All sorts of factors affect real estate and housing affordability, from the Reserve Bank’s monetary policy to the cost of living. OneRoof asked a range of experts about the basics.
WHAT IS INFLATION AND WHY IS IT RISING?
James Wilson, head of valuations at Valocity: Inflation, put really simply, is a way to measure the change in prices over a set time period. In New Zealand, this is usually measured in how much prices may have changed over a quarterly period. In order to allow prices to be monitored and compared in a consistent and comparable way, Stats NZ measure and monitor how the prices of goods and services change and track this within the New Zealand Consumer Price Index (CPI).
Jarrod Kerr, chief economist at Kiwibank: You can think of it as like a basket of goods that we consume; everything from food to petrol to rents and spending on a house. All of these goods are measured and looked at by Stats NZ. They look at the prices and how the prices change over time and at the moment just about everywhere you look you see pretty decent inflation across the whole basket of goods that’s in the Consumer Price index, the CPI, and here we are at 7.3%.
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Half of the inflation that we’re experiencing has come from offshore (petrol prices and higher imported costs). The other half has been domestically-generated, particularly in the housing market. The cost of building a home is up 18% on the last year, rents have risen, just about everything to do with the housing market is producing some pretty big price gains – apart from house prices themselves. Global inflation is running at 9% and our tradables inflation, which is the imported inflation, is running at 8.7%. You’ve got a global phenomenon, a global lift in prices. Our domestically-generated inflation is running at 6.3%.
Petrol prices have risen sharply in recent months. Photo / Getty Images
Wilson: International situations are having an impact on the supply and therefore price of oil/gas, which in turn makes it more expensive to import these goods to New Zealand shores; significantly increased volumes of spending by central and local government as a response to COVID-19; domestic supply disruption – for example, shortages of materials within the construction industry; labour supply shortages, meaning increased competition for employees and increased wages as a result; strong demand for goods and services across many parts of the economy, when combined with the above shortages and restrictions, drives the prices of goods and services up.
WHAT’S THE RESERVE BANK’S ROLE IN ALL OF THIS?
Kerr: The Reserve Bank is the banker of the banks. Their mandate is to keep inflation between 1% and 3% and inflation is running at 7.3% so they’re failing on that mandate and that’s why they’re hiking interest rates at quite a rapid rate.
WHAT IS THE OCR AND HOW DOES IT IMPACT MORTGAGE RATES?
Kerr: The Official Cash Rate is an overnight cash rate that banks deal with the Reserve Bank at. That rate is used in financial markets and wholesale markets. The expectations of where that rate is going to go is translated into Government bonds and swap rates (the cost at which a bank borrows at a fixed rate for a set term).
The OCR, and where the OCR is going, is the biggest driver of interest rates in the market. The fact they’ve (the Reserve Bank) come in and told us the cash rate is going to 4%, the market has 4% priced in over the next year in anticipation of those moves. Now those rates that we use have all got 4% cash rate priced in so the mortgage rates that we are offering do reflect the fact that the Reserve Bank is tightening and has more tightening to come.
Kelvin Davidson, chief economist at CoreLogic: When the OCR goes up the costs to the banks go up for their operations and so they pass that on to borrowers. The idea is they use the Official Cash Rate to control inflation so at the moment you have high inflation so the Reserve Bank needs to be increasing the Official Cash Rate which makes it more expensive to borrow money. The Official Cash Rate is the key tool for monetary policy in New Zealand, and elsewhere too. Mortgage rates will always be higher than the OCR because the bank has to make a margin, too. There’s costs and they are commercial entities and that’s basically their operational margin plus a profit.
WHAT’S DRIVING CURRENT HOUSE PRICE FALLS?
Kerr: The fact that interest rates have risen so dramatically over the last year has put a lot of pressure on the housing market. There are a lot of things that have been thrown at the housing market at once but the biggest driver is the rapid rise in interest rates – number one – and that’s by design. This is exactly what the Reserve Bank wants to see – they want to see higher interest rates, they want to see the housing market come off. It’s all part of their way of trying to get on top of inflation.
Kiwibank chief economist Jarrod Kerr: “Half of the inflation that we're experiencing has come from offshore.” Photo / Fiona Goodall
The other things that have been thrown at the housing market include the CCCFA which had a big impact on the availability of credit, and then, of course, the LVR (Loan to Value Ratios – how much the bank can lend compared to the value of the home) changes that came through; higher LVRs. That had an impact, and then of course the Government’s decision to not allow interest deductibility on dwellings had a big impact on investors. What we are seeing is investors being funneled into new-builds, which I don’t think is a bad thing. We want to stimulate more supply in the housing market because there’s still a chronic shortage of dwellings.
