Summary. Here’s an economics lesson. What happens in a free flowing market when demand rises and supply falls? Prices go up. This is the easiest of such questions to answer alongside what happens when demand falls and supply rises. Confusion sets in when demand goes up alongside supply, or they both go down. Which scenario are we in now and likely to remain so for the next 1-2 years? The first.

When supply fails to meet demand

Tony Alexander

Wednesday 8 November ‘23

My monthly survey of real estate agents shows a net 63% are seeing more first home buyers in the market looking for a property. This measure has been strong since February. A net 14% also say that they are seeing more investors. But six months ago this reading was -46% and the latest number is the strongest since before the tax rules were changed in March 2021.

Demand for housing is rising and more demand is now likely to come along because of the rule changes planned by the incoming National-dominated government. The slow restoration of interest expense deductibility will bring a reversal of what happened from late-March 2021 when investor buyers disappeared.

I can also tell from a monthly survey I run of existing residential property investors that the expected restoration of no-fault tenancy terminations is being greeted positively by landlords and this will also act as discouragement to sell and encouragement to buy.

Do I think these rule changes will bring a bold rush of investors into the market ahead of Christmas? Not really.

Many more will look to buy. But interest rates are high and have just risen further while banks are still showing preference for first home buyers – not investors. It is notable that this year no bank has run a traditional Spring mortgage campaign.

What I do think is going to happen is that first home buyers who have been holding back – many thousands have since early-2021 – will now look to make a purchase before the investors fully return. Their encouragement to buy will be strengthened by the pressure which a record net migration gain of 110,000 people in the past year is placing on the rental market. The migrants can’t buy, but local renters will look to accelerate their plans.

What about the supply side? The volume of house construction around New Zealand has been falling for the past year in response to buyers backing off. They have grown wary because of soaring costs and stories of developers and builders falling over.

This interaction of supply falling and demand rising for numerous reasons has already produced an average 2.8% rise in NZ house prices since June. The rises are being led by Wellington, then Auckland, then Canterbury. The regions are lagging and that is something I have expected for this cycle. People leaving New Zealand leave from everywhere. But people coming in go largely to the three big cities and particularly Auckland.

Early this year I printed an expectation that average NZ house prices this year will rise by 3%. Now I’d say 5% is more likely, with gains near 10% through 2024 and 15% for 2025. Why accelerating price rises? Because gains are occurring now while interest rates are high and still creeping higher. It seems fairly clear what will happen once those interest rates start falling, probably from the latter part of 2024.

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