A key determinant of where the New Zealand economy goes is the pace of growth in our main export destinations. If they are doing well we tend to see more tourists come our way (when borders are open), commodity prices tend to go up, and the overall volume of sales of our commodity exports rises as well – subject to the weather permitting good production levels.
 
In our biggest export destination, China, growth of about 8.5% is commonly expected this year. This arises not because of a successful vaccination rollout, given the low efficacy of the Chinese vaccine, but because outbreaks were brought under control quickly and because the rest of the world’s consumers are spending heavily on many goods made in China.
 
This is where the problem with container location comes into play. Shops outside of China are struggling to get the goods they have ordered because the containers which would normally have been recycled back to China after being emptied in the past are often still sitting in Western and other countries.
 
Until this situation changes – perhaps by the end of the year – shoppers can expect continuing shortages of some products and businesses will lack timely delivery of key inputs into their production processes.
 
The strong growth in China is helping push up prices in particular for New Zealand dairy and forestry products with the result that on average all of our export prices in March were 14% ahead of their levels at the end of 2019.
 
The United States accounts for just over 10% of our exports and their economy is expected to grow 6.5% this year and 4.5% over 2022. This reflects the strong rollout of vaccines, catch-up spending, continued very low interest rates, surging house prices (up 12% in the past year), and a very strong fiscal stimulus from the Federal government.
 
Australia takes around 14% of what we export – though mainly manufactured goods – and over the Tasman consumer confidence is at an eleven-year high and business investment intentions a 27-year high. One interesting dynamic there is a surge in house building caused by over 115,000 people signing up to receive a $25,000 grant to assist with getting a new house built.
 
Already I have received feedback of Kiwis being headhunted to work in the new home sector in Australia as demand for building and outfitting staff is extremely high. This drag of Kiwi tradespeople and labourers across the Tasman will impede the speed of growth in NZ house construction over the next three years, cause some frustrating delays for builders and buyers, and push up overall construction costs.
 
The UK only takes about 2.5% of what we export. But their outlook has improved tremendously in recent weeks as a result of the rapid vaccine rollout. Hopes are high in government quarters and amongst some exporters for a free trade deal to be signed with the UK soon. But as the media have recently noted, there is the usual pushback by the still inefficient farming sector over there and this means gains to New Zealand’s primary producers when a deal does eventually get penned could be a tad limited.
 
Will the firm growth overseas propel the NZ economy forward at an especially rapid pace? No, but prospects nonetheless are good. There is a key factor which will limit the speed of recovery here over the next couple of years. Labour is in short supply in New Zealand.
 
The recently released ANZ Business Outlook Survey tells us that early in April a net 16% of businesses were planning to hire more people over the coming year. This is the highest proportion since 2017 and well above the ten-year average of 5%.
 
But of greater interest perhaps are these numbers from the NZIER’s Quarterly Survey of Business Opinion. In the March quarter a net 49% of businesses said that they were finding it difficult to source skilled labour. This was above the 37% ten-year average and the highest reading in two years. A net 27% said they are finding unskilled labour difficult to source and that is the highest reading since just before Covid-19 struck and well above the 16% average.
 
But the really interesting statistic from all of the surveys is this. In the March quarter only a gross 36% of businesses said that the main constraint on their ability to grow is a shortage of customers. This is down from 47% two years ago and well below the 51% ten-year average. In fact, this 36% reading is the lowest since 1974.
 
Businesses in New Zealand are going to have to make some hard decisions regarding their levels of achievable output given the good demand which is set to strengthen, yet the shortage of people and materials needed to produce their goods and services set to get worse. In fact, the government has stated clearly that when borders properly reopen they will not be issuing as many working visas as before Covid-19.
 
So, businesses will be in a position where they must focus on their highest yielding products, and in many cases will be easily able to raise their selling prices if they choose. This is partly where the risk of rising NZ and global inflation comes from for the next three years.
 
