the drift lower in average household size suggests that

the construction sector response will need to include smaller dwelling sizes and more intensification.


KEY FORECASTS

Weekly mortgage repayments table (based on 25-year term)

Mortgage Rate (%)

Mo

rtg

ag

e S

ize (

$’0

00

)

4.00 4.25 4.50 4.75 5.00 5.25 5.50 5.75 6.00 6.25 6.50 6.75 7.00 7.25

200 243 250 256 263 270 276 283 290 297 304 311 319 326 333

250 304 312 320 329 337 345 354 363 371 380 389 398 407 417

300 365 375 385 394 404 415 425 435 446 456 467 478 489 500

350 426 437 449 460 472 484 496 508 520 532 545 558 570 583

400 487 500 513 526 539 553 566 580 594 608 623 637 652 667

450 548 562 577 592 607 622 637 653 669 684 701 717 733 750

500 609 625 641 657 674 691 708 725 743 761 778 797 815 833

550 669 687 705 723 741 760 779 798 817 837 856 876 896 917

600 730 750 769 789 809 829 850 870 891 913 934 956 978 1,000

650 791 812 833 854 876 898 920 943 966 989 1,012 1,036 1,059 1,083

700 852 874 897 920 944 967 991 1,015 1,040 1,065 1,090 1,115 1,141 1,167

750 913 937 961 986 1,011 1,036 1,062 1,088 1,114 1,141 1,168 1,195 1,222 1,250

800 974 999 1,025 1,052 1,078 1,105 1,133 1,160 1,188 1,217 1,246 1,274 1,304 1,333

850 1,035 1,062 1,089 1,117 1,146 1,174 1,204 1,233 1,263 1,293 1,323 1,354 1,385 1,417

900 1,095 1,124 1,154 1,183 1,213 1,244 1,274 1,306 1,337 1,369 1,401 1,434 1,467 1,500

950 1,156 1,187 1,218 1,249 1,281 1,313 1,345 1,378 1,411 1,445 1,479 1,513 1,548 1,583

1000 1,217 1,249 1,282 1,315 1,348 1,382 1,416 1,451 1,486 1,521 1,557 1,593 1,630 1,667

Housing market indicators for November 2015 (based on REINZ data)

House

prices (ann %

change)

3mth % chg

No of sales

(sa)

Mthly % chg

Avg days to sell

(sa)

Comment

Northland 6.3 6.4 268 +8% 55 Sales +69% y/y, prices flattening off.

Auckland 14.2 0.5 2,227 -13% 34 Volumes -11.8% 3m/3m, days to sell at 15-month high

Waikato/BOP/Gisborne 8.9 7.5 1,439 -6% 37 Strengthening prices, low days to sell, volumes +38% y/y.

Hawke’s Bay 1.5 0.8 256 -9% 35 Volumes +36% y/y, days to sell at 10-year low.

Manawatu-Whanganui -6.6 3.9 293 -5% 39 Days sell below average (44), volumes 14% y/y, prices flat.

Taranaki -3.5 4.5 182 +6% 45 Volumes +22% y/y, days to sell up from decade low.

Wellington 2.0 2.9 776 +1% 34 Prices trending up, volumes +17% y/y.

Nelson-Marlborough 4.1 2.6 277 +2% 34 Days to sell down, prices flattening off, volumes +1.7% 3m/3m.

Canterbury/Westland 1.0 0.1 938 -1% 31 Sales volumes -0.6% 3m/3m, prices +0.1% 3m/3m.

Central Otago Lakes -10.7 -5.8 163 -4% 39 Prices down, sales +42% y/y, days to sell up from record low.

Otago 9.8 3.4 268 -2% 30 Days to sell at 8-year low, volumes +12% 3m/3m.

Southland -1.2 -2.4 187 +9% 39 Days to sell at 3-year low, volumes +39% y/y.

NEW ZEALAND 0.8 0.3 7,329 -4% 35 Days to sell at 8-month high, median price at 5-month low.

Key forecasts

Actual Forecasts

Economic indicators Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17

GDP (Ann Avg % Chg) 3.6 3.3 2.9 2.4 2.2 2.2 2.3 2.5 2.6 2.7

CPI Inflation (Annual % Chg) 0.3 0.4 0.4 0.3 0.9 0.9 1.1 1.6 1.7 1.7

Unemployment Rate (%) 5.7 5.8 5.9 6.0 6.2 6.3 6.2 6.1 5.9 5.9

Interest rates (carded) Oct-15 Nov-15 Latest Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17

Official Cash Rate 2.75 2.75 2.50 2.50 2.50 2.50 2.50 2.50 2.75 3.25

90-Day Bank Bill Rate 3.0 2.8 2.8 2.8 2.7 2.7 2.7 2.7 3.1 3.5

Floating Mortgage Rate 6.0 6.0 5.7 5.7 5.7 5.7 5.7 5.7 6.0 6.5

1-Yr Fixed Mortgage Rate 5.0 4.8 4.6 4.6 4.7 4.9 5.0 5.1 5.5 5.7




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