Tuesday, 20 May 2014

There is another property market...

There's any amount of coverage of the residential property market, but much less of the commercial property market, even though it's an important sector in itself and has also tended to act as one of the transmission channel in financial crises, including the GFC. There are also very few, if any, official statistics on what's happening in the sector, and what private sector coverage there is has to be chased down in a variety of places, which is why I've previously posted a DIY guide to finding some data and decent commentary.

Given that there's been a bit of fuss about New Zealand's house prices being the highest, or amongst the highest, in the OECD relative to incomes or rents, I thought I'd have a look and see how our commercial property market is faring. Is it also mad hot by current global standards?

The short answer is, yes it is. Here are two graphs prepared by the UK's Royal Institution of Chartered Surveyors (RICS) as part of their most recent Global Commercial Property Monitor - if you want to read the whole thing, you'll need to register (free) here.

The top one shows rental and capital value expectations (on a 'net balance' basis) over the next year. And there we are, amongst the world's most bullish commercial property markets. Some of our neighbours up in the far north-east quadrant are special cases - rents and capital values are rising rapidly in Ireland and the UAE because they are now coming out of previously colossal property wipe-outs, and Japan's in the middle of enormous fiscal and monetary stimulus - and there's only one 'normal' country, if I can call it that, within cooee (the UK).

The second one plots an index of occupier demand for property (vertical axis) against an index of investor demand for property (horizontal). And again it's all systems go here in New Zealand. We're not so much on our own from this perspective. Yes, we've still got the UAE, Ireland and Japan as boisterous neighbours, and the UK again, but the US, Germany and arguably Singapore are in much the same sort of market as we are.

Should we be worried about this? Probably not. You'd expect us to be out somewhere on the north-eastern frontier in any event, since we're currently among the world's better performing developed economies, as these nice little graphics from the OECD show (we're green, the OECD area is blue, and you can play with them yourself here).

I might be more concerned if there was evidence of loose credit inflating a generalised bubble in financial assets (and if you were thinking along those lines, you'd note that the stock market has been reasonably lively, too). But with the latest numbers from the Reserve Bank showing private sector credit to residents growing at only 4.2% over the past year, which is barely keeping pace with nominal GDP, I'm not ready to press any panic buttons about this (nor about residential property prices, if it comes to that).

I'm not saying the good folk at Number 2 The Terrace can afford to junk all the material they collected since the GFC about financial asset booms and the proper role of monetary policy, but for now I'd say the commercial property sector is doing pretty much what you'd expect in economic conditions like these.


  1. With commercial property, the better that the economy is doing then, the higher the price. Isn't this one of the oldest laws of economics? It is called supply and demand. With a booming economy, the demand for commercial property goes up but the supply remains the same. The result is higher prices. The cure? Build more commercial properties, or heaven forbid, go into a global recession again.

    Nicholas Taylor @ Vancouver Business Brokers

  2. Sure, and since I wrote that piece the commercial (and housing) property markets have continued to do well as the economy has continued to grow. So far the supply response of more construction hasn't built up enough momentum to meet the demand.