No turning point in housing
Posted August 22, 2008on:
It is interesting to see the real estate blog calling a “turning point” in the housing market. For the sake of completeness, I’m going to attempt to call the opposite – namely I am going to put down the case for why the housing market will continue to remain slow.
Note that I am stating that it continues to remain slow – rather than making the even more specific argument that it will slow further. In order to defeat the idea that we have an upswing in the property market coming, I merely have to show there will be no upswing – after all it would be harder to record lower house sales volumes then we currently are 😉 . First, I will face up the facts that the real estate blog has put forward for an upswing, and then I will add a few more issues that I think will keep the real estate market depressed.
Also ultimately, the “heating up in the property market” appears to imply two things on the real estate blog, namely:
- Sales rising to normal levels,
- Steady house prices.
I will attempt to look at these issues separate – and I will discuss how these may trade-off.
House sales are heating up!!!
July was a surprisingly “strong” month for house sales – and the real estate blog did pick that (view this comment). However, it is important to look at this month in context.
It was still down 32% on year earlier levels – when a year earlier sales were already dropping. Even if sales rose by another 25% (in seasonally adjusted terms) the real estate market will still be running cold, as sales have fallen off a cliff!
A 35% increase (in SA terms) would have us back inline with what might be seen as a normal housing market – for this to be a turning point in the housing market, it must look like sales are going to head up by these types of levels over the rest of the year. Personally I can’t see annual house sales of much over 60,000 over the year to March 09.
Now the three indicators that the real estate blog is suggesting show that house sales will turn back to “normal” territory are:
- Rising website activity,
- Falling inventories,
- Rising purchasing enquiries.
The first factor does not seem terribly relevant – the real estate site is becoming more popular as the result of interest in the housing market overall, rather than an improvement in the market. However, the second and third factors could well be very important.
The third factor does not seem to match the market particularly well. Enquiries were well up over the March quarter of 2008, but sales were very poor over this period. This is a series I would like to see some more historical data for – and as a result it doesn’t have me convinced.
Now the second factor, the inventories, is the important one. A decline in inventories gives the impression that the market is clearing, and as a result the value that the buyers and sellers place on property is coming closer together. In this type of situation, sales volumes will head back to normal levels.
However, we have to ask why inventories have fallen. Inventories fell back while house sales were still weakening – suggesting that sellers were taking properties off the market after realising that their valuations were not being met. Ultimately, if inventories are falling because buyers and sellers are placing restrictively different values on property, then we will not see any uptick in sales as a result.
There is an indication that this is infact what is happening, as the rental stock in NZ appears to have increased, as “accidental landlords” have moved away from trying to sell there old property and just lent it out. This is part of the reason why rents have fallen. At some point these properties will have to be sold – however, it is unlikely to occur unless the sellers are willing to take significantly lower prices (which they currently appear unwilling to do).
But are there any indicators that suggest the market will stay down!
Well, one major factor is the days to sell which is still rising at a remarkable rate. According to REINZ it took an average of 58 days to sell property that was sold in July – the longest period of time since February 2001. The increase in days to sell indicates that momentum in the property market is incredibly slow – it is taking buyers and sellers a long time to agree on the value of property.
Furthermore these low sales levels have occurred in the face of record arrivals. The net migrant inflow 5,200 people was tiny, but the number of permanent arrivals has gone through the roof. The current arrival level is unsustainable, especially given the NZ governments cap on arrivals – as a result, demand for property is going to dry up further!!!
With renting remaining a cheaper option given current house prices, and with the rental stock looking reasonable robust in most places, there appears to be no fundamental factors sparking up that would drive a recovery to a normal property market.
But if prices fall!
Yes, if prices fall back (especially given that they are 30% “overvalued”) then sales will push back – however this requires sellers being willing to accept these lower property prices. As the real estate blog says, inventories are falling, this is a factor that will help to keep house prices elevated – thereby reducing housing market activity.
Ultimately, something has to give. Either house sales will stay in the doldrums for a while yet and inflation will eat the difference between buyer and sellers valuations, or house prices will tank and the market will be able to clear. I’ve long been a proponent of the first outcome – although the weight of evidence is definitely pointing the other way now.
Good on the real estate blog for going out there and calling a turning point – if they are right then it will be a very good thing 🙂
However, I’ve tried to have a look over the points, put them in some context, and state why I don’t think house sales levels will pick up over the coming months – without a significant dip in prices.