There are many reasons why we seem to experience a never ending march towards more expensive housing. The basic cause of the increase in the supply of money is with us even after the last global financial crisis. This is mainly due to two aspects of how our money system works.
1. Money is created through lending, we have a fractional banking system which allows the banks to lend out most of the deposits they hold
2. The currencies around the globe are not based on a limited resource ie the gold standard, most central banks are able to increase the supply of money in certain circumstances
These two fundamentals mean that there is always more money in the system and as the money supply increases, certain asset classes collect more of the money. There is another factor which has the biggest impact on the timing of these cycles, confidence. Confidence is generally based on some real shift in demand or supply which tends to get the ball rolling.
There seems to be divergence between the nett migration figures and house price inflation lately, although generally a change in nett migration seems to lead the charge.
Increases in supply of housing could have exasperated the pre election lull in price increases. Some of the consents below would also be down to the new housing accord increasing the supply in the medium to lower price brackets.
The number of houses sold each month are still well below any boom territory recorded over the past fourteen years.
The supply side of the equation seems to be ramping up to continue to meet demand. The Reserve Bank is determined to keep the housing market in check and they have various tools outside of the interest rates to help them. The first of which has been in place since last year (low deposit restrictions) and the other which may come in place shortly (6 or more house restrictions). These tools will also provide a certain degree of robustness to any future weakness in the housing market; as any relaxation of these tools may stimulate demand.
On the flip side nett migration looks to continue its very positive trend. The new government has set aside any capital gains tax and increased help for first home buyers through increased first home subsidies (doubled). After many years of money creation by some of the bigger central banks abroad we might see an influx of cheap capital.
Either way it feels like a downturn in the housing market is unlikely, although the pace of change might be a little more relaxed this time around.
This article has been written by Hamish Patel, mortgage broker with mortgagesonline.co.nz. Ph: 09 625 4693, Mobile: 021 625 693, hamish@monline.co.nz
