1. Is trading up back on the agenda?
Has the drop in prices made trading up easier or harder for buyers? With the housing market now at or close to the bottom, it’s worth considering, as prices are likely to rise from hereon in (although expect any rises to modest).
I’ve been looking at the price gap between three and four-bedroom properties around the country to see how much extra equity/debt people might have to find to be able to get that bigger or better property (or equally how much money might be freed up by somebody downsizing).
The figures showed that trading up is still a big financial hurdle, with the gap standing at more than $200,000 across many parts of Auckland, as well as Hamilton, Tauranga, Wellington, and Christchurch. However, the trade-up premium has nevertheless fallen in several parts of the country over the past year, and I suspect that some pent-up demand from households keen to relocate may start to show through soon.
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The largest percentage drops in the premium have been in Upper Hutt (24%), Lower Hutt (16%), Wellington City and Tauranga (both 15%).
Now, just to be clear about the maths: the median values for each property type in each area have dropped by pretty similar amounts in percentage terms. However, given the four-bedroom properties start at a higher level in dollar terms, any given percentage drop also translates into a bigger fall in dollar terms – which shrinks the premium.
It’s also important to note that even after the recent value falls, the trade-up premiums are still quite large. They range from around $150,000 in Upper Hutt and Dunedin, to between $200,000-$250,000 in areas such as Franklin, Tauranga, Wellington City, Waitakere, Hamilton, Christchurch, and Papakura.
Meanwhile, the premium still exceeds $300,000 in Auckland’s North Shore and Manukau areas, and is about $530,000 in Auckland's central suburbs. Outside those Auckland sub-markets, the only other parts of the country with trade-up premiums in excess of $300,000 are Queenstown ($345,000), Waipa ($314,000), and Hastings ($306,000).
At the other end of the spectrum, trading up will "only" cost $35,000 in Kawerau, $64,000 in Otorohanga, and $74,000 in Clutha, with seven other parts of New Zealand below $100,000 to trade-up.
2. The recession may not have lasted
Stats NZ figures last week showed that the NZ Activity Index (NZAC) for May was 0.7% higher than a year earlier, after April’s 0.8% rise. These aren’t exactly stellar results, but they’re nevertheless showing that the economy is “ticking over”. Indeed, if you translate these results into an implied quarterly figure for GDP in Q2 you get an increase of perhaps 0.5% – not strong, but still enough to suggest that the recession might already have ended. We’ll still need to wait for June’s NZAC to have the full quarter’s worth of data, but the early signs are encouraging for the wider economy. Emergence from recession would bolster employment and adds to the sense that this property market downturn is all but over.
CoreLogic chief economist Kelvin Davidson: “Emergence from recession would bolster employment and adds to the sense that this property market downturn is all but over.” Photo / Peter Meecham
3. Inflation expectations down, with sentiment and filled jobs up
Adding to that more encouraging message around the economy were ANZ’s business and consumer confidence surveys last week. In June, both firms and households became more optimistic about the economic outlook (albeit from a low base), with cost pressures, pricing intentions, and wider inflation expectations also dropping. On top of that, Stats NZ also reported last week that filled jobs expanded again in May, helping to prop up households’ incomes and allowing them to handle the shift from lower mortgage fixed rates onto the current higher levels without terminal damage.
4. Looser LVRs starting to become (slightly) visible
There was $5.9bn of mortgage lending activity in May, which was still lower than a year ago, although the 14% drop was the smallest in 18 months. However, there are already hints in the data that the loosening of the LVRs – now 15% (previously 10%) of owner occupiers can get in with less than a 20% deposit, and 5% of investors can borrow with less than a 35% deposit (previously 40%) – has had some effect, with the share of lending at a high LVR edging up lately for owner-occupiers. That said, the rise in high LVR owner-occupier lending (as % of total) from around 4% a few months ago to more than 6% now isn’t off the charts, and nor would we expect it to be. After all, a lower deposit (higher LVR) simply means more debt and larger mortgage payments with rates at 7%!
5. Continued focus on shorter term fixes?
And finally, a key dataset coming up this week is the new RBNZ release covering loan originations and the terms that new borrowers have been favouring (excluding those who are repricing existing loans). In April, 74% of owner-occupiers took out fixed loans of up to two years, with the investor figure sitting at 78%. It wouldn’t be a surprise to see a continued focus on shorter fixes in May’s data, although three-year fixed rates at some banks are now quite a bit lower than shorter terms.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