Central banks remain at pains to stress that they intend keeping their official overnight interest rates at current low levels through to 2024. But early signs of inflation are appearing and the markets are highly likely over the coming year to price in monetary policies tightening well before 2024.

In fact in New Zealand market pricing is for the first rise in the 0.25% official cash rate to come before the end of 2022. The Bank of Canada also recently noted that the way the Canadian economy is improving they anticipate meeting the conditions to start raising interest rates from record low levels also before the end of 2022.
 
Well before floating interest rates rise we can expect to see fixed interest rates going up and this is something just starting to happen in New Zealand. Banks are slowly withdrawing their very low medium to long-term fixed housing rates and this is a process likely to continue for the next 2-3 years.
 
How high might interest rates go at their peaks? Frankly, we can only guess as to how inflation develops in a post global pandemic environment. But for modelling purposes I am assuming New Zealand’s cash rate rises 2%, with a high scenario of 3% and low (optimistic) scenario of just 1%.

For most borrowers, the best way to approach their interest rate risk management given the high uncertainties around an upwardly shifting rates track, is probably to take a spread of fixed rates from the one to five-year terms.
 
Email me at tony@tonyalexander.nz to subscribe to my free weekly “Tony’s View” for easy to understand discussion of wider developments in the NZ economy, plus more on housing markets.
 
By Tony Alexander

Late in 2017 Labour won the general election and made many promises with regards to improving many things, including housing affordability. But since September of that year, we have seen these developments.

• House prices on average have risen 32%.
• Rents on average have risen 30%.
• The state house waiting list has grown from 5,000 to 23,000.
• The proportion of dwellings being sold to investors with mortgages has risen from 24% to 30%.

​Housing goals for the government have not only not been met, the starting points for all the things they want to achieve have become a lot worse. Because of this, and the extreme 14% rise in average house prices over the past five months (over 30% annualised), the government has promised to announce a range of measures aimed at curtailing housing demand and boosting supply.

Supply-side policies are likely to be announced in the Budget due in May, but unless most controls are removed on land use it is very unlikely much acceleration in the pace of construction will be able to be achieved.

It is worth noting however that since September 2017 the annual number of consents issued for the construction of new dwellings has risen from 30,000 to almost 40,000. It is on the demand side that the government is likely to continue to focus its attention, despite the fact that all policies which have done so over the past two decades have failed to stop house prices rising strongly. The Budget will likely contain some policies, and in mid-March the Finance Minister will announce something new.

New Reserve Bank Instruction
But already we have seen the Finance Minister attempt to make a big change through issuing a new instruction to the Reserve Bank on February 25. When setting its policies, the Reserve Bank must now take into account the government’s housing policies – specifically around affordability for first home buyers and reducing purchasing of existing properties by investors.

Does this mean higher interest rates? After all, it is largely because mortgage and deposit rates are at record lows that demand for property from investors has surged. No.

The official cash rate will continue to be set to achieve goals on inflation and employment. Responsibility for achieving housing goals will be left in the hands of other tools. Already one of those tools is well known – Loan to Value Ratios (LVRs).

There is a chance the 40% minimum deposit for investors will be lifted to 50% if investor demand remains rampant in the next few months. There is also a chance that new rules on interest-only lending by banks to investors will be introduced.

The Finance Minister has asked the Reserve Bank to give him information on such rules and how they could be restricted to affecting only investors. The Minister has also asked for advice on how Debt to Income rules (DTIs) could be introduced and structured to again affect only investors.

Momentum is Turning
What actually happens and when we shall simply have to wait and see. But one strong rule of thumb when it comes to implementing government policies is that they have their best impact if well explained and if the target is moving in the desired direction in the first place. Momentum counts for a lot – or strike while the iron’s hot one might say – and in this case of the residential real estate market we can see some early signs of things easing slightly.

Each month I conduct a number of surveys of the 18,000 people signed up to receive the weekly Tony’s View publication, and of two subsets in particular. One of those subsets is people that I have been able to identify as mortgage advisers. In the most recent mortgages.co.nz & Tony Alexander Real Estate Survey a net 5% of advisers said that they are seeing fewer investors coming forward looking for advice.

