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Potential NZ Housing Market Contagion?

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As traders know, in economic terms, Australia and New Zealand are connected at the hip. It’s not uncommon for economic issues to hop across the Tasman Sea, usually from west to east. 

Given the ongoing housing issues affecting Australia, it’s reasonable to worry that a similar pattern might emerge in New Zealand. And a quick glance at the latest data releases shows some worrying trends.

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One of the factors that we have to be aware of is the potential of a self-fulfilling prophecy. If enough people think that there will be a housing problem in New Zealand, it will happen regardless of the underlying macroeconomic issues. This phenomenon can override even the best economic and financial explanation for why there shouldn’t be housing contagion. This is, of course, assuming there is a case for such an argument.

Similar Issues

One of the ways to understand the potential for contagion is to look deeper into the similarities between the two countries to see if the same housing circumstances exist. 

So, we go back to Australia. There, the “crisis” was precipitated by almost a decade of significantly increasing house prices. That, coupled with relatively low interest rates and large amounts of foreign investment into real estate, chiefly from China.

Is that the situation in New Zealand? Well, there are some worrying figures proving it just might be. Although the affordability index is not as high as Australia’s (since theirs is the highest in the world, even with the drop in prices over the last months), it is still pretty high. 

Housing prices rose faster in New Zealand than in its larger neighbor. They were the fastest growing of the OECD following the sub-prime crisis. In fact, the only reason New Zealand homes are not more expensive than Australia, is because they started out at a lower baseline.

New Zealand also receives substantial capital flows from China, as well as housing pressure from immigration prompting demand to far outstrip supply. The slowing of Chinese growth and global economic resilience concerns have the same effect in reducing the amount of demand for houses.

Dissimilar Issues

New Zealand is a lot smaller than Australia, and the dynamics of capital flows are somewhat different. The effect also tends to be slightly delayed in New Zealand. This is because the wave of investment started well over a year after it had already reached Australia. 

The metropolitan area of Auckland has had similar real estate development as other major cities. However, property beyond that which constitutes the overwhelming majority of housing in New Zealand, has not behaved in the same way.

The Kiwi government is also discussing whether to introduce a new capital gains tax to affect housing. This would drastically increase the cost of housing speculation and reduce the incentives to treat housing as an investment.

The Worries

Housing prices in Auckland have primarily stagnated, with similar average prices as those a year ago. This is not a downturn or a crisis, evidently. But a rising market first goes flat before turning downwards. 

On the other hand, the number of mortgages continues to grow apace. House transfers remain at similar levels as the prior years. However, there’s a notable drop in the amount of foreigners buying homes.

In the end, there is a key element to form an economic “crisis” for a certain sector, which is basically a sector-specific recession. And that is excess inventory. 

If inventory outstrips demand, then prices will drop until that excess demand gets taken out of the market. So, even with similar situations in terms of a drop in capital flows and immigration, if there is enough elasticity between supply and demand, New Zealand could technically not have a housing problem. 

However, we’ll have to watch the data (and the corresponding effect on the NZD) for the next couple of months to be sure.

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