ANALYSIS: A few weeks ago, the Commerce Minister announced that come June there would be some tweaking of the Credit Contracts and Consumer Finance Act legislation to make things clearer for the banks trying to interpret it. Specifically, the Act would make clear that banks should not count regular savings as expenses when calculating debt servicing ability. Also, they can take the word of loan applicants regarding their expenses rather than feeling they have to use detailed bank statements from recent months.
Has his announcement had any impact in the housing market as yet? Not that I can see. Partly that will be because some banks look like they might be waiting for the actual legislation to change rather than taking the minister’s word that altered lending now will be okay.
But mainly the lack of obvious impact in the market will be because buyers no longer feel they need to make a purchase as quickly as possible and can step back to see how things pan out. We can see this clearly in the most recent survey of real estate agents which I run with the Real Estate Institute of New Zealand.
At the end of March only 5% of agents said that buyers were displaying a fear of missing out – FOMO. In February that was 7% and October 70%. For Auckland the numbers have changed from 79% in October to 7% in February then 5% a week back.
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Buyers are no longer worried that delaying will mean paying a higher price. Instead, 64% of agents now say that buyers have a fear of over-paying – FOOP. Last month that was 53% and in October just 19%. The Auckland numbers are almost the same.
A net 45% of agents say that the party in the transaction feeling most motivated to get a deal done is now the seller. It is a buyer’s market in other words. Last month that was a net 37% and October’s result was a net 53% saying it was a seller’s market.
This turning of the residential real estate market has been extraordinarily quick and brutal. That is important because it says to us that a key thing the Government wanted to see happen as a result of its policies to try and boost house supply and constrain investor buying was lower prices. Last year after the March 23 announcement of tax changes, I noted that investors had best hope house prices are not still rising at a pace above 10% a year down the track. If they were, then the Government would hit them again.
Economist Tony Alexander: “Buyers no longer feel they need to make a purchase as quickly as possible.” Photo / Fiona Goodall
The fact that prices are now falling says that there is little chance that investors will face new measures aimed at stripping the ability of people to provide for their retirement by investing in residential property. Note that the report this week from the Infrastructure Commission blamed the huge structural lift in house prices on planning restrictions – not investors, or foreign buyers, or banks, or baby boomers.
Another implication of the turnaround in the housing market is reinforcement of my comments last week on interest rates. I noted that if I am to change my pick of a 3% peak in the official cash rate this cycle it will more likely be to cut in than lift it. That is partly because come 2023 a lot of the current pressures forcing inflation up will be reversing. It is also because the crunching of household spending which the Reserve Bank wants from raising interest rates is already happening according to the results from my monthly Spending Plans Survey.
Now, with a negative wealth effect running through household spending willingness from falling house prices, a further reason for aggressive interest rate rises is disappearing.
One final implication of the savage turning of the housing market since October is this. Property developer pre-sales are unlikely in many instances to meet levels needed if banks are to advance finance. Some planned building projects will not proceed. A number of people who have already signed up will be getting their deposits back.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