This was a substantial turnaround from a net 24% in January seeing more investor enquiries and the first time that this measure has been negative since the survey started in June last year.

Another subset I survey is real estate agents and in the March REINZ & Tony Alexander Real Estate Survey a net 5% of agents said that they are seeing more investors coming forward looking to sell a property. This is the first time that this measure has been positive since the survey started in June, though the turnaround from a net 2% seeing fewer investors looking to sell in February and 7% in December is not that substantial.

But there are some other measures in the survey with REINZ showing some easing.

A net 15% of agents said that they are seeing more investors in the market looking to buy. This means growth – but the speed of that growth is slowing. In the February survey a net 31% of agents said that they were seeing more investors, in December 45%, and in November 59%.

From the survey we can also see that the speed of increase in first home buyers coming forward to make a purchase is easing. In March a net 32% of agents were seeing more first home buyers, down from a net 46% in February, 50% in December, and 64% in November.

And finally, the survey also tells us that in March, when asked why investors are looking to buy, a gross 10% of agents said they aren’t – that they are instead looking to sell. This was the highest result so far and up from 7% in February and 3% in December.

But we also have the official data on real estate activity released by REINZ telling us of some easing in the speed of growth. During January average house prices around the country increased by 1.3%. In December the rise was 2.2%, and in November 3.9%. The pace of price growth has been slowing for two months.

Further, whereas in November nationwide property sales were 34% ahead of a year earlier, and in December growth was 46%, in January annual growth was only 3%.

None of these measures mean that the market is going backwards. But they do suggest that if the government and perhaps Reserve Bank use the next few weeks and months to mid-year to warn about the need for further easing and the potential for anti-investor policies, the actual requirement for new punitive policies may not be great.

Having said that, as noted above, it would be reasonable to think that if the market is still fairly active mid-year that the 40% minimum deposit for investor buyers borrowing from a registered bank could rise to 50%. And we could easily see some restrictions on interest-only lending to investors. Plus, there is the mid-May Budget to come and that could easily contain an extension of the Brightline test from five years to ten, along with some measures (better understood by accountants than economists) reducing the after-tax returns of investors.

Will any of the measures to come cause house prices to fall on average? That is very unlikely. The Prime Minister last year noted that the constituency for rising house prices is greater than the numbers favouring house price falls. Plus, house price falls tend to be associated with economic weakness and job loss and the government and Reserve Bank will not want to do anything which disturbs the economy’s post-lockdown recovery.

In particular, the government will not want to make changes so drastic as to make people fearful of falling prices because that will cause orders for new houses to decline.

All up, we can see early, tentative, signs that the frenzy in residential real estate activity and prices growth is ending. The government primarily, and the Reserve Bank almost reluctantly, are likely to look to hasten the pullback of investors over the remainder of this year.

Email me at tony@tonyalexander.nz to subscribe to my free weekly “Tony’s View” for easy to understand discussion of wider developments in the NZ economy, plus more on housing markets.

By Tony Alexander

The new year is well under way now and most people will have returned to work, giving thought to what 2021 will bring. As we progressed through 2020 the outlook for our economy shifted from good with an accelerating housing market early in the year, to truly dire as we saw potential for devastation from the effects of Covid-19, to some stability and positive growth surprises, and then most frenzied housing market on record by some measures.

The housing market surge is somewhat surprising considering that the unemployment rate has risen from 4.0% to 5.3%, consumer confidence was weak most of the year, many businesses have closed, foreign tourists are no longer occupying Airbnb-type properties, and banks have cut back mortgage funding to groups such as the self-employed and people working in the most heavily affected sectors.

But housing has been propelled higher by some exceedingly strong factors, led by falls in mortgage rates to record lows. The two-year fixed mortgage rate currently sits near 2.5% from 4.3% two years ago. Banks are also offering one-year fixed rates at 2.29%. Attracted by low borrowing costs many people have decided to jump into the housing market.

