ANALYSIS: Last week the new chief economist at the Reserve Bank, Paul Conway, made some comments about housing. One made sense and looks quite reasonable, the other looks like wishful thinking.
First, he said that once house prices have fallen some 15% from their peak of late-2021 they will no longer be considered by the Reserve Bank to be “unsustainable”. To be unsustainable means to be well away from where underlying economic fundamentals suggest a thing should be and to occupy a price range more reflecting speculation and FOMO.
So far average New Zealand prices have fallen just under 8%, with Auckland down 12% to sit 23% higher than in March 2020, using data from REINZ, which adjusts for changes in the mix of properties sold from month to month. This means we shouldn’t expect the Reserve Bank to make any moves preventing house prices from falling until prices decline another 7% or so.
The way things are going with prices on average declining by 1.3% a month since December, we might be at this sustainable price level by about the turning of the year, allowing for the pace of decline slowing from here on out.
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What might we expect to see happen once prices become “sustainable” while still remaining “unaffordable”, which is quite a different thing? There is a good chance that the Reserve Bank will look to tweak the Loan to Value Ratio (LVR) rules. Their desire to do so may be encouraged by something which has just happened.
Most of the main lenders have temporarily suspended lending where the borrower’s deposit is less than 20% of the property valuation. Why? Not because there has been a rush of demand for debt from those with low deposits but because there has been such a pullback in borrowing by people with decent deposits that the banks risk breaching a rule introduced last November.
That rule says that a bank cannot have more than 10% of their lending below 20% deposit and because of the falloff in all lending we are right back where we were in November 2021 when banks had to slash low deposit lending to avoid breaching the rule. The credit crunch has returned after easing off a bit over the March-May period.
When prices for houses on average have fallen by another 7%, we are likely to see the Reserve Bank lift the 10% maximum of lending rule – maybe back to 20%, maybe just to 15%. Or they could reduce the minimum deposit to 15% but that is less likely.
The other major focus for the Reserve Bank economist’s recent speech was that people are going to shift away from focussing on housing as a means of building wealth for their retirement. No, they are not for a variety of reasons.
Independent economist Tony Alexander: “History is replete with people who have confused a cyclical move with a trend change.” Photo / Fiona Goodall
First, house prices are far less volatile than prices of financial assets and while many people have entered retirement with their share portfolios worth substantially less than expected, this rarely has happened for housing (this correction from the absurd price surge of 2021 excluded).
Second, research continues to show that people who retire with a paid-off house are better off than those who are renting. This desire to retire without not owning property will keep demand for this asset firm.
Third, the National Party has said that when they get returned to government, they will restore the ability of investors to deduct interest expenses from income when calculating tax obligations. Given that the commencement of this rule for fresh purchases of used houses from March 27 last year caused a large decline in fresh buying by investors, we can expect that when it returns in 2023 or 2026, investor buyers will return.
Fourth, while we are probably not going back to the low global inflation and interest rate environment of 2009-2019, interest rates offered by banks and other borrowers (governments) are unlikely to be considered all that attractive by most investors.
Fifth, history is replete with people who have confused a cyclical move with a trend change. Their actions tend to set up the scene for the relevant asset’s price to whip back the other way once reality reasserts itself. Whether that happens or not for NZ housing as we head into the pre-election months of 2023 is anyone’s guess at this stage.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
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