The economic fallout from Covid-19 was supposed to lead to a housing market correction. It hasn’t. Instead the most recent round of market data makes what most already knew official: New Zealand’s housing market is going crazy. But this has left economists revising their forecasts and worried it could herald a new bubble.

This month we start off with a concise overview of the jaw-dropping prices, sales and listing statistics. And then we turn to a range of commentators to get their take on the runaway market – and where it might be heading.

Crunching The Data

Prices Are Red-Hot: There’s no doubt that prices are on a firm upward

trajectory. CoreLogic’s latest House Price Index has values nationwide up by 7.6% year-on-year and by 0.8% in the three months to September. This left the average national value at $743,678 in September.

The lift in values on a nationwide level was also generally evident across the six main centres in September. Of the main urban centres, Tauranga (up just 0.1% to $795,182) and Dunedin (flat on $547,429) saw the least value growth. Values in the other four main centres (Auckland, Hamilton, Wellington, Christchurch) all increased over the quarter. Notably, Auckland was up by 0.8% to $1,078,326. While Queenstown values were down by 4.2% year-on-year (to an average of $1,141,643), overall, value growth was the order of the day for the provinces.

REINZ’s latest price data is even stronger. It has median house prices nationwide up by 14.7% year-on-year to a new record high of $685,000 in September. Auckland’s median house price was up by 12.6% year-on-year to $955,000 (also a new record high), while nine other regions turned in record median prices during September. These regions were Gisborne, Taranaki, Otago, Bay of Plenty, Manawatu/Wanganui, Wellington, Waikato and Canterbury.

Additionally, the September data from Realestate.co.nz and Trade Me Property reveal nationwide price increases and a host of record highs.

Sales Are Soaring: It’s not just prices that are rising, sales volumes have skyrocketed too. According to REINZ, the number of properties sold nationwide in September increased by 37.1% from the same time last year (from 6,112 to 8,377).

That’s the highest number of sales in a September month for 14 years. Ten regions saw increases of over 30% in annual sales volumes during September. They were Nelson, West Coast, Tasman, Canterbury, Waikato, Manawatu/Wanganui, Marlborough, Bay of Plenty, Southland, and Auckland.

In a stellar turn, the number of sales in the SuperCity increased by a hefty 53.2% year-on-year (from 1,867 to 2,861) in September. That’s the highest sales figure in 52 months and the highest annual increase in sales in 11 years.

Barfoot & Thompson’s September data provides further evidence of Auckland’s strong sales activity. For the second consecutive month, sales numbers for the time of year were at a level last seen at the height of the last property cycle.

There were 1,099 sales in September - which was the highest number of sales in a month since 2017. That sales figure was also a solid 42.5% increase on the 771 sales seen in September last year.

Listings Are At Record Lows: Despite a recent increase in new listings,

low total stock numbers are very much at play nationwide. Realestate.co.nz’s latest data shows that 10 of the 19 regions have hit record total stock lows. Nationally, the total number of homes available for sale was down by 17.0% on September 2019 to just 17,576 listings.

In Auckland and Wellington housing stock was down by 7.5% and by 19.9% respectively. While Taranaki, Marlborough, Wairarapa, and Northland all saw big declines. The only region to see an increase in housing stock for sale was Central Otago/Lakes, which was up by 9.1%.

New property listings were actually up by 12.9% nationwide as compared to September last year, but high buyer demand means those new listings aren’t making much difference to the stock shortage.

The September REINZ data also shows the total inventory of properties for sale is now at the lowest level since records began. It’s quite a data set! So what do the experts have to say about it all?

Value Resilience

CoreLogic head of research Nick Goodall says values have held firm through the worst of the Covid-prompted economic downturn. “The combination of low interest rates, access to credit and renewed confidence has seen demand hold firm. Limited available supply remains a key contributor to the property market’s resilience to lower values.”

Further, to date, the absence of any meaningful lift in unemployment has minimised the number of urgent listings or strongly motivated vendors willing to discount their price, he says. While lockdown 2.0 in August posed a threat to the market, particularly in Auckland, it seems that activity is now back to normal.

Goodall says the perceived safety of property, and availability of cheap money, appear to be protecting the property market from falling though as does the lack of stressed sales.

“Overall, September was another month of resilience in the property market, with activity and values holding up, or even increasing further. The likelihood of rising unemployment is a factor to watch, but for now the key drivers remain ultra-low mortgage rates and the tight supply of available listings.”

It’s A Hot Market

For Westpac chief economist Dominick Stephens, it’s clear the market is booming. After seasonal adjustment, the REINZ sales numbers were the highest in any month since March 2007 – the hottest time of the hottest boom in recent history, he says.

‘The boom is being driven by very low interest rates and, if anything, interest rates are going to fall even further’ DOMINICK STEPHENS

“Some of these sales could represent catch-up from the level four lockdown. The number of sales over the past six months in total have been only equal to the same six months a year earlier. But even if some sales are catchup, this is still a hot market.”

Alongside this house prices are now rising extremely rapidly, he says. “Back in July we upgraded our price forecast to an 8% increase over 2021, and in September we shifted again to a forecast of 6.3% price inflation for 2020 and 8% in 2021. It seems we were too timid – the lift-off in prices is turning out earlier and faster than we expected.”

They expect the current strength in the market to continue well into next year, Stephens continues. “The boom is being driven by very low interest rates and, if anything, interest rates are going to fall even further.

“Other factors like net migration and economic confidence are currently, if anything, holding the housing market back. But by next year, both could be in recovery. When that recovery combines with low interest rates, house prices can be expected to continue rising.”

What Correction?

House prices did fall in April/May at the height of the level four lockdown but that seems to have been a blip rather than the start of a new downward trend, according to ASB senior economist Mike Jones.

He says the last four times New Zealand experienced economic recession annual house price inflation went negative. But this time appears to be different and there’s two key reasons why.

One is the huge amount of stimulus unleashed to counteract the economic pain of lockdown and the other is that they now believe there is a much more severe housing shortage than previously assumed. “A larger shortage estimate fits better with the strength in activity and prices we are seeing now. The stimulus has exacerbated this position of excess demand and the tightness of the market now evident. In short, there’s a scramble for houses.”

Jones says the tightening of the market promises to keep market momentum humming and house prices rising in the short term. That’s led ASB to upgrade their forecasts to annual price inflation of 9% by year end and an 11% positive annual increase till June 2021.

While the longer-term outlook remains murky, Jones expects the current upswing will run through most of next year. “The less gloomy outlook for the labour market and falling mortgage rates will continue to stimulate the market. Flat-lining net migration and some rollback of policy support will slow rather than stall the market next year.”

Risky Business

Some economists are beginning to question where soaring house prices could lead. One of them is BNZ head of research Stephen Toplis. He says that while the Reserve Bank is well aware of the financial stability implications, it believes high unemployment is a bigger risk than that of an overvalued housing market.

“This may well be the case shortterm but we caution that a future significant house price correction driven by stretched valuations could equally reverberate through the economy and generate the same, or even bigger, problem.

“We wouldn’t necessarily argue that house prices are currently wildly out of kilter, but we would question the risks imposed by further aggressive appreciation from here.”

Toplis says that despite their short-term positive view on house prices, they can’t help but think the underlying drivers will eventually weigh on the market. “But it’s becoming increasingly plausible that when the impact of falling interest rates on the market wanes, the world will be getting on top of Covid-19 and borders will be reopening. If so it would be reasonable to assume that net migration into New Zealand will soar and again underwrite the market.”

That means any major correction in prices may not occur until interest rates start to steadily move higher and that could be some time away.