But it is not just lower mortgage interest rates in play. Term deposit rates have fallen to roughly 0.8% for most terms. The average two-year term deposit rate has fallen about 2.5% over the past two years. This is greater than the fall in the same term mortgage rate and depositors are now seeing their money shrink in value after allowing for tax and then inflation.

The opportunity cost of placing funds in an asset like property has plunged and so money has moved into the sector. But we have also seen people flocking to residential property because of the removal of Loan to Value Ratio regulations – LVRs.

Initially this was because they were removed. But since maybe October last year it has been because of an expectation that they would be coming back very soon. People have been buying property before the likes of the investor minimum deposit requirement goes to 30% and perhaps even 40% come March 1.

There has also been property buying because of the inability to travel overseas, use of money saved up during the seven weeks of lockdown, the stronger than expected economy and return of jobs growth with labour shortages, and a few other important factors.

One of these other factors is an expectation that when the borders fully reopen, many of the one million Kiwi residents overseas will look to come home. Few will, but the expectation that they might is encouraging people to buy property sooner rather than later.

The expectation of a boost to our economy from the eventual return of tourists and reversion of some rental accommodation to servicing tourists will also have been driving the desire to buy property.

How will this end? In the first 2-4 months of this year the frenzy is likely to continue. In fact, from my monthly Mortgage Advisors Survey we already know that there has been a return of both investors and first home buyers after they took a break over the Christmas-New Year period. But come March 1 and the likely return of 30%, or more likely a 40% minimum deposit requirement for investors, a good number of buyers are likely to step back.

Some new sellers are also likely to emerge. These will include skilled investors choosing to offload some less desirable properties to eager buyers, some taking profits, and some simply cashing up to seek whatever the new strongly rising market might be.

We will slowly see some current unrealistic vendors realise they are not going to sell for 40% above RV, and they will capitulate in their price demands. This meeting of the market will be good for turnover, but it will also be an interesting development when we consider the following.

It may be that at the end of December the number of properties listed for sale around the country was 26% lower than a year earlier and 73% down from the December 2010 total. But during December the number of new listings received by real estate agents was 23% ahead of the number for December 2019.

There are more people willing to sell and it won’t take too much of an easing off of the frenzied, panicking buyers, for the pace of price growth to appreciably slowdown.

Will prices fall at some stage this year? That is very unlikely given the improving state of the economy – assisted by high strength in house construction – and an expectation that interest rates will remain low for a long time.

This low interest rate expectations scenario has been engineered by central banks around the world determined to drive their economies upward on the back of higher debt to the greatest extent possible. Many central banks have stated that even when the outlook for inflation goes up, they will hold off raising their main overnight interest rate until either inflation actually comes in above 2%, or it has sat above 2% for some unspecified period of time.

Expectations of sustained low interest rates along with an improving economy and eventual opening of the borders all suggest that prices will continue to rise this year – but at a slowing pace once we get beyond the March quarter.

With regard to the economy itself, we can anticipate support not just from low interest rates and growing construction of houses, but slowly rising infrastructure spending and businesses restarting capital spending plans which were shelved when Covid-19 came along. Businesses will be looking to focus on investing in labour-saving technologies, logistics facilities because more people are shopping online, more efficient premises, better data systems, and so on.

​There is also going to be support for growth from the improving world economy and the eventual return of people overseas to eating out, which will be good for our primary sector exports including dairy products and wine.

The return of tourists will be a net positive for the economy – but it is best to assume that does not happen until early in 2022 rather than getting optimistic about a date well before the end of this year. The rollout of vaccination programmes around the world looks like being somewhat problematic and this could delay border reopening in many countries.

There will be some restraint on growth from the Kiwi dollar rising further. Our economic story is a good one, as is our ranking of number 1 for handling Covid-19 according to the Lowy Institute in Australia in January. The high probability that our central bank will tighten monetary policy before other central banks will also slowly place some upward pressure on the NZ dollar as the coming year advances, and this will take some of the strength out of rising export earnings including from the recent strength in dairy prices.

