Tony Alexander: My pick for when first home buyers will return to the housing market

ANALYSIS: When will buyers return to the housing market? When the three key things which real estate agents say they are worried about retreat by enough. I can tell what those three things are from the results of the monthly survey of residential real estate agents which I run with REINZ.

Each month I ask about the presence of first home buyers, investors, FOMO, offshore enquiries, auctions etc. I also ask what factors are motivating investors, and what the main things are which buyers generally are concerned about.

In my most recent survey two weeks ago, 82% of agents said that buyers were concerned about high interest rates. 78% said they were worried about access to finance, and 69% said they were worried about buying then seeing prices going lower. This is called FOOP – fear of over-paying.

So, when will worries about high mortgage rates start easing? Now, probably. Most people won’t have noticed because of all the attention being paid to the Reserve Bank raising its cash rate, and articles discussing how those with a mortgage are seeing their payments jump as their fixed rate changes from near 2.5% to more than double that.

But these are people who already own a house. 99% of them are not going to be buyers in the near future. Those buyers will slowly realise that from the peak of fixed mortgage rates in June there have already been decreases ranging from 0.2% to 0.4%. Why are these rates falling? Because the cost to banks of borrowing money to lend fixed is falling.

Why are those wholesale rates falling (so far down 0.7% or so from June peaks)? Because the world’s markets are looking through the central bank increases in their 24 hour interest rates to reductions to come next year in response to slowing world growth if not recession, and potentially rapidly falling inflation next year.

Already oil, mineral and food prices are declining, shipping costs are easing, and locally we can see the pace of rent rises slowing down. Add in retailers soon cutting prices to move excess stock and we could see NZ inflation easing quickly in the next few quarters. The markets are expecting that and expecting our central bank to start cutting interest rates before the end of 2023. The same expectations are being priced in for the United States and Australia. Hence fixed wholesale interest rates falling.

Come mid-October, when the next annual NZ inflation rate probably comes in below 7.3%, thoughts of lower mortgage rates are likely to be a lot stronger than they are now. At the same time we will be getting close to a point when the Reserve Bank is likely to ease LVR rules.

This easing will reflect the correction of house prices reducing the risk of a shock to the financial system and therefore the reduced need to curtail low deposit lending. Already in my surveys I can see that the peak period for credit tightness was very early this year. Since then things have improved. We are nowhere near back to where things were before November last year. But the trend is clear. Mortgage availability is improving.

Independent economist Tony Alexander: “Come mid-October, thoughts of lower mortgage rates are likely to be a lot stronger than they are now.” Photo / Fiona Goodall

And what about FOOP? That might take longer to fall away if we believe it is driven only by actual house price changes. But I wonder if some sort of shift might not happen soon as first home buyers in particular get increasingly challenged about their decision to stay back in the shadows. People increasingly will be asking these frightened newbies what it is they are looking for. A house in which to raise a family, or the final 5% of the house price cycle decline?

People will challenge them about their deep concerns last year at a shortage of listings. The stock of property for sale is now 104% higher than a year ago. Ultimately, once they see mortgage rates edging a tad lower, realise that this period of economic weakness isn’t going to cause a sizeable jump in the unemployment rate, and find the banks a bit more accommodative, a movement back into the market will start.

My pick for timing? Before the end of the year for these three concerns to be substantially less worrisome than they are now. Oh – and watch for investors starting to buy now that the polls suggest National might win and therefore interest expense deductibility will return along with a two-year brightline test. As a first home buyer, wouldn’t you like to take advantage of the current buyer’s market before these older people get active again and the migrants return – especially the 200,000 being switched from working to residency visas which bring a legal ability to purchase property?

Remember. Housing markets move in cycles. This downturn will not last.

- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz