For a number of months I’ve been describing the multitude of factors causing the 30% house price spike this past year as forming a layer cake. Lots of extra layers of cake have been added to the big bottom layer which comprises people achieving life goals like a new child, new job, retiring etc. and needing to shift.
I’ve focussed on 11 layers – all of which will eventually disappear. Here’s a run-through of them plus some new icing and eaters of the cake.
First, here are three layers with no bites yet taken out of them.
- Perceived shortages of property all around New Zealand.
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- Parents helping offspring by buying with them now, or buying years ahead, planning to sell the extra property and help fund their purchase down the track.
- Low term deposit rates. This layer has actually got thicker because although rates have risen near 0.4%, inflation has jumped from 1.5% to 3.3%. Real after-tax returns have fallen from near -1.2% to near -2.5%.
These next layers have been partly eaten.
- FOMO. The gross proportion of real estate agents reporting Fear of Missing Out now sits at 66% from peaks above 90% between August and February, according to my monthly survey with the Real Estate Institute of New Zealand.
- Expats returning in droves. The popular view is they will flock here. I believe many will now stay offshore as foreign economies boom and job offers grow, while many Kiwis are set to shift to labour-hungry Australia. Plus there are OEs to eventually catch up on.
- Delayed travel. We are still months away from being able to comfortably holiday overseas again. But distance in time to doing so is less than it was, and some people will now start saving for travel next year.
Tony Alexander: “The record lows are gone, and more rate rises are imminent.“ Photo / Fiona Goodall
- Space to work from home. This has been a big driver of activity overseas and initially was a factor here. But our extra lockdown durations since May 2020 have thankfully been short and rising vaccination rates mean lockdown risks are easing – hopefully.
- Low mortgage rates. The record lows are gone, and more rises are imminent with forecasts of a string of rises strengthening.
These layers have been completely eaten.
- Removal of LVRs in March 2020.
- Re-joining the fray by first home buyers when last year’s nationwide lockdown ended, hopeful of distressed sellers, discounted prices, and higher numbers of listings.
- Lockdown savings. We’ve probably well spent our savings from seven weeks locked down.
One new extra layer of cake is rising expectations of higher inflation. People will be seeking assets which tend to naturally appreciate as inflation lifts. Bank deposits don’t qualify, property does.
But there are new factors accelerating eating of layers generally.
- Interest deductibility rules have been radically changed for property investors.
- Immigration policy is being tightened.
- LVRs have just been strengthened again.
What does it all add up to? A slowing pace of increase in house prices with the direction of change being towards more and more slowing for the next three years at least.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