Davidson: There’s certainly more choice for buyers so listings are up. That’s not due to a big flood of new listings, that’s due to a drop in sales, so it’s given a chance for stock on the market to be replenished so that’s giving buyers more choice so they've got the pricing power so that's one factor.
You’ve also got a mindset shift, I think. Psychology plays a part and when people aren’t as confident as to what’s going to happen in the market they tend to offer less and prices fall. When people are feeling bullish and confident and think prices will rise they tend to rise.
If mortgages cost more, if mortgage rates are higher, people can’t borrow as much, they can’t service as much debt so that will have an impact on housing activity and house prices like we’re seeing now. It’s a sort of inverse relationship; when the OCR goes up mortgage rates go up and house prices fall/feel the pain, and vice versa like we saw post-Covid.
Wilson: The cost of borrowing has a very strong link on the confidence of borrowers, both existing and would-be borrowers, to make their next purchase decision. Mortgage payments often make up a household’s most significant monthly expense, so if these are increasing, or borrowers think that they are likely to increase further, often spending behaviours change quickly and households adopt a more cautious approach, especially initially as they wait to see how high interest rates may rise and what impact they have on the market.
WHAT IS HOUSING AFFORDABILITY?
Davidson: We look at it in a range of different ways. Things like the house price to income ratio; years to save a deposit; and also how much a mortgage will take up of your income. At the moment, the house price to income ratio is very stretched, or very high, which means houses are very unaffordable. The ratio is about 9 but the long-run average is about 6 so it’s well above normal. When the ratio of house prices is very high in relation to income, houses are relatively unaffordable.
Unfortunately, a house price to income ratio of three is just not realistic. It hasn’t been three for 30 years. What that measure misses is the impact of falls in mortgage rates over time. When mortgage rates were 20% in the late 1980s of course you couldn’t take out much debt because interest rates were 20%, so the house price you could afford to pay was quite low in relation to your income, but as mortgage rates have fallen from 20% to 5% you can afford to borrow more in relation to your income and you can afford to pay more for the house.
WITH PRICES FALLING, DOESN’T THAT MEAN HOUSING IS MORE AFFORDABLE?
Davidson: No, and there’s a few countervailing things going on here. With the mortgage payments as a percentage of income measure, incomes are going up so that helps, and house prices are falling, so that helps, but mortgage rates are going up – and that doesn’t help. So even though house prices are falling and incomes are going up, active rising interest rates offset a lot of that. The falls in house prices aren’t necessarily a big saviour in terms of affordability because at the same time mortgage rates have gone up. In big picture terms, New Zealand does have relatively unaffordable housing.
Houses are taking longer to sell in the current market. Photo / Fiona Goodall
Kerr: Look, we’re starting from a very unaffordable starting point. What the housing market has done in recent years has been quite extraordinary. The peak and the annual rate of growth was 33% in the year to August last year so there was a massive gain in house prices and that made the market even more unaffordable. Now we are seeing house prices coming off so, yes, they are becoming more affordable but I would still classify the housing market, even with the 10-15% correction, as unaffordable. It’s not until we see a significant increase in the supply of homes that the housing market will become affordable and I think that’s still a few years away.
Mike Bayley, managing director of Bayleys: In short, no. New Zealand has some of the highest house prices relative to incomes in the world which is why the pipeline of new supply is so important to deliver. Add to this the expected $200 billion in new infrastructure required if we are to meet future projections for population growth and policy-makers have a difficult road ahead. While incentives like the exemption of new-build properties from interest deductibility changes are working to encourage investment into new housing supply, some builders and construction firms are struggling in the current climate which will limit the number of new homes coming online for sale. Rents continue to increase rapidly also, making it difficult for tenants to accrue savings for a home deposit.
WHAT ARE THE RESERVE BANK AND THE GOVERNMENT DOING ABOUT THE DOWNTURN?
Davidson: There’s certainly nothing going on directly to try to bring the housing market downturn to an end. They are not saying ‘we can’t have this anymore, we’ve got to do something to stop house prices falling’. That’s not what is going on. The Reserve Bank is concerned about inflation so that’s what they are focusing on.
