Apparently, based on the article headline, a few people last week thought I was writing that the tax changes announced by the government March 23 have had no impact on the residential real estate market. As anyone reading the article would have seen that is not what I was saying and perhaps to reinforce that point let me repeat a few things.
In the months leading into the announcement, my REINZ & Tony Alexander Real Estate Survey was showing that typically a net 30% - 60% of agents were noticing more investors in the market. That fell to a net 63% seeing fewer in the May and June surveys and still for our July survey a net 52% were seeing a reduced number of investors.
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There are many other measures showing the same thing, including that ahead of March 23 30% - 60% of agents were seeing more first home buyers. But that response fell to a net 17% seeing fewer late in May. Late in June a net 4% were still seeing fewer.
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But there is one area where you’d have to say there could be a disconnect between the plethora of anecdotes and expressions of angst, and reality on the ground. There is no statistical evidence to back up the claim that a wave of investors are offloading their property.
Late in January a net 2% of agents said they were seeing fewer investors stepping forward to sell. That rose to a net 12% late in April saying they were in fact seeing more investor sellers. But come late-June that proportion was back to a negative 3% - meaning more agents seeing investors stepping back from selling than stepping forward.
The fact that new listings numbers in seasonally adjusted terms have fallen by 4% during the June quarter also directly challenges the story of investors running for the exit doors.
The problem for anyone selling is that with listings in short supply they are reluctant to sell until they have bought. Few want to run the risk of being homeless or having to compete for short-term rental accommodation against many other home seekers.
Will we see this listings situation improve as interest rates get pushed higher? Only marginally. It is certainly true that quite a few borrowers who have taken on large debts over the past five years are in for a bit of a shock. They are likely to see the likes of the one-year 2.19% fixed rate they might be on at the moment rise to 4.25% two years from now. In January 2018 the average one-year rate was in fact 4.6%.
Tony Alexander: “There is definitely going to be some trimming of budgetary cloth as interest rates rise.” Photo / Supplied
That means a near doubling of dollars having to be paid out each month on interest. This might cause problems for a few. But there is a buffer which will help. Banks have to undertake what is called “responsible lending”. They cannot advance someone funds if they think there is a reasonable chance they may not be able to service the debt under a reasonable shock scenario – such as interest rates going back to where they were in the middle of 2016.
To meet their responsible lending obligations, banks and other lenders calculate the ability of a borrower to service their debt not at the rate they actually start paying, but at a rate some 4% or so higher, depending on the lender.
So, everyone who has borrowed funds for a mortgage over the past five years has had their ability to meet repayments calculated at rates over 8% five years ago to over 6% recently.
There is definitely going to be some trimming of budgetary cloth in the next 2-4 years as interest rates rise. But a wholesale forcing of property onto the market is very unlikely. That means a continuing procession of people seeking builders to get a new house constructed, continuing low levels of listings, and continuing upward pressure on prices – though at a pace likely to slow quite rapidly perhaps 12-18 months from here.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
