ANALYSIS: Three things have happened in the past week to make me reinforce my comments made here and elsewhere recently that we are in the endgame for the downward leg of the house price cycle.
First, on Tuesday REINZ reported a 0.1% monthly rise in its house price index in February. This followed a 1.4% fall in January and 1.7% fall in December and while the falls have almost certainly not ended, the pace of decline when smoothed out is decidedly slowing.
Second, and this is important for Auckland especially, net migration flows have turned on a dime. Just six months ago the net annual migration flow for New Zealand was a loss of over 13,000 people. Now we learnt also on Tuesday that the flow has switched to a net gain of 33,000 for the year to January.
We have seen this sort of radical flow change before, such as at the end of 2001, and the housing market implications are fairly obvious. Accelerating population growth means more demand for rental accommodation and houses to own. Migrants coming into New Zealand tend to go to the big cities and to Auckland in particular. This, when combined with a fairly sharp slowing of new dwelling construction later this year, is going to create an interesting demand/supply interaction.
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For the moment though, the attention of people is firmly on other things such as the soaring cost of living and recent extreme flooding. So popular recognition of the migration change is not likely to have much impact on people’s house buying plans for a few months. But that is where things get interesting.
One of the things people are looking at - and the third factor this past week which is positive for the housing market - is the US government takeover of Silicon Valley Bank in the United States. The bank has gone under not because of bad lending but because of a run on deposits caused by their poor management of liquidity reserves.
Independent economist Tony Alexander: “A systemic banking sector decline is very unlikely.” Photo / Fiona Goodall
So, a systemic banking sector decline is very unlikely. But people always get concerned when these things happen and the current bout of worry running through the US economy will depress economic activity and inflationary pressures. This takes away some of the pressure on the Federal Reserve to keep raising interest rates.
That pressure to at least slow down the pace of interest rate increases is reinforced by concern that further rate rises will expose more financial institutions to the particular problem encountered by SVB. The result has been the greatest three day decline in the US two year Treasury note yield since the October 1987 sharemarket crash.
Interest rates have fallen across the curve in the US and that has fed through to some hefty declines here. The cost to a New Zealand bank for instance of borrowing money at a one year fixed rate to lend fixed for one year has fallen from 5.55% a week ago to now 5.3%. The three year borrowing cost to a bank has decreased from 5.25% to near 4.75%.
Many of us have warned for quite a while now that wholesale borrowing costs in NZ are going to go all over the place for many months as we try to get a picture of where inflation is tracking and what monetary policy will likely do. Such volatility has not gone away and we could easily see these rates blip back up again next week.
That is why banks are unlikely to initiate a fresh round of fixed mortgage rate cuts, as happened a couple of months ago. But growing discussion of monetary policy tightening slowing is going to encourage more potential house buyers to back away from worst-case scenarios of rate rises even if believing rates will fall rapidly is not justified for this year.
If we throw in the strengthened evidence of first home buyers getting into the market contained in my latest surveys of mortgage brokers and real estate agents we get the scene being firmly set for at least a bottoming of the nationwide house price cycle potentially before the middle of the year.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
