ANALYSIS: When the pandemic struck in 2020 the general expectation for all of us was that house prices would fall relatively sharply. Initially they did, with a 3% nationwide fall on average over the two-month period from April to May 2020. But then with the assistance of record low interest rates, the removal of loan to value ratio restrictions, our inability to spend money travelling overseas, and a desire to improve our immediate living conditions, we saw a bidding war start for houses all around the country.
By the time a credit crunch caused house prices to start falling at the end of 2021, average prices had rebounded upward by over 45%. Since then, with assistance from changes in tax rules affecting investors from March 2021, the return of loan to value ratio rules and their strengthening, along with the fastest pace of increase in mortgage rates most people have ever seen, we have seen house prices on average around the country fall by almost 18%.
In the September quarter of last year I made the call that we were entering the end game for the period of rapid house price declines on the basis of interest rates not having much further to go up, migration flows looking likely to improve slightly, some easing in lending restrictions being likely before the end of the year, and a few of the measures I track in my monthly surveys starting to improve.
But then we got an unexpectedly high inflation number on October 18 and everything changed. The Reserve Bank lifted interest rates by a record 0.75% on November 23 and warned that the economy would go into recession with the unemployment rate eventually approaching 6%. Newly scared householders pulled back from the housing market.
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Now, things are once again changing. But this time around the chances that most of us are wrong and prices will continue to decline sharply are fairly low. I can see evidence of the housing market improving again in my monthly surveys. For instance, in the monthly survey of residential real estate agents which I run with REINZ a net 55% have just reported that they are seeing more first home buyers in the market. This is the strongest such reading since the start of 2021.
A net 32% also say they are seeing more people attending open homes. Again, this is the strongest result since early 2021. FOMO is also started to creep up though at only 9% of agents observing it the reading is clearly still extremely low and nowhere near levels close to 90% late in 2020. At the same time people are becoming slightly less worried about prices falling.
FOOP, or fear of overpaying, is now being observed by 49% of real estate agents as compared with 60% - 70% of them since early 2022.
Why is the housing market turning around? One reason is a boom in net migration inflows to 65,000 people in the past year compared with a loss near 20,000 a year ago. More people means more demand for housing and this initially shows up in the rental sector where from another of my surveys I can see landlords are finding it increasingly easy to secure good tenants. This will eventually produce an accelerating rate of rental increases.
Independent economist Tony Alexander: “We live in uncertain times and have to be careful not to over-predict the turning of the housing market.” Photo / Fiona Goodall
Another factor driving the housing market upward is the Reserve Bank's recent indication that it doesn't plan raising the official cash rate beyond the 5.5%. We can't completely rule out the possibility that the OCR will go higher, but the chances are slim and now that people can see the worst case scenario for their borrowing costs their willingness to contemplate a debt-funded purchase is likely to be increasing.
The labour market is providing direct encouragement to people to consider making a house purchase with the unemployment rate staying low at 3.4% and good growth in job numbers over the past few quarters.
An increasing frequency of negative stories about the house construction sector means people are increasingly perusing the stock of listings of existing properties rather than looking at buying off the plan.
Finally to top it all off we have evidence that the quantity of properties available for sale is falling. Listings have already decreased in seasonally adjusted terms by 13% from their seven-year peak at the end of 2022. I can tell that people are growing aware of falling numbers of listings because 25% of real estate agents in my most recent survey have said that buyers are concerned about listings availability. This is the highest such reading since January 2022.
We live in uncertain times and have to be careful not to over-predict the turning of the housing market. In particular it would be unwise to take any strong view on how strong activity levels and house price inflation will become over the coming one to three years. Therefore perhaps the best view people should take is that the many indicators which I track and the factors which I believe drive the housing market suggest that the pay-off to a buyer from continuing to wait for lower prices now looks extremely slim for most locations around the country.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
