Ashley Church: Is the housing market about to hit a wall?

COMMENT: Over the many years in which I’ve been talking to people about property I’ve observed that there are some constant themes which form a backdrop to the market and which never really change. For example, the long-term trend of house prices is always up; governments will always attempt to control house prices (and fail); and "the fear of loss" has a much bigger influence over the market than "the desire for gain".

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What do I mean by that last point? Simply that the primary motivator of action, or inaction, in the housing market is the fear of the consequences of acting or not acting. This malaise is obvious amongst those who are considering buying their first home and who have no experience upon which to base their decision. They torment themselves with "what ifs". What if I buy and prices drop? What if interest rates go up? What if I can’t manage the mortgage? What if I lose my job?

But even seasoned property owners and investors aren’t immune from worry. What if the market has peaked? What if the Reserve Bank changes its rules? What if the Government changes the rules?

The list of "what ifs" is endless.

But while most of these fears are about the consequences of getting into the market and what might happen if we get it wrong, occasionally, they’re fears about the consequences of not acting. Economist Tony Alexander recently wrote an excellent article for OneRoof about this in which he explains that the fear of missing out (FOMO) has been driving recent strong buyer activity in the housing market. He’s right of course. Buyers can see that house prices are going up and fear that, if they don’t act now, house prices might get out of their reach.

But Tony also alludes to the fears of investors, particularly in respect of their fear that the Government or Reserve Bank has been planning to take steps that might slow the market down or curtail their ability to invest. In particular, there was a fear that moves to reintroduce the loan-to-value-ratio restrictions might stop them in their tracks, so their recent buying activity has been driven as much by fear that they may soon be unable to buy as by a desire to capture capital growth.

But as with most of the things that we tend to fear, only one or two of the many scenarios that we imagine can actually take place, and thanks to recent announcements from Finance Minister Grant Robertson and Reserve Bank Governor Adrian Orr we now have a broad idea of what will happen next.

Robertson has signalled that he will address housing affordability by going after "speculators". The speech didn’t define precisely what steps he proposes to take but it’s reasonably safe to bet that they will include an extension of the "Bright Line" test, which taxes the capital gain made on houses sales within a set period of time. This is almost certain to increase from five years to ten years. Sadly, this move will have zero impact on speculators because they already pay tax on property sales since that’s the nature of their business, but it will also hit a handful of property investors who will now find themselves being taxed twice. In this respect, Robertson continues to fail to understand the most basic of differences between speculator and investors but the measure is unlikely to be retrospective so investors will, at least, go into any future purchases with their eyes open.

We also now know what the Reserve Bank has planned. Orr announced that the 30 percent deposits for Investor purchases will be re-introduced from March and that these will ratchet up to 40 percent from May.

Most other owner-occupiers will require a 20 percent deposit. But keeping in mind that most banks have continued to largely treat the old rules as if they were still in place, these steps demonstrate that our fears of what might happen were probably exaggerated. Putting aside my strongly held view that the LVRs are completely ineffective as a means by which to control house price inflation, these changes mean that owner-occupiers and first home buyers will be treated largely as they are now. And while investors will face a larger hurdle, some of that will be offset by recent capital growth, particularly for those who have a portfolio of more than two properties.

So, will some of the hysteria in the market settle down now that we know the nature of the steps that will be taken by the Government and the Reserve Bank? Time will tell, but we can be sure that the market isn’t about to hit a wall anytime soon.

In the words of Franklin D Roosevelt in his famous Presidential inaugural address in March 1933, “the only thing we have to fear is fear itself”.

- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]