Tony Alexander: Puncturing New Zealand’s big house price delusions

On May 20 the Minister of Finance will release the Government’s annual Budget and he has promised that there will be some additional housing measures included. I don’t know what these will be, though I suspect he will be bringing forward some elements of a plan to prevent councils stopping six-storey apartment blocks going up in certain areas.

The uncertainty about what the Budget will contain is likely to be one factor occupying the minds of many people thinking about buying or selling a property. But that Budget uncertainty is probably quite minor compared with the uncertainty everyone has about what everyone else is thinking.

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This is what you get in the market for an asset for which people can choose the timing of their purchase. This past year has seen a massive surge in people who had been thinking about buying a property doing so earlier than they had planned because of: record low borrowing costs; record low term deposit rates; the temporary removal of Loan to Value Ratio rules; and a few other push-type factors. Now, people are wondering if buyers are going to shift their purchase plans back to 2022 or 2023, or even beyond.

One factor which has been encouraging people to buy early is a belief that when the international borders open up properly we will be over-run with many of the one million Kiwi residents and citizens overseas flocking back to our near Covid-free shores. It is doubtful that the flow will remotely approach the levels people are thinking. I have spent some time speaking with Kiwis offshore over the past decade and there are very good reasons they are there, stretching from escaping family to earning much more than they could ever dream of making in New Zealand.

We can even get an indication of offshore demand and how it is changing from the monthly survey I run of real estate agents with the Real Estate Institute of New Zealand (REINZ). Back in early-February a net 7% of agents said that they were seeing fewer enquiries from people located offshore – not more. This worsened to a net 12% in March, 31% in April, and now a net 35% negative at the start of this month.

But it is not just the absence of a rush of offshore buyers which challenges some of the hopeful thinking of buyers regarding the potential for price rises. There are also people who are hoping that the recent rash of anti-investor policy changes will result in some big bargains becoming available. But this also is very unlikely, partly because it will take four years for investors to fully feel the effects of interest expense deductibility being removed.

In the survey with REINZ I ask agents why investors are in the market. In my latest survey a gross 18% said they are hoping for a bargain, up from 13% a month ago and 11% in March. But the net proportion of agents who say they are seeing more investors step forward to sell has only risen to 12% from 6% one month ago and a net 2% saying fewer investors were coming forward to sell in February.

So, there is an increase in investors, but it is fairly small. The simple reality for most is that the alternative to holding an investment property is placing one’s capital in a bank and watching it go backwards after tax and inflation. And while many people note that shares deliver good capital gains over time, no bank is going to let an average Kiwi borrow five times their income to invest in listed equities. That all stopped back in 1987 when the market crashed.

For average Kiwis looking to build an asset base for retirement, property will remain the only game in town, and that is why while monthly average house price changes in coming months could easily be negative now and then, the underlying trend in prices is likely to remain upward as investors keep holding their asset and look to buy more – probably a new build. However, about one-third of investors buy with no mortgage so first home buyers should not think they will have the low-priced existing house market all to themselves.

That is why the next big thing I am looking for the Government to discuss or do is remove more than just the ability to deduct interest expenses. There are plenty of other costs a concerned Government can make non-deductible as well. Whether they do or not will depend a lot on price movements over the next 12 months.

- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz