Tony Alexander: Seven reasons why first home buyers are back in the market

ANALYSIS: In the financial markets recently the focus has been on stronger than expected jobs figures in the United States – as discussed here last week. Those figures suggest that inflation isn’t going to head back to 2% as quickly as hoped, and has fed through into a sizeable jump in borrowing costs for NZ banks this week.

We have probably seen the peaks for fixed rates of two years and beyond this cycle. But no one should expect the decline in rates from here to be either swift or in a straight line. We could easily see some small rises around a declining trend for the next couple of years.

There is a lot we don’t know about inflation these days and the links between growth and pricing pressures are difficult to pin down. This is actually a continuation of the situation following the Global Financial Crisis of 2008-09 – but the other way around. From 2010 to 2019 inflation rates around the world turned out to be a lot lower than all the modelling, experience and theory suggested. That is why interest rates had fallen to record lows in New Zealand at the start of 2020 despite the unemployment rate decreasing to just 4%.

Now, the surprises are the other way around. One day they will probably switch back in the other direction, but we have no way of knowing when that will happen and it will probably take a few years.

For the New Zealand housing market, the general direction interest rates are now moving in is positive, but the support afforded to turnover and prices is going to take some time to show through. I make this comment even though there were some strong results from my most recent survey of mortgage brokers around the country undertaken with mortgages.co.nz

Each month since June 2020 I have asked brokers to give me their insights into bank lending policy changes and the market presence of both first home buyers and investors. We can easily track the boom in lending and buyer demand during the pandemic, the impact of the March 2021 tax changes affecting investors, and the credit crunch of November – December that year.

We can see the impact of the record tightening of monetary policy on November 23 last year and now we can see the effect which shifts in interest rate fears are having. First home buyers are back in the market.

Independent economist Tony Alexander: "The push to buy rather than stay renting grows as each month goes by." Photo / Supplied

In October a high net 48% of brokers said that they were seeing more first home buyers looking for advice. That fell away to a net 13% seeing fewer come January. But now, or more accurately just last week, a net 30% have reported they are once again having more young people walk through their doors.

Why are the young buyers returning? For many reasons. First, banks have cut their fixed mortgage rates for two years and beyond so fears of shockingly higher interest rates are rapidly disappearing. Second, for all the talk of recession hardly anyone is being laid off and plenty of jobs are on offer. Feelings of job security are strong. Third, banks are not meeting their mortgage sales targets as real estate turnover is running 35% down from a year ago. They are responding by easing up their lending criteria in a further step away from the credit crunch which the Reserve Bank and government imposed late in 2021.

Fourth, the stock of property to choose from is the highest since late-2015. Fifth, competition at auctions and open homes from other buyers including investors is minimal. Sixth, house prices have fallen some 16.2% from their peaks while incomes have risen over 8%. Seventh, rental shortages continue and could be worsening while rents continue to rise even as house prices fall. The push to buy rather than stay renting grows as each month goes by.

The tide is turning and we have yet to factor in surprisingly strong net migration inflows and investors realising deposit rates have probably just peaked. But with interest rates so high the ability of many people to meet lending rules and fund a house purchase is still poor. So, we are not going to see a rush of buyers. Plus, we have been here before and the improving scene was smashed by October 18’s higher than expected inflation.

Perhaps the best we can say is that we are no longer looking at worst case scenarios for either interest rates, or house sales. But the negatives remain dominant and house prices still look like they have a bit further to fall before there is a corrective whip back from over-sold positions the other way.

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