ANALYSIS: The holiday period is always a tricky time to be a property economist, because the market itself goes into hibernation (and thin volumes don’t always make for truly reliable statistics), while the regular data release calendar is disrupted too. However, once you make a few allowances for these seasonal factors, there does seem to be a growing body of evidence that the market has gone through its peak growth phase and that the long-awaited slowdown is here.
First, the downwards trend for sales volumes has started to become a bit clearer, with the change in the 12-month moving average (which smoothes out plenty of the recent COVID volatility) turning negative in December (-2.4%) for the first time since July 2020. With new listings flows generally ticking over at a normal pace, the slowdown in agreed sales at the other end of the pipeline has allowed the total stock of listings on the market to be replenished.
To be fair, some areas are still pretty tight – e.g. most parts of Canterbury still have fewer total listings than this time a year ago. But in many other parts of the country, there’s been a fairly substantial change, with the total stock of available listings up in Bay of Plenty, Hawke’s Bay, Wellington, Otago, and Southland.
In other words, the balance of power has begun to shift away from sellers and towards buyers. Certainly, we’ve heard anecdotes that back this up, such as conditional offers from buyers becoming much more common than they were just a few months ago. Sure, vendors are still in a strong position, given that unemployment is low and “motivated/forced” sellers are thin on the ground. This means that properties may just sit unsold for longer if vendor price expectations aren’t met, or the listing may eventually be withdrawn altogether. So the shift to a true “buyer’s market” may still take some time. But it’s likely before the end of the year.
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In that environment, it’s inevitable that the pace of growth in property values will slow. To be fair, this process is taking some time – indeed, the CoreLogic House Price Index for January showed a further monthly gain, of 2.1%. In addition, any interruption to the new listings flow caused by omicron and the red traffic light system could drive another near-term ‘mini bounce’ in values.
However, with affordability stretched, mortgage rates rising, and credit conditions tightening (and listings rising too), the fundamental forces for a sharp slowdown in value growth are now firmly in place. It’s certainly hard to see any other outcome when you look at the possibility of many borrowers rolling off fixed mortgage deals over the next 3-6 months and seeing their interest rate potentially double, while at the same time the hurdle is also being raised by factors such as tighter loan to value ratio rules, debt to income caps at some banks, and of course the CCCFA regulations.
CoreLogic chief economist Kelvin Davidson: “The fundamental forces for a sharp slowdown are now firmly in place.” Photo / Peter Meecham
Indeed, to my mind, it’s not just that sales volumes might be down this year; a key consideration is also how the market share of various buyer groups will change with that smaller overall pie – and really it’s about who’s affected least by regulatory pressure. Based on the CoreLogic Buyer Classification series for January, we’re already seeing a shift in dynamics – first home buyers’ (FHBs) market share dropped from 26% in the final few months of 2021 to 24% last month, the first clearer sign of the impact on this group of changed LVR settings and CCCFA requirements (although it’s hard to disentangle the relative effect of each). FHBs dipped in many places in January, including Auckland, Wellington, and Christchurch.
Looking ahead, FHBs and mortgaged investors will both continue to face lending challenges, as will other owner-occupiers looking to buy their next property with only a low deposit, especially if their last three bank statements aren’t up to scratch either. In this environment, we could start to see cash investors and equity-rich owner-occupiers come to the fore. Indeed, in January, we saw the market share for movers (i.e. relocating owner-occupiers) perk up.
Overall, Omicron means it could yet be a bumpy few months ahead for the economy and property market, with the new trends that might just be emerging potentially stopped in their tracks just as they’re getting going. However, the signs are that the property market has already started to soften and this underlying pattern should generally continue. But with unemployment low and borrowers already being tested at serviceability rates that are still well above the actual mortgage rates available out there in the market, we’re still expecting a slowdown for the property market this year rather than a full-scale downturn.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
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