Immigration won’t rescue plunging New Zealand housing market

I reported yesterday how the Ardern Government in New Zealand announced some tweaking to the immigration system that will ensure Kiwi businesses have easy access to migrant workers.

These changes will also give easy access to permanent residency, thus ensuring that New Zealand’s population continues to grow.

For all intents and purposes, the Ardern Government’s reforms are effectively a continuation of the former Key/English Government’s mass immigration policy, which saw New Zealand’s population swell last decade.

Despite these changes, Westpac believes that New Zealand’s immigration intake will only rebound to half of its pre-COVID level which, when combined with elevated dwelling construction rates, means that the nation’s chronic housing shortages should end mid-decade. This elimination of housing shortages, in turn, will relieve pressure on house prices:

Population pressures are one factor that has contributed to the strong rise in New Zealand house prices in recent years…

The closure of our borders has seen population growth plummet at the same time as home building is hitting record levels…

Between 2015 and 2020 New Zealand’s population grew by around 11%. Over that same period our housing stock only increased by 7%. That left us with around 75,000 too few homes…

Shortages of housing have been most intense in Auckland. However, they have become increasingly widespread across the country, with the average number of people per dwelling rising sharply in nearly every region over the past decade…

That huge imbalance between population pressures and housing supply that developed over the past decade has undergone a rapid transformation in the wake of Covid-19. We estimate that since the start of the pandemic, the shortfall of housing has fallen by around 30,000 homes. That still leaves us with a shortfall of around 45,000 houses. However, further big changes are in train in terms of both housing demand and supply…

Over the next five years, New Zealand will need to build around 130,000 new houses to address the existing shortfall and keep up with the needs of our growing population. That’s equivalent to building 26,000 new homes a year…

Between 2015 and 2019 net migration averaged around 60,000 people per annum. But over the past year that story has gone into reverse, with the country actually recording a net outflow of 7,600 people in the year to February.

We expect that net migration will remain negative for some time yet, as many young New Zealanders who put off OEs in recent years are now looking to travel again as conditions abroad have improved.

Longer term, net migration will (eventually) turn positive again as the current pent-up demand for overseas travel by New Zealanders eases back to more normal levels. In addition, with the borders opening up again, the coming years will see a pickup in the number of new migrants landing on our shores.

Even so, we don’t expect a return to the sorts of migration levels that we saw over the past decade… We expect that net migration will settle at around 30,000 people per annum. That’s a big step down from the annual inflows of 50,000 to 60,000 people per annum that we saw in the years leading up to the pandemic. And the impacts of that change will be felt across the economy, including in our housing market…

The combination of rapid home building and slower population growth means… the shortages that built up in recent years are now being rapidly eroded, and they are set to be largely eliminated by the middle of this decade…

Now, with population growth taking a step down and the previous shortages of homes being eroded, we don’t expect that population pressures will provide the same boost to prices going forward that they did in previous years.

In its separate “Home Truths” report, Westpac forecast a 10% fall in New Zealand house prices this year, followed by a further 5% decline in 2023. With New Zealand inflation running at around 6% annually, this would imply a peak-to-trough decline in real house prices of up to 25%.

Obviously, interest rates are the main driver of New Zealand house prices. Nevertheless, if immigration fails to return to its manic pre-pandemic level and supply shortages evaporate, it will be another headwind for the nation’s property market.