1. Reselling property a bit more painful
The latest CoreLogic Pain & Gain report shows that 96% of resales in the fourth quarter of last year got a price higher than the owner originally paid, and that the median gain was $328,000. These figures might still seem high, but they are certainly coming down as the wider property market weakens – for example, at the peak in Q4 2021, the median resale gain was $441,000. It’s also important to note that these aren’t really cash windfalls for owner-occupiers. Unless they’re downsizing or moving to a cheaper location, those equity gains will simply be recycled straight back into the next purchase, potentially alongside more debt too.
Most of the properties that sold at a loss were bought and sold within a 19-month period, which indicates interest rates are starting to bite. A change in an owner’s financial situation could be behind a short-hold period – and at the moment, rising interest rates would be a clear candidate for driving some of these sales.
The pain was most pronounced in Auckland, with 6.9% of those who resold properties in Q4 doing so at a loss. Hamilton witnessed the biggest change, between Q3 and Q4. More than 6% of properties resold there for less than their purchase price, almost double the previous quarter.
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However, it’s apartment owners who felt the most pain, with the median resale loss on apartments $52,750 - the highest it’s been in a decade, which could create a risk.
Apartments are a small segment of the overall property market, but they’re clearly a property type worth keeping an eye on over the next six to 12 months, given a tendency for them to be owned by investors – who may be more financially minded, and willing to rejig their portfolios in a low yield/high interest rate environment.
2. Rents rebound a touch
As measured by new bonds lodged in January, rents recorded a stronger than expected increase, leaving them 2.8% higher than a year ago – a sharp recovery relative to what we’ve seen in the past 3-4 months. That said, I wouldn’t necessarily conclude that the weaker phase for rents is over just yet. After all, the ‘real world’ affordability pressures for tenants still apply, and there may also just be some volatility in the data caused by recent weather events (e.g. January’s Auckland floods).
3. Net migration up again
The net migration balance rose further in December, with the annual total now standing at around 15,800 – on the back of a sharp rise in new arrivals to NZ (rather than a fall in departures). This will obviously be adding to property demand, maybe for rentals in the main centres, but the bigger (and negative) influence still remains general credit conditions and higher mortgage rates.
CoreLogic chief economist Kelvin Davidson said: "It’s clearly still expensive to be a new borrower." Photo / Peter Meecham
4. High debt to income lending remains ‘controlled’
The Reserve Bank’s latest lending figures showed that over the final three months of 2022 mortgages taken out at a high ratio of debt to income were still pretty low – e.g. lending at a DTI >7 for first-home buyers was only 1-2% of the total lending to that group, and for investors it was 11-12% (way below the typical figures of 35-40% in 2021). Of course, this is a natural consequence of higher mortgage rates, which mean that borrowers simply can’t service as much debt on a given income as before. The Reserve Bank will be pleased to see this restraint, given their plans to impose official caps on DTI ratios in early 2024. Those caps could mark quite a big change in our lending landscape, tying house price growth more closely to income growth, and also tending to limit how many properties each individual or household can actually own.
5. The Reserve Bank kicks off 2023 on Wednesday
Most eyes this week will be firmly on the Reserve Bank at 2pm on Wednesday, with their latest official cash rate decision (OCR) and the accompanying full set of forecasts that will be published in the Monetary Policy Statement (MPS). It’s an intriguing decision, with market expectations having softened lately from another 0.75pt OCR increase back to ‘only’ a 0.5pt rise.
My own gut feeling is that the focus does now need to shift a bit from hammering inflation towards trying not to undermine the real economy too much – especially given the adverse effects on economic activity that have resulted from Cyclone Gabrielle (although the weather events may also have an unwelcome upwards influence on inflation in the next little while too).
I’d anticipate a 0.5pt OCR rise, but either way, the impact on mortgage rates doesn’t seem likely to be too significant. To be fair, floating mortgage rates will tend to go up again, but only about 10% of loans are on these rates anyway. There may also be a bit of upwards pressure on one-year fixed rates, but it’s likely to be minimal (as further OCR increases have already been priced in), and of course the banks have actually brought down their longer term fixes lately. Even so, it’s clearly still expensive to be a new borrower, and the adjustment for existing borrowers as they reprice onto new rates remains large too – typically 2-3% looks likely over the course of this year.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
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