Businesses are likely to rapidly find themselves in positions where ability to grow will again be compromised by shortages of labour. Some are already restraining their acceptance of customer orders because of concerns about the global disruption to supply chains and the risks that necessary products do not show up in time.

There is also the issue relevant to the strong demand for new houses of blockages in the pipeline of developable land. Councils around the country have been caught out by the speed with which people have turned from trying to buy an existing house to contacting building companies to get one built. Those companies have bought up land very quickly and the pressure is now on to get the necessary infrastructure in place.

Covid-19 was the big challenge for 2020. This year we know it exists and we know which sectors are most negatively, and most positively, affected. This year the challenges for businesses will shift back to where they were over 2018-19, and for investors the challenge will be finding yield in an environment where some asset prices seem absurdly high – but we cannot know whether they will correct back the other way or not.

Email me at tony@tonyalexander.nz to subscribe to my free weekly “Tony’s View” for easy to understand discussion of wider developments in the NZ economy, plus more on housing markets.

​By Tony Alexander

In my column last month, I noted that the Reserve Bank would probably respond to evidence of a rise in low deposit lending to investors by seeking to reinstate Loan to Value Ratio regulations (LVRs) earlier than the scheduled date of May 1. So, it has come to pass, not with the Reserve Bank unilaterally acting, but with banks putting the speed limits back in place themselves.

It looks like the banks had been approaching the RB, lobbying individually for an early return of the rules, but afraid of making an individual decision to do so themselves for fear of not being followed by the other banks.

Now that the LVRs are back in place voluntarily, are we likely to see the recent extreme heat coming out of the housing market? Yes, in that although November will still likely show a sharp price increase, for December onward monthly price gains below the 3.5% of October and 2.6% of September are likely.

How fast might prices rise on average in the coming year? In the six months leading into March this year prices nationwide rose on average by 1.1% a month. In the seven months since April prices have risen on average by 1% a month, though with falls in April and May and rises in other months.

In all probability, on average in the coming year prices will again rise by about 1% a month, though with a risk that gains are higher than that.

Prices will keep rising despite the immediate return of minimum 30% deposits for investors and 20% for owner occupiers for a great variety of reasons. One is that interest rates will remain at extremely low levels. This not only makes the purchase of a house highly affordable for owner occupiers, but it also nudges more and more investors every day toward doing something more with their low risk bank term deposits.

There is currently about $200bn sitting in household bank accounts. Most of that money will stay there and not leave the banking system. But the low returns are going to affect people’s behaviour. A year ago, the average two-year term deposit rate was 2.6%. Now it is 0.8%. Over the same time period the average two-year fixed mortgage rate has fallen from near 3.6% to 2.5%.

Term deposit rates have fallen much more than mortgage rates, and that is why the drive by investors to diversify away from bank deposits will continue. But there are more than just low current returns which will be encouraging investors into other assets. We have yet to see discussion of an underlying change in mindset towards funding one’s retirement, but as awareness of this factor grows, it will drive even more property purchasing.

We Kiwis have traditionally viewed the use of invested funds in retirement as involving living off the income of the assets we might have, be they corporate bonds, bank term deposits, or some rental property. But that approach is not going to be possible in the future outside of property because cash returns on assets will average much lower in a permanently lower interest rates environment.

People are going to have to consciously plan to reduce their wealth far earlier in retirement than they would have been thinking. That is, starting in their 60s rather than their 80s. This is a big change not yet being discussed in New Zealand, but the implications are strong.

Money kept in a bank delivers zero capital gain. In fact, after inflation the wealth will decline, with further reductions caused by taxation of earnings. Property however delivers a capital gain which over the past 28 years has averaged 6.8% per annum across the whole country.

