New Zealand sees a boom in the housing market, making it one of the country’s biggest industries at $41.2 billion with an overall economic impact of S115.6b when considering the supplier and employee activities, the Stuff reports.
According to the article, the property sector has grown by $19.6 billion in the last ten years, accounting for 15 % of its GDP.
The data is from the Property Industry Impact Report 2021, which shows the sector’s impact on the economy and how it surpasses the value of other sectors, including agriculture, manufacturing, and health, which accounts for 11%, 6%, and 7% respectively of the country’s GDP.
The report also shows that the sector provides livelihood to 200 thousand people or 9% of the total NZ workforce.
What contributes to the NZ housing boom?
Bloomberg labels the NZ property market as the “most bubbly house market in the world” (Morison, 2021).
But what caused this industry to soar.
According to economist Niraj Shah from the Blomberg Economics report, “A cocktail of ingredients is sending house prices to unprecedented levels worldwide. Record low-interest rates, unparalleled fiscal stimulus, lockdown savings ready to be used as deposits, limited housing stock, and expectations of a robust recovery in the global economy are all contributing” (Morison, 2021).
Should the country remain optimistic about the sectors’ growth or brace for a crash following a significant boom?
The working paper, “Booms and busts in housing markets: determinants and implications,” that looked at 18 industrialized countries, finds that housing booms and busts have a strong correlation.
The boom and bust relationship is determined by the persistency and magnitude of the booms, with some lasting to 40 years, and the economic losses per GDP after the boom depends on several variables. The study also presents a model that can predict the occurrence of booms and busts (Agnello, L., Schuknecht, L., 2009).
Regarding the NZ property conditions, the Bloomberg report suggests that the sector will likely cool down rather than collapse in New Zealand due to the following factors: the interest rate being low, lending standards being higher than in the past, and macro-prudential policies are in place. But it’s not to say that there is no risk at all (Morrison, 2021).
“The risk is greater when there’s a synchronized boom in house prices, as is the case in the current cycle. When borrowing costs do start to rise, real estate markets, and broader measures put in place to safeguard financial stability, will face a critical test,” according to Shah from the report (Morrison, 2021).
Geoff Bascand, Deputy Governor of The Reserve Bank of New Zealand, says that global low-interest rates have increased risk-taking and elevated housing prices in New Zealand, increasing loan to value ratios. High LVRs can make recent borrowers vulnerable and could threaten the financial systems. To mitigate the risks, the Bank is tightening the LVR requirements to support more sustainable house prices and follow market response to the Government’s recent housing policy changes (Coltman, 2021).
Asset manager’s role in the property market.
How can asset managers ensure that property owners maintain the market value and increase return on their investments?
Infrastructure managers can apply asset management principles to ensure that assets for sale can maintain their market value, avoid asset depreciation, and mitigate exposure to risks.
They can provide advice to property owners to guide their investment decisions to reach the above goals.
New Zealand’s public housing portfolio has already developed asset management plans and is implementing these over the next decade.
Growth in NZ housing also puts pressure on the other civil infrastructure – roads, water, wastewater, energy, and telecommunications systems to provide the necessary infrastructure to meet demand.
The response to these challenges continues to develop in New Zealand.
Coltman, Karen. (2021, July 26). Property ‘New Zealand’s largest industry’, report says. Stuff. Retrieved from https://www.stuff.co.nz/business/125858062/property-new-zealands-largest-industry-report-says
Agnello, Luca; Schuknecht, Ludger (2009): Booms and busts in housing markets: determinants and implications, ECB Working Paper, No. 1071, European Central Bank (ECB), Frankfurt a. M.
Morrison, T. (2021, June 15). NZ has ‘most bubbly house market’ in the world, according to Bloomberg. Stuff. Retrieved from https://www.stuff.co.nz/business/125452535/nz-has-most-bubbly-house-market-in-the-world-according-to-bloomberg