ANALYSIS: Along with the availability of credit from one’s bank, prospects for employment and wages growth, and the amount of money saved up or available for a deposit, interest rates have a huge impact on whether or not someone can buy a house. As interest rates were rising, we saw activity in the housing market eventually slow down substantially and then with help from the late-2021 credit crunch, prices on average fell 18%. Interest rates matter.
Now, interest rates are falling and there is increasing optimism that the Reserve Bank will soon, potentially late in August, validate the market-driven cuts so far seen. The popular advertised one-year fixed mortgage rate now sits near 6.85% from 7.35% in February.
Taking the new rates optimism into account, is there any evidence that the housing market is responding? The only way to know that ahead of the eventual release of data from the likes of REINZ is to ask real estate agents what they are seeing at the coalface.
That is what I have been doing in my monthly NZHL-sponsored survey since the middle of 2020. I’ve just conducted my July survey and the results allow us to answer in the affirmative – yes, interest rate cuts are having an impact.
Start your property search
Discover more:
- Tony Alexander: Banks worried we're not borrowing enough as interest rates start to fall
- Queenstown house prices reach record high as rest of NZ suffers second slump
- Tiny town's pub for sale for $450,000 - 'if it doesn't sell, it will close'
Whereas a month ago only 1% of agents said buyers were displaying FOMO – fear of missing out – now 10% say that. This is still well below average but the lift is interesting.
At the end of June, a net 35% of agents said fewer people were showing up at open homes. Now a net 13% say they are seeing more people. Also, late in June a net 3% of agents said they were seeing fewer first-home buyers in the market looking to make a purchase. Now a net 10% say they are seeing more.
These readings are still weak and a net 39% of agents still say we are in a buyer’s market. That is, they report that the vendors are more motivated to get a deal over the line than the buyers. That is good news for buyers.
The problem is that the buyers in the market are still worried about a great number of things. Thirty-eight per cent of agents still say buyers are worried about prices continuing to fall after they have made a purchase. Fifty-one per cent say buyers are worried about their employment and income, while 63% say buyers are still worried about getting access to finance.
Independent economist Tony Alexander: "Buyers are still worried about a great number of things." Photo / Fiona Goodall
In no way can one say that the residential real estate market in New Zealand is strong. But it looks like the corner of the downturn has been turned and things are set to get better. How much better? That depends upon how rapidly interest rates fall.
Do we economists feel we know the speed with which mortgage rates will decline and where they will eventually settle? Let’s see. We did not pick the collapse in interest rates over 2008-09. We didn’t pick the fall in rates to record lows in 2019 amidst a bout of worries about deflation.
We obviously didn’t pick the 0.25% cash rate during the pandemic. We didn’t pick that the cash rate would eventually peak at 5.5% in May last year or that the likes of the one-year fixed mortgage rate would almost hit 7.4%.
There is no basis for believing that we have confidence in our forecasts for what will happen now. All we can really say is that the economy is weak, inflation measures are heading down at a rapid clip, and it is highly likely interest rates will fall from here on out through to some point in 2026 or 2027. It is impossible to reliably predict the levels rate will fall to.
But it pays to keep in mind that unless we see the return of worries about deflation and a pandemic, rates are unlikely to go back to where they were from 2019–21.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
