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Q&A with Gareth Kiernan - Residential housing outlook post Covid-19

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Gareth Kiernan is the Chief Forecaster at Infometrics. managing the preparation of the company’s regular forecast publications. Within the forecast process, he is responsible for the macroeconomic overview and building and property forecasts. After featuring on PrefabNZ Innovation Bites webinar (watch it here), Gareth has generously answered the audience questions received in the survey below.

  1. The reference point for immigration statistics had changed turning housing demand from undersupply to oversupply. I noted your comments about housing oversupply with interest being an aspiring property developer and wonder if you were aware of the statistic reference point having changed?

    I’m not sure about the change in “reference point”, but I wonder whether the question refers to the most recent migration data released by Stats NZ that shows an unusual or unexpected pick-up in net migration in February – possibly surpassing the 2016 peak in net migration. This figure potentially reflects unusual travel patterns that were starting to emerge in February and will continue into March and April, with increased numbers of New Zealanders returning here to live. This trend is unlikely to last long given the lack of travel connectivity, and I would still expect net migration over the coming year to be virtually zero as both inflows and outflows dry up. I would also note that Stats NZ’s estimates of migration flows in the latest months tend to be very volatile and can show quite a different picture from where they end up once the 16-month estimation period is ended. Our experience suggests they start to become more stable after about eight months, so the February data published a couple of weeks ago won’t be particularly reliable until about October.
  2. Has this government, in its term of management, done all it can to boost NZ construction industry in light of the overall unexpected problems it has had to deal with?

    In my view, the government has made moves in the right direction in trying to beef up the work being done by the Construction Accord, as well as the efforts to accelerate infrastructure projects. Having said that, I’m somewhat skeptical of the Construction Accord and how successful it might have been in achieving any significant improvement in the resilience of the non-residential construction industry, for example. The government obviously has a lot of scope to do more in the residential space as I indicated in Tuesday’s presentation, and while my focus was on state housing, there would be little to stop the government also going down a KiwiBuild 2.0 route of providing financial support or underwriting for new housing to be built in areas where affordability or undersupply might continue to be a concern, even factoring in the downturn we’re expecting in the housing market over the next 1-2 years. If we think about the GFC, one of the biggest problems for the industry as the upturn emerged in 2012 was the amount of capacity that had been lost over the preceding three years with residential and non-residential construction activity at such low levels. If we expect a similar large, but relatively temporary, drop in activity over the next couple of years, then supporting activity can potentially address a multitude of issues: maintaining a level of industry capacity, improving the supply of affordable housing, and boosting the size of the state housing stock.

  3. Which Govt. department do you think should be petitioned for spends in innovative housing solution development funding? These businesses are often higher risk, but potentially can/will deliver much higher on the "productivity" count.

    I suspect MBIE is the best bet, although my experience with government departments is that you’re better to err on the side of spreading the net a bit more widely in case you strike bureaucratic pushback in the first area that you try. In that regard, I’d also suggest trying to get traction with the Ministry of Housing and Urban Development.
  4. Could you summarise the key areas we can expect to see economic strength in the NZ economy over the next two years?

    The short answer is none: it’s almost all varying degrees of contraction. However, if I was to pick out the industries that look likely to be less affected by the pandemic and its aftermath, I would choose the following.
    • Health – particularly those areas around the public health system, noting that some areas within the healthcare sector have seen an immediate decline in demand due to the lockdown, but most of this drop should reverse out.
    • Education will be subject to two main conflicting influences. Reduced foreign student numbers will significantly affect private education providers and, to a lesser extent, universities and polytechnics. These effects will be partly offset by a lift in demand for training given the weak labour market, with a greater proportion of school leavers choosing to continue onto tertiary study, while some people who have lost jobs will look to retrain or upskill.
    • Agriculture and food manufacturing should perform reasonably well given our reliance on China as an export market, and the likelihood that China will bounce back from the pandemic more quickly than many countries in Europe and North America. A weak global economy implies that export prices are not likely to be as favourable as they were pre-COVID, but I’d expect food prices to perform better than hard commodity prices – reflecting that people will still need to eat, but demand for manufactured products and the inputs into them will be weaker for longer. Furthermore the New Zealand dollar is more than 10% lower than it was at the start of the year, helping to cushion the effects of lower international prices for our exports.

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