Going forward that average is likely to be closer to 5.5% given that we have ended a period of structural declines in interest rates and growth in house supply is better now than over the past three decades and likely to remain relatively high.

This capital gain is likely to continue in retirement, and that becomes important to people who still seem to place value on passing something on to the next generation and maybe the one after that as well.

Anticipated mild capital gain in retirement will assuage concerns about wealth declining as people age. Facilitating drawdown of this capital and retaining the ongoing gains will require much deeper development of the reverse mortgage sector, to the point where the interest rates charged do not prove such a persuasive argument against pursuing that course as is the case now.

The upshot of relevance for the next few years is that investors will continue to favour property, and they will continue to favour it even when the brightline test is inevitably extended from the current five years to at least seven years and probably ten years. Personally, I had expected such an extension to already have occurred by now and the move does look overdue.

Will the government go further than that to try and contain the pace of house price increases? Probably, but they will not make any change large enough to cause prices to go down. Falling prices might please a few first home buyers. But banks will lift deposit requirements if prices are falling, taking home purchase even further out of reach to those young buyers.

​Plus, falling prices will hardly be greeted positively by recent young buyers. And all other property owners will feel some disquiet about their wealth declining. Therefore, all the government will ever try to do is slow the pace of price increase, not reverse it. In fact, the Prime Minister has already noted that she will be taking into consideration this term the desires of the over 400,000 people who switched in the most recent general election from National to Labour.

These people are probably property owners and the PM will want to retain as many as possible come the 2023 election.

Could the government tinker with the ability to deduct interest payments from rent before calculating taxable profit from property investment? That would be an extremely big move and if they did it would probably be spread out over a number of years. There is a risk that such a move would cause selling by investors which has never happened in the past in response to other moves which reduce landlord returns, such as ring-fencing.

But the big, big problem for the government is that the average occupancy of a rented property is higher than an owned one, and if the home ownership rate were to rise as some investors sell, more people would find themselves unable to secure accommodation.

Rents would rise and there would be even more pressure on the state housing list which has already tripled in size over the past three years. Over the coming months we are likely to see both Treasury and the Reserve Bank offer insight into measures which might go some way toward slowing the pace of average house price increase in coming years.

But in our new environment of extremely low interest rates, an expected migration boom once the borders reopen, and a coming shift in how people perceive their technique for funding retirement spending, any changes made are unlikely to do more than mildly ease the average pace of house price gain rather than reverse it.

Email me at tony@tonyalexander.nz to subscribe to my free weekly “Tony’s View” for easy to understand discussion of wider developments in the NZ economy, plus more on housing markets.

​By Tony Alexander

Back in March, as we all tried to make sense of what a global pandemic meant and how much economic damage would ensue from something unheard of called a lockdown, the outlook most of us had for the residential real estate market was bad. There was a near universal expectation that prices would fall as turnover shrank, that mortgagee sales would jump, and that house construction would fall away quite rapidly. Things have turned out to be quite different – thankfully.

​In the three months to August, the number of dwellings sold around the country was ahead 22% from a year earlier. The number of properties listed for sale was down by 13%. Prices initially fell 3% during April and May, but they have since risen to sit 1.5% ahead of average levels in March. Why have things turned out this way?

There are numerous factors which help explain why our economy has not collapsed as much as expected, why the unemployment rate has not soared, and why the housing market looks to have an entirely new lease on life. Principal among these factors is the cutting of interest rates to record low levels.

In March, the Reserve Bank cut its official cash rate by 0.75% to just 0.25%. This caused the likes of the one-year fixed mortgage rate to fall from 3.4% to 2.5%. But it pays to remember that the March cut was preceded last year by another 0.75% worth of cash rate cuts which had seen the one-year fixed mortgage rate decline from 4.1%.

The rate cuts of 2019 meant that our housing market entered this crisis with accelerating momentum, assisted by last year’s confirmation that no capital gains tax would be imposed.

But it is not just the cuts to current interest rates bringing new buyers into the housing market. The Reserve Bank, like other central banks overseas, has indicated that it will keep interest rates low for a great number of years. They have also indicated that they might cut the cash rate below 0% next year.

