ANALYSIS: I was at the supermarket last week when I heard it. A lady said to her husband: “We better buy a house quick. Interest rates are going down, so house prices will go up.” It’s been years since I’ve heard people talk like this.
The last three years have not been kind to the housing market. The CCCFA made borrowing harder, the Reserve Bank raised the OCR from 0.25% to 5.5% and reinstated harsher loan to value ratio rules, inflation spiked and house prices dropped almost 18%. On top of that, the last government introduced extra taxes on property investors.
A year ago, it looked as if the market was out of the doldrums. The Reserve Bank had signalled an end to rate hikes, buyers came off the sidelines and prices started climbing again. The scene was set for a revival in 2024, but hopes of a post-election bounce and an early rate cut were torpedoed by a tsunami of listings in February and March, continued shakiness in the economy and unease around inflation.
Prices dropped again and buyers retreated.
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But in recent weeks all that gloom has started to lift, the direction of interest rates has changed, and there are strong signs that first-home buyers and investors are ready to come off the sidelines.
So is now a good time to buy a house? Let’s find out.
1. Is it easier or harder to get money from the bank?
A few years back, it was almost impossible to get a home loan, thanks to revisions to the CCCFA – the law which prevented banks from giving you a loan if you spent too much on Uber Eats or Netflix.
At the end of July, the Government loosened the rules, which should allow more people to borrow.
Servicing test rates are also on their way down. These are interest rates banks use to determine the size of an applicant’s loan and their ability to repay it. They are higher than the rate borrowers would actually pay, and like the CCCFA have been a powerful brake on buyer appetites.
Opes Partners resident economist Ed McKnight: "A few years back, it was almost impossible to get a home loan." Photo / Fiona Goodall
At the time of writing, ANZ’s servicing test rate was 8.5%, down from 8.95% at the start of the year. The reduction could boost what would have been a $500,000 loan to $570,000.
On the other side of the ledger, debt-to-income ratios (DTIs) are now in place. These tie the amount a buyer can borrow to a multiple of their income. These will make lending more difficult, but they won’t have a significant impact until banks lower their servicing test rates to around 7.5%.
2. Are interest rates going up or down?
Higher interest rates have been a major burden for buyers, limiting what they can afford to spend. For homeowners, they’ve been a headache too, putting the squeeze on finances and possibly stymying plans to upgrade or even downsize. For investors higher interest rates have hurt cashflows, and led to many putting off purchasing decisions.
But, the tide is now turning. Two weeks ago, I launched the OneRoof Opes Interest Rate Cut Counter. At the time of writing, most of the major banks have cut their interest rates by one percentage point (Westpac alone has cut its 18-month rate seven times this year).
According to ANZ, interest rates could hover just above 5% by June 2025. This reduction is likely to draw more investors and home buyers into the market, increasing demand.
3. Are house prices rising or falling?
House prices bottomed out in May 2023 after a 17.8% drop. Prices began to rise in the second half of last year year but growth rates tailed off at the start of 2024 and prices in many regions are now in decline. Typically, this “sideways” phase of the property cycle lasts about two to two-and-a-half years before prices start climbing again.
We’re about 15 months into this phase, so it’s reasonable to expect another six to nine months of unevenness before there is a steady rise in prices.
4. Are there more or fewer properties available to buy?
The graphs below shows the rise in new and total listings at the start of the year. At the end of August, there were 38,511 residential properties for sale on OneRoof - 28.8% more than at the same point last year. New listings for the month totalled 8443. That number was just 0.2% up on August 2023. In Auckland, new listings for August were down 7.6% year-on-year. That suggests caution among potential vendors. They’ve likely seen how much competition there is out there and clocked that the number of buyers active in the market isn’t enough. Falling prices won’t have helped either.
For first-home buyers, though, the market is still very much in their favour. More stock means they have better chance of finding the right property and improves their ability to negotiate.
This does not mean that the property market is rosy and that everyone should buy a house. Not everyone can. The good data for property buyers comes at a time where the economy is doing it rough and some are being made redundant.
But, for those who are able to buy – this is about as good a time as any.
- Ed McKnight is the resident economist at property investment company Opes Partners
