ANALYSIS: As a result of the higher-than-expected inflation rate revealed two to three weeks ago, New Zealand’s wholesale borrowing costs have gone higher and banks have undertaken a round of fixed mortgage rate rises. Most rates are up by about 0.5% from where they were early last month.
Since those rate rises things have actually calmed down a lot in the wholesale market where banks borrow at fixed rates to lend to you and I with most of those costs now down around 0.2% from their peaks. Does this mean banks might make some rate cuts? No.
The margins they earn on fixed rate loans are still running about 0.7% below averages for the past two years and although competition for business in the spring housing period is usually strong between the banks, it’s not likely to lead to rate declines.
With the new higher borrowing costs in place, do we have any information on what the impact has been in the residential real estate market so far? Yes we do, from my most recent monthly survey of real estate agents, conducted with REINZ.
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The first thing we can see is that all measures of buyer demand have eased off. For instance, late in September a net 19% of agents said that more people were showing up at open homes. Now the result is a net 3%. It is still positive but the rate rises have made people pause for a moment.
Second, first-home buyers have shuffled back slightly. A net 15% of agents have said that they are seeing more first-home buyers looking to make a purchase. A month earlier that was a net 27% which was the strongest result since February 21. The latest result is the second best. I read that as saying the first-home buyers are still there, especially in Wellington, Hawke’s Bay, Canterbury, and Auckland at a net 19%.
Independent economist Tony Alexander: “2023 is shaping up to be a fascinating year for residential real estate.” Photo / Fiona Goodall
Third – and this is the most stark result in the survey – the investors have again run for the hills. Last month a net 28% of agents said that investors were still stepping back. So, it’s not as if anyone can claim that the investors had been following the first-home buyers. However, the latest result of a net 48% of agents now saying that the investors are disappearing tells us the hike in financing costs is just too much for most to contemplate a fresh purchase.
But fourth, are investors yet selling in any decent numbers? Plenty of people have claimed that the tax changes announced in March last year will encourage a wave of investor selling. But while there is overwhelming statistical and anecdotal evidence of investor buyers disappearing, there is no evidence of a wave of them selling.
In my latest survey, only a net 6% of agents say that they are seeing more investors looking to sell. That is the strongest outcome since February but it is hardly large and not overly far from the -6% of a month ago.
This space will, however, be interesting to watch as the approaching end of the tax year and further reduction in the proportion of interest expenses which can be offset against rental income occupies the minds of investors and their accountants. Equally though, if the polls suggest a change in government late next year, the expected restoration of interest expense deductibility will discourage investors from selling and encourage them to start buying.
In that regard 2023 is shaping up to be a fascinating year for residential real estate.