This matters, because what drives asset markets is not just conditions on the ground, but where people believe things are going. Expectations matter in markets and those interest rate expectations help explain why so many investors are looking to move their funds out of low interest rate term deposits and into other assets including shares and property. The low rates also explain why many people who were planning to sell their investment property and live off earnings from other assets have decided not to. They simply won’t generate the returns which they have been earning on their housing investment and which they are likely to continue to earn. This helps explain the shortage of listings.

Another factor explaining listings shortages is unwillingness of people to sell before they have bought. They are scared of being caught having to rent a property for some time while they search for a suitable new house, and ending up potentially paying more for an eventual purchase than they would currently. So, people have switched to buying first then selling.

This fear of missing out on a purchase has in fact become a strong element once more in the property market. FOMO is short for “fear of missing out”, and it mainly refers to people feeling fearful of not making a purchase and not enjoying capital gains.

Back in May, in the monthly REINZ & Tony Alexander Real Estate Survey, I asked real estate agents all around New Zealand whether they felt that buyers were feeling FOMO. A net 2% back then said no. Now, in the September survey, a net 77% say yes. Similarly, back in May a net 17% of agents said that they felt house prices were falling. Now a net 81% feel that they are rising.

But it is not just low interest rates generating FOMO and the self-perpetuating momentum it generates in the housing market. In the year to March there was a net immigration boost to our population of 90,000 people. This has since eased to 76,000 in the year to July, but that 76,000 includes an unheard of net 20,000 gain in Kiwis.

All of these extra people in the country mean we have already accumulated the population gain most of us analysts expected would accrue by August of 2021. These extra people will not largely be staying in motels, hotels, campervans and tents. They will be using rental accommodation – including Airbnb. They won’t be buying houses if they are foreigners, but their presence has removed downward pressure on house prices which can come from downward pressure on rents.

Since April, net migration inflows have averaged only just over zero a month, and going forward the numbers will remain low until the borders open. However, every few weeks the government has announced an easing of rules allowing more people into the country and more migrant visa workers to stay. There are also discussions underway regarding private accommodation providers contracting to quarantine skilled workers. One could imagine that extending to foreign students ahead of the 2021 academic year if things go well.

But more than these sources of upside to monthly migration numbers is the increasing expectation that over 2021 much of the world will be vaccinated, and by the start of 2022 our borders might be open again. This will not only bring a flow of tourists back which will provide an economic boost, but restoration eventually of previous firm net migration inflows. And that loops us back to the point made above regarding expectations driving asset markets. The expectation in the housing market is that the next change in border control will be an easing which will boost housing demand. And there is more.

For now, banks are running very tight eligibility criteria for home loans. Staff shortages are making processing times very long, and many applicants who in the past would have qualified for a loan, are now having difficulties. For some it is because of the sector they work in, for others the volatile nature of their income.

The expectation is growing that the next change in bank lending criteria will be a loosening up. This might not come to any noticeable degree until the first half of 2021. But when it comes, it will make purchasing a home accessible to more people. That will place upward pressure on prices.

Another source of upward pressure is bond buying by the Reserve Bank (money printing), which swaps a bond asset for a bank cash balance asset on the part of the investors selling those bonds. For some of those investors, the low returns on bank deposits may not be a problem as those returns will be better than they were getting on bonds. But for others the low interest rates on offer will encourage the purchase of other assets such as shares, commercial property, finance company debentures, and again, residential property.

None of these and other factors suggest house prices will boom – not with slowly rising unemployment and high global uncertainty. But they do suggest that the chances of house prices turning back down again as they did on average nationwide during April and May, are exceedingly slim. Rises are more likely than declines from here on out.

Email me at tony@tonyalexander.nz to subscribe to my free weekly “Tony’s View” for easy to understand discussion of wider developments in the NZ economy, plus more on housing markets.

By Tony Alexander