It is the time when we all like to speculate heavily on the main themes that the new year is likely to hold for us, and whether or not there will be any major trend changes.
First National Bank property economist John Loos expects a constrained consumer, a more conservative approach to consumption expenditure and home buying, and possibly a higher household savings rate.
He predicts luxuries such as swimming pools are likely to become even less cool this year, so new home-building would be very much focused on basics and few frills. However, a greater focus on energy alternatives to the grid may be witnessed in middle-to higher-income areas, given further power tariff increases last year.
Home buying is likely to be overwhelmingly about “essentials”, so Loos expects city markets, which are dominated by primary residential demand, to begin to outperform holiday town markets. Many other less economically diversified rural towns may be at greater risk than the major metros this year, notably mining-and manufacturing-driven towns, while the drought poses threats to many towns in which agriculture is the dominant driver.
Within the residential market, the conservative household is also expected to make its presence felt in terms of what the buyers go for. Smaller-sized homes and smaller average stand sizes are expected to be more sought after as a portion of households tries to contain home operating cost increases, notably the steadily-rising municipal rates and utilities tariffs. This may keep the sectional title market’s house price growth a mildly better levels than that of full title.
Lower and middle-income areas are anticipated to outperform the high income/price end of the market in terms of house price growth, as a portion of demand shifts “down” in search of greater affordability. Not that house price inflation is likely to be a major contributor to a further deterioration in home affordability. Rather, it is the expectation of mild further interest rate hiking in 2016 which would gradually lead to further affordability deterioration.
Home buying is also likely to be overwhelmingly about “essentials”, meaning primary residential demand, so we would expect the primary residential demand-dominated city markets to begin to outperform the holiday town markets. Many other less economically-diversified rural towns may also be at greater risk than the major metros in 2016, notably Mining and Manufacturing-driven towns (given the severe weakness in those sectors of the economy), while the drought poses threats to many towns where agriculture is the dominant driver too, depending on how long the drought continues for.
One trend change in the residential market could be a renewed rise in yields on residential property. Part of a more conservative household spending approach could be some strengthening in demand for rental properties, driving rental inflation slightly stronger while house price growth falls slightly slower. The combination could starts a rise in yields.
In short, therefore, 2016 looks set to be a year of hard work and a need for property and consumer-related businesses to improve their creativity and efficiencies, in an economy that looks set to continue its mediocre performance. It is thus realistic to expect a financially constrained consumer, a more conservative approach to both consumption expenditure and home buying, and possibly a higher household savings rate to come.