ANALYSIS: Last week I discussed insights into the residential real estate sector provided by the five monthly surveys I run and noted that they showed the market reaching the end of its period of weakness around March or so. Canada and Australia look to have bottomed out in February, so we are not alone in reaching the end of the downward leg of the house price cycle.
One thing I aim to do with my surveys is to be about 2-3 months ahead of the media in identifying changes in the underlying nature of the market and that timing looks to have been about right this time around.
This past week’s media commentary has brought a focus on the problems for buyers of new homes no longer being able to get finance because the market value of the asset they are buying has fallen 20% or so. There has also been some discussion of a rush of people showing up for some open homes – in Wellington at least.
This development is important. The housing market is half driven by the ongoing need of some people to buy and some people to sell because their circumstances are changing as they age, change jobs, experience marital breakdowns etc. The market is also driven by people who can choose when they make their purchase or sale.
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If times are tough, many people in a position of flexibility will hold back from buying because they worry about being able to service the debt should they lose some income, or maybe they expect prices will go lower. Others will hold back from selling if they can because they don’t want to be a weak seller and would rather not face bills of uncertain magnitude and duration for advertising and potentially failed auctions.
At the moment there are two-and-a-half years’ worth of people who have held off buying and held off selling because of tax changes and the return of LVRS early in 2021 then the deep credit crunch late that same year. Many of those people will now be starting to think about getting back into the market as they read stories of other people attempting to make a purchase.
We take our guide for what to do from what other people do. Other people are stepping forward as buyers back into the housing market, led by first home buyers who re-engaged in February.
Independent economist Tony Alexander: “More buyers and more sellers mean more turnover.” Photo / Fiona Goodall
For real estate agents this is good news. More buyers and more sellers mean more turnover and seasonally adjusted sales have risen almost 20% over the June quarter. But from a price change point of view, what matters is the relative strength of the return of two-and-a half-years’ worth of buyers versus two and a half years’ worth of sellers.
History gives us some insight. In the past when sales have picked up there tends to be a lift in fresh property listings. But these new vendors tend to get exceeded in number by new buyers. The upshot is that as sales rise the end-of-month stock of property on the market for sale goes down. This is already happening.
At the end of June nationwide property listings, after adjusting for seasonal factors, were down 14% from their December 2022 peak. Auckland is down 19% from the peak reached in August last year, Canterbury is down 10% from its March peak, and Wellington is down 44% from its August 2022 peak.
This is important. The window of opportunity for buyers to make a purchase after being able to inspect a number of suitable properties is closing fast. Hence, the story about the open home frenzy in Wellington, which produced traffic jams.
The experience of the second half of 2021 when prices nationwide jumped 11% despite tightening credit, outward migration, new tax rules, and rising interest rates is relevant. Back then property stocks hit a record low of under 14,000. The stock at the end of June this year was just under 25,000, so we are a long way from that degree of tightness. But we shouldn’t be surprised to hit that level again within the next couple of years. The price implications are fairly clear.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
