ANALYSIS: Here is a quick run-through of some of the underlying factors influencing the housing market currently and how it will perform for the rest of the year.
First, mortgage interest rates for existing borrowers will bring pain for many as they roll onto higher rate this year. But very few of these people are in the market looking for another property. They already have one. For real estate demand what matters is current interest rates and not refinancing rates. In that regard fixed borrowing costs peaked six weeks ago.
The decline in mortgage rates from here is likely to be very slow. But the removal from people’s minds of worst case scenarios where rates approach 8% for all bar floating means some buyers will start to get interested again.
Second, wages are growing at a strong pace and labour demand is recovering from the late-2022 shock decline following the record tightening of monetary policy on November 23. Businesses continue to report labour shortages so we can reasonably expect feelings of job security to be better than anticipated some three months ago. Confidence of continuing income tends to be positive for property demand.
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Third, net migration flows have turned on a dime from an annual loss of 16,000 six months ago to a gain of 16,000. The way things are running we may end the year with a net gain of near 40,000 people. That means more demand for housing on top of the demand generated by displacement of people by the recent flooding.
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Fourth, new supply growth is about to fall substantially. Architects report orders for designs drying up as developers find they cannot get new bank finance, buyer demand for new builds has switched to existing properties, and some off the plan buyers are looking not to settle.
Fifth, my monthly survey of real estate agents with REINZ now shows what my monthly survey of mortgage advisers with mortgages.co.nz showed three weeks ago. First home buyers are back in the market – but not investors.
Sixth, banks are failing to meet their mortgage sales targets and have recently been heavily discounting 1-2 year fixed rates for limited periods of time. This mirrors what is happening in Australia where banks are lending at rates below their cost of funds.
Independent economist Tony Alexander: “Keep an eye out for things tilting in the other direction as we approach mid-year.” Photo / Fiona Goodall
Seventh, the economy and therefore eventually consumer confidence and willingness to consider a property purchase are being boosted by some new factors. Tourism flows have risen sharply, foreign students have returned earlier than anticipated, the NZ dollar is low and supportive of exporters, and China’s economy is lifting up earlier than expected. Add in extra spending associated with rebuilding after the floods and extra government spending because this is election year, and the outlook for the economy is not as bad as many might think. I retain my view that a recession is still a 50:50 call.
Eighth, my survey of existing property investors alongside Crockers Property Management is giving some early indications of rental pressures returning – assisted one suspects by some properties going back to tourism use from pandemic-generated long-term leases.
Ninth, new listings of property fell in seasonally adjusted terms by 5.2% in the three months to February after falling 10.5% the previous three months and 5.4% the three months before that. This dearth of fresh listings means even taking into account the extremely low level of sales, the stock of dwellings on the market at the end of February was almost 4% down from the peak in December.
At this stage these developing positives pale into insignificance beside the rapid tightening of monetary policy from mid-2021, structural decline in credit availability courtesy of many rule changes that year, completion of many newbuilds, and structural decline in demand from investors using debt to finance their purchase. But keep an eye out for things tilting in the other direction as we approach mid-year.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
