Running backwards into a housing deficit again

“In other words, New Zealand has a widening housing deficit.”

By ANZ’s estimates the housing deficit had largely been eroded by the third quarter of last year, based on its assumptions around people per dwelling and depreciation of the housing stock.

The country for the first time in a long time had roughly enough houses for its population – albeit not always in the right places, with some regions like Tauranga and Queenstown still well short.

However, new demand for housing outstripped new supply in both the fourth quarter of last year and the first quarter of this year.

Together, over these two quarters alone, the shortfall between new housing supply and demand has come in at around 5,500 dwellings, taking the net migration numbers at face value. And with net migration showing no signs of letting up yet – although ANZ assumes it will soon, that deficit is likely to keep widening for a while. 

Plotting the quarterly new supply and demand balance against house price inflation suggests house prices could turn quite quickly from here, especially if there is a slowing fixed mortgage rate headwind, the report says.

However, it is important to note that mortgage rates are still a lot higher than before and that affordability – both in terms of serviceability and the price level relative to incomes – is hardly at a level that screams ‘bargain’. That is, affordability constraints should prevent the market from really taking off.

Net migration is a wild card and is notoriously difficult to forecast, the report says. But its influence on economic outcomes can be quite meaningful.

ANZ’s forecast is for net migration to ease from recent extremely high levels. Clearly, persistently strong net inflows would present upside risks to the bank’s housing outlook.

All up, the report says this may be a floor for house prices, but the outlook is no more certain than previously.

A sharp deterioration in household incomes for example is a big downside risk that could lead to a sharp rise in forced sales. But there are upside risks too, such as migration.

Then there’s the upcoming election, which adds significant uncertainty around housing policy – interest deductibility being a big one – not to mention the potential implementation of DTI restrictions by the RBNZ from early next year.

The report says the bank’s forecast strikes a balance through all these risks assuming the status quo for housing policy, but the middle ground between potentially extreme scenarios doesn’t always turn out to be a good forecast.