Last week, LINZ released the first batch of data from the new attempt to measure non-resident purchases of property in New Zealand.
As they note, at this stage the data have considerable limitations (including around the exclusion of purchases by trusts and companies). In addition, it is unlikely that the few months these data cover will prove to have been representative. On the one hand, there may have been some permanent behavioural changes as a result of the introduction of the “brightline test” and the tax number requirement introduced on 1 October. For those concerned about non-resident purchases of houses in New Zealand, if those legislative changes reduce the extent of purchases that would no doubt be welcomed, but it will also mean we will never know with any certainty what the extent of non-resident purchases was in the couple of years before the law was changed.
So our law changes may have permanently reduced offshore purchases. But they will almost certainly have temporarily disrupted the flow of such purchases. Some people will have rushed to get in ahead of the law changes, and others will simply have been unsettled by them, or a little confused by them. Many regulatory changes have that sort of effect – a (potentially material) short-term disruption, which gradually abates. In the housing market, we’ve seen it with the succession of new LVR restrictions.
All of which means that whatever the non-resident share of house purchases over the first three months of the year, it is likely to be a low-end estimate of the number of non-resident purchases (at least until China more effectively cracks down on capital outflows, and/or runs a regime that makes people more comfortable with holding their wealth in China. As I’ve pointed out before, in normal successful countries citizens don’t rush to buy houses in other countries as some sort of safe-haven store of value.
The focus of the discussion of this issue has been on the Auckland market. The LINZ data tell us that in the January to March period, 4 per cent of transfers involved non-resident purchasers. In most other localities, that share appears to have been smaller, but in the Queenstown-Lakes TLA, the share was a little higher still (for the entire October to March period).
What has surprised me somewhat is that 4 per cent has been treated by most people as a small number. In writing about this almost a year ago, I noted that – with no data whatever to back the supposition – it wouldn’t surprise me if 5 per cent of Auckland housing demand was from non-residents, and that in a market with fairly tightly constrained new supply, even quite small percentages could make a material difference to house prices.
And much of the discussion of this issue seems to ignore the fact that most turnover in the housing market is not as a result of people entering the market for the first time or leaving it for the last time. Most turnover involves New Zealanders buying and selling from one another – people changing city or suburb, or just changing their stage of life (wanting a bigger house as the kids grow, or a smaller house later in life). The same goes for residential rental properties: the stock turns over as individual owners’ circumstances and interests change. A well-functioning housing market will have a lot of turnover (facilitating those changes in life circumstances etc) and little persistent pressure one way or the other on real prices. In these data, New Zealanders bought sold from each other around 40000 houses in a six-month period.
Pressure on prices arises from net new demand to the market (or – the Christchurch story post-earthquake – net reductions in supply) not from routine turnover. It is a bit like immigration influences on the housing market. In a year in which there are big swings in net migration, those fluctuations might amount to only around 1 per cent of the population. Even if migrants typically eventually purchase their own home, probably most don’t purchase in their first year or two here (especially as many initially come on temporary – work or student – visas), so newly-arrived immigrants themselves might still only account for a quite small percentage of house sales in any year. But previous formal empirical studies have suggested that a 1 per cent shock to the population from a change in immigration can still produce up to a 10 per cent change in house prices. Markets operate at the margin – it is changes in the net new demand/supply that really should be the focus of attention.
If the average New Zealand house was turned over five or six times in the course of an adult life (eg turning over roughly every 10 years), then perhaps 80 per cent of all turnover would just represent “churn” – a term that sometimes has pejorative connotations, but here I just mean New Zealanders moving through different phases of their lives. If, on the other hand, most of the non-resident purchases were net new demand to the market, then 4 per cent of total turnover might be more like 20 per cent of net new demand to the market. I’m not staking anything on that number; it is purely to illustrate that data suggesting non-resident purchases are 4 per cent of turnover may tell one very little about what role those purchases are playing in the overall balance of pressures on the Auckland market.
The issues around immigration are a bit different from those around non-resident purchases. Immigrants need to live somewhere, regardless of whether or not they own a house themselves. Non-resident purchasers, almost (but not quite on the LINZ measure) by definition don’t need somewhere to live here. On the other hand, the suggestion has been – although we don’t have the data to know the extent of it – that many non-resident purchasers have been buying properties and leaving them empty (recall the store of value motive). If that is happening to any material extent, the impact on the housing market is much as if they were a new migrant. If, on the other hand, houses purchased by non-residents are placed on the rental market, non-resident demand might still raise house prices materially (in a supply constrained city) but shouldn’t materially affect the affordability of accommodation itself – ie rents.
One other limitation of the residency data is that it doesn’t give a sense of transitions from one residency to another. For example, the data show quite a large number of purchases, and a large number of sales, by Australian tax residents. One possibility is that most of these people are actually New Zealand citizens. A New Zealander might have gone to Australia a few years ago, and left a house behind, unsure how long they would stay in Australia. Finding that life has worked out well in Australia, and having become an Australian tax resident, they might now be selling the house here. Or a New Zealander who has lived in Australia for some time, and become an Australian tax resident, might be looking at coming home, and purchases a house here in anticipation of the move. Given the easy migration flows between New Zealand and Australia, there is likely to be a different interpretation on transactions by these non-residents than there might be in respect of most purchasers with Chinese tax residence (a country where there is a well-known high level of capital outflows to a variety of countries, often manifest in residential real estate purchases). Of course, if that Australian story is correct, there is a considerable element of “churn” in those transactions too, rather than net new demand to the market.
It is going to take time, and more refinements by LINZ, to really get a good sense of the situation, particularly after the first disruptive effects of last year’s regulatory changes pass. But, for now, it is best to keep in mind that even if the offshore non-resident purchases (from people not having lived here previously or likely to live here in the near future) are only equivalent to a few per cent of total housing turnover in Auckland, that probably isn’t a small number in terms of its economic effect. In a well-functioning house supply market it might be different – increased demand boosts supply, in effect providing a new export industry. When supply doesn’t work well, quite small changes in the net balance of demand can have uncomfortably large implications for prices.