House prices have risen around the country at an especially strong rate in recent months, with high numbers of sales and shortages of stock on the market. How has this situation arisen during a global pandemic and can we reasonably expect it will continue through 2021?
A year ago, we all expected that the Covid-19 pandemic and lockdown would produce recession, high unemployment, and house prices falling anywhere between 5 per cent and 15 per cent. For a while house prices did fall, but only by just over 3 per cent during lockdown.
The economy did also shrink, but the 11 per cent fall in the June quarter was more than reversed by the 14 per cent rise in the September quarter. And unemployment did rise, but only from 4 per cent to a peak of 5.3 per cent and now it sits at a lower rate of just 4.9 per cent.
We can put the strength in the economy and resulting strength in the housing market down to a large number of factors. In no particular order or importance, here are a few of them.
Start your property search
1. We Kiwis were going to spend $10 billion on overseas travel. Being unable to we have instead spent those funds within New Zealand on spas, motorbikes, kayaks, shares, and property.
2. Interest rates were at record lows heading into lockdown and the housing market was accelerating, with average Auckland prices ahead over 3 per cent during the March quarter last year. With rates cut even further from March, bank depositors have been taking out funds now going backwards 1 per cent - 1.5 per cent a year after tax and inflation and placed some of that money into property. Borrowers have been able to access rates sometimes below 2 per cent, most commonly just under 2.5 per cent.
3.LVRs (loan to value ratios) were removed, so many more people found their deposits could stretch to purchasing a property.
4. First home buyers saw their deposits grow firmly during lockdown as they kept earning subsidised wages yet were unable to spend those earnings.
5. Expectations of being unable to travel encouraged many people to change their plans from 2-3 years of travelling then buying a property to purchasing a property with travelling to be done once the borders reopen.
6. Shortages of labour meant most businesses were reluctant to lay off staff and have been quick to seek new people since the economic upturn became evident.
7. We went into the lockdown with listings down more than 60 per cent from a year earlier. That shortage has worsened, especially as vendors worried about not being able to buy quicky have been looking to make a purchase before they list their property – thus aggravating the listings shortage.
8. The household sector went into lockdown with low debt growth in recent years and low levels of risky debt because of LVRs in place from 2013 and banks applying high test interest rates for debt-servicing purposes.
9. Expectations of expats returning and foreigners eager to shift here once the borders reopen has incentivised Kiwis to make a purchase now before those people reach our shores – and some Kiwis overseas have been buying sight unseen while waiting to gain entry.
10. Momentum - meaning that rising prices tend to encourage expectations of further price rises in asset markets (think Bitcoin, Tesla shares). FOMO – fear of missing out on those rises drives people to buy sooner rather than later. Their buying pushes prices higher, they feel vindicated, they perhaps seek to purchase more while others holding out for price weakness give in and join them.
Can the surge in prices generated by these many factors continue? No. But come the end of this year prices do look like they will still be rising at a 10 per cent pace if not more. This will be especially so in Auckland which only re-engaged with the upward leg of its house price cycle at the start of 2020.
That is a key reason why the reimposition of the 40 per cent minimum deposit requirement for investors will not have the same impact as back in July 2016. In that earlier year Auckland was overdue for a pause, having experienced strongly rising prices for four years. The rest of the country was still catching up.
Nonetheless, the return of a 40 per cent LVR will be one factor encouraging a slowing in the pace of price rises during 2021. Another factor will be the anticipation of borders reopening slowly causing people to shift their plans away from housing and back toward travelling, or at least putting money aside for that eventual travelling.
History also tells us that in all price cycles, just as reluctant buyers eventually capitulate and dive in, so eventually do hesitant vendors eventually feel prices may be as good as they are going to reasonably get, and they list their properties. In particular, vendors holding out for prices 30 per cent above valuation eventually ease off and accept prices just 10-20 per cent over. Some investors also start selling properties which might need some extra maintenance.
Higher prices also, eventually, discourage buyers and encourage more vendors generally. It pays to note for instance that although stocks of listings are low, in January new listing numbers were around 15 per cent higher than those received in January 2020. There are properties being advanced for sale, and it will not take much of an easing in demand for stocks to start rising again – which will encourage the capitulation of sellers noted above.
The Government has also made it clear that there are some extra measures coming aimed at boosting supply and curtailing demand. History tells us that such measures outside those initiated by the Reserve Bank don’t tend to have strong short-term impacts. Nonetheless, if the messaging is good enough, some calming can be expected.
There are no slam-dunk factors suggesting an ending of house price rises in the near future. But all cycles eventually turn, and all emergency-type effects eventually fade. 2021 is likely to be a story of many of this past year’s unusual factors easing off in strength and producing a slowing of average house price growth all around the country.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