The Government are not necessarily doing anything either. What they are doing in housing is trying to increase supply so long run we have enough houses to cater for the population and we can hopefully over time restore housing affordability to some kind of acceptable level, whatever that is.
LISTINGS ARE UP BUT SALES VOLUMES ARE DOWN – WHAT’S GOING ON?
Jen Baird, REINZ CEO: We haven’t seen a big flood of new listings so there’s not a whole heap more coming to market. The numbers are up a few percentage points compared to this time last year. The reason the overall stock level is so much higher is that property is staying on the market longer. The average days on market last month was 44 days across the country and that’s up 50% on this time last year. It’s up 13 days on this time last year so a considerable growth in that number and that just means that property is on the market longer and so stock levels stay high.
REINZ CEO Jen Baird: “People need to understand what's going on in their local market and make a decision that works for them.” Photo / Supplied
But neither are people sitting on their hands – they are getting married, their teenagers have finally hit that age where they have to be in a particular school zone, it’s time to retire to the country, all those sorts of things still happen in people’s lives. We talk about property as if it’s this rational asset class and, actually, people are making life choices and the property transaction is just one part of that – it’s not the whole thing.
ISN’T IT A BIT SILLY TO LIST YOUR HOUSE IN A FALLING MARKET?
Simon Tremain, managing director of Tremains Real Estate: Market volumes throughout the country are in line with post-GFC – there are very low volumes. I wouldn’t expect the market to move any further downwards. Is it a good time to sell? People buy and sell for different reasons and there are buyers out there if you need to sell but there’s a lot more competition, there’s a lot more listings available, so if you are going to sell, your price and expectations need to be realistic. You’ve missed the peak of the market, that was November last year, so don’t be silly about it. You’ve missed the high, but you’ve still done pretty well based on where your property sat five years ago.
Baird: Absolutely not. A property will sell at the right price. People need to understand what’s going on in their local market and make a decision that works for them because it’s so situational. Let’s say you’re downsizing, then you’re literally buying and selling in the same market.
Bayley: The fundamental need to buy and sell remains. As we come out the other side of pandemic disruption Kiwis have assessed their priorities and are looking to make a move – be that for employment, family or lifestyle. The pandemic stimulus also had the consequence of lifting the price of residential assets which has meant homeowners have seen their homes increase in value and are now looking to capitalise on this by trading up (or down) to something that may better suit their needs. It’s also important to retain some perspective here, while property prices have come down from their peak, they’ve increased upwards of 30 percent in some areas, so a slight regression is negligible when we look at the bigger picture.
AND ISN’T IT SILLY NOT TO BUY WITH PRICES FINALLY GOING DOWN?
Baird: One of the challenges at the moment, prices may feel easier for people to stomach but then they have to be really mindful of what that mortgage is going to cost them over time so while the cost of the actual asset might have come down, the cost of the financing of that asset has gone up and people really need to balance that against their own budgets. I think one of the challenges for people, too, is they’ve seen interest rates go up quite quickly so that interest rate is changing fairly regularly at the moment and every few months it’s changed again so, actually it would have been better to buy before the last increase was factored in by banks.
Bayley: Interest rates are up from record-low levels, but they are historically considered to be still at the lower end of the scale. At the same time, there’s been a decline in wholesale interest rates (which determine mortgage lending rates) as markets across the world become concerned the rapid tightening of monetary policy could drive the global economy into recession. Monthly, house prices are starting to stabilise, and once we pass the low point, prices are likely to begin to gradually increase. Another point to note is that public information releases such as housing indexes and price statistics, while useful, often lag up to three months. This means by the time those waiting on the sidelines see evidence the market has bottomed out, we’ll have already passed that point. For this reason, real-time data and the guidance of a real estate professional are so important to help Kiwis make informed decisions.
SOME PEOPLE ARE WAITING FOR THE MARKET TO FALL FURTHER – IS THAT WISE?
Tremain: I don’t think they’re going to drop any further. I think we’re at the base and if you keep waiting you’ll miss the opportunity. As soon as that pressure gets released from the vendors and all of a sudden they start feeling there’s more buyers around, the lack of urgency goes out of accepting prices.
Baird: You only know when the top of the bottom of the market is once it’s been hit. You can try and pick it if that’s what you want to do or you can make a decision that’s good for you and the life stage you’re at. There might be people sitting around waiting for the bottom of the market or waiting for the top of the market but I think probably more likely those people are looking for a really good deal, they’re not looking for the bottom of the market as such because, you know, that could be last month.
