The New Zealand economy has shown signs of stabilisation in recent months, supported by early signs of a housing market rebound and improved retail sales. However, the economic recovery remains fragile, which was what kept the RBNZ from raising the OCR just yet.
Although the global outlook has improved over recent months, the IMF has continued to caution that all is not out of the woods yet.
House prices in main cities have recently reverted back near to the previous peak. The rebound in house prices is due to pent-up demand that has been partly released due to an improvement in home affordability, helped by low interest rates and lower house prices.
A shortage of housing stock for sale in the market has also contributed to rapid house price increases. The housing market rebound has also been underpinned by strengthening net migration, as fewer New Zealanders are departing offshore to Australia and Britain, countries that are also grappling with higher unemployment rates.
The rebound in the housing market should trigger the onset of a recovery in house building activity, albeit from a very low base, but we expect activity to remain relatively low over the next 18 months.
Despite improvements in house prices in the main cities and in sale transactions in recent months, the housing market upswing is not yet well-established. But as the residential property market strengthens, we expect the residential construction cycle to be near its bottom and will soon rebound.
We expect a moderate rebound in overall residential consents for the December quarter. From thence, it will build up momentum to a strong activity level by 2012/13, led by the Auckland area.
However, a likelihood of the housing market recovery gathering momentum, combined with low new housing supply (below 15,000 units per annum over the two years to 2010/11), and strong net migration, may force the RBNZ to tighten monetary policy earlier and more aggressively over the course of 2010 to rein in the housing market and inflation.
Consumer demand growth will gather pace from the second half of 2010, and turn into strong growth from 2011 on the back of a full-blown global recovery.
With new supply running below demand due to under-building in past years, combined with inevitable interest rate hikes, home affordability will once again be a real challenge.
Keeping the affordability issue in mind, we expect this residential building cycle to peak at a lower level of activity at below 27,000 units nationally in 2012/13, compared to record levels of 30,000-31,000 units per annum over the two years to 2004/05.
Non-residential construction has remained resilient, held up by strong activity in the social and institutional sector — especially in the hostels, education buildings and sports, recreation and entertainment sectors, as well as in the office building sector.
Building activity in the health, retail and factory building sectors has also remained relatively healthy. However, we continue to expect non-residential construction to enter into a downturn soon, as activity levels begin to drop off following the construction of projects related to the 2011 Rugby World Cup.
This downturn is expected to be mild, as it is driven by weak demand (not excess supply) and lack of financing for developers to start new projects following the credit squeeze during the global financial crisis.
The current economic downturn has resulted in weak demand for commercial properties, causing rental rates to soften and, therefore, exerting upward pressure on vacancy rates. But the saving grace is that the markets are not oversupplied. A lack of funding and take-out of the end product has curtailed or delayed most new projects in the past 12 months, particularly in office development.
As a result, new additions to office space over the next three years have halved, which means that, once demand picks up again, excess space will be quickly absorbed, vacancy rates will tighten and rents will rise — setting the stage for the next upturn.
Strengthening leasing markets will bring back the equity injection that will underpin the next round of commercial projects.