ANALYSIS: Just for something different, let’s step back from my usual analysis here of what the latest data and my five monthly surveys are telling us about the residential real estate market and have a look at the main factors causing the ups and downs of recent times.
Starting back in 2019 we saw the end of a period of flattish prices in Auckland and slowish growth elsewhere as the Reserve Bank cut its cash rate to a record low of 1% to fight worries about deflation. Falls in the likes of the one-year fixed mortgage rate to 3.4% from over 4.1% late in 2018 caused house prices to start rising again in Auckland and rise more quickly elsewhere.
When the pandemic came, we went into our shells as we wondered about the effects of the borders being closed, being locked down in our homes, and health impacts of Covid-19. Average house prices fell by 3%.
But with the cash rate cut to 0.25%, one year mortgage rates falling quickly to 2.6%, Loan to Value Ratio rules removed, our jobs safe because of the wage subsidy scheme, and predictions of a migration boom, we went ballistic buying things. While spas, home renovations, electric bikes and kayaks topped the list for many families, purchasing a first property or an investment property were prioritised by the many people who had tried and failed to do so over 2018 and 2019.
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With prices soaring and FOMO rampant average NZ house prices rose by 2.7% a month from July 2021 to March 2022. Then we sat back to digest the impact of the return of LVRs in March and stronger deposit rules for investors from May 2022, and tax changes targeting investors effective from March 27.
Over the three months from April – June 2021 average house prices rose just 0.8% a month. Then, having concluded other people were not going to sell we jumped back into the market encouraged by the one year fixed mortgage rate briefly falling below 2.2% and still sitting below 2.5% into September. House prices rose on average 2.2% a month from July to November last year as FOMO also went back up.
Then with November’s tightening of Loan to Value Ratio rules, introduction of changes to the Credit Contracts and Consumer Finance Act from December 1, discussion of net migration outflows and booming new house supply, plus a soaring cost of living from June quarter 2021 and the one year fixed mortgage rate hitting 3.2% in October, we stopped buying.
Since December house prices have been falling by on average 1.4% a month with extra assistance from increased talk of a brain drain and speculation of an over-supply in Auckland (I disagree), falls in business and consumer sentiment levels to near record lows, the one year fixed mortgage rate rising above 5%, and buyers holding back aiming to try and pick the bottom of the cycle.
Tony Alexander: “We have entered the endgame for the period of falling prices, but the negatives still easily dominate.” Photo / Fiona Goodall
Where things stand now is that credit availability from banks has improved slightly, eligibility for low deposit purchases with Kāinga Ora has improved, interest rates have sort of stopped rising (lots of uncertainty there), and sentiment levels have become less dire. Soaring construction costs and building delays have encouraged buyers to look back again at listings for existing properties, and young buyers look to be pulling back from trying to pick the bottom and concentrating instead on making a purchase from vendors who have finally capitulated to the reality of lower prices.
We have entered the endgame for the period of falling prices, but the negatives still easily dominate and prices are likely to fall further, though soon at a slowing rate. Will rises return? Definitely. House prices move in cycles, newbuild costs keep rising, numbers at open homes and auctions are growing, and the Reserve Bank Governor this week expressed confidence that New Zealand will not have to newly attack inflation as is happening offshore because the rate rise cycle started much earlier here than almost everywhere else.
When will prices start rising again? Having observed housing cycles in New Zealand since the 1970s I can say with confidence that none of us can reliably pick when the cycle will bottom and when prices will do more than just oscillate along the bottom. My best pick is the turn of the year for things to bottom out – but it would pay to keep an eye on newly worrying developments offshore.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
