ANALYSIS: We are now in the part of the housing cycle where it is obvious to most people that prices are falling, though I still come across a few asking me if prices will in fact fall. They haven’t quite caught up with the likes of the 10% declines seen so far for Auckland and Wellington, or 3% fall for Christchurch City.
But we have not yet reached the stage where vendors lose all hope of selling for what they could have got nine months ago and meet the market. That is why the number of properties being sold is going to keep falling for probably the rest of this year through towards the middle of 2023.
When that capitulation by vendors happens, it will be interesting to see which group is first out of the blocks picking and choosing from amongst the rapidly growing stock of unsold properties. It would be great to think it will be first home buyers taking advantage of a market far more in their favour than at any other time since the Global Financial Crisis – if they can get the credit.
But whereas it was first home buyers who jumped most strongly into the market after the first nationwide lockdown in 2020, maybe this time around it will be investors. Not average Mum and Dad investors as they tend to follow the already turned cycle and will be concerned about their rising tax obligations and getting credit.
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Instead, when the capitulation point comes in the cycle, the first movers may well be the growing number of cashed-up investors who run their portfolios as a business, tend to buy for yield, and only tend to buy or sell on the basis of price and property availability at the cyclical extremes.
What I mean by that is that this time a year ago such long in the tooth deeply experienced and well capitalised investors were selling off their lower yielding and more troublesome stock. They were cashing out of their crap as I called in back in February last year and starting to build cash reserves for when opportunities would once again appear.
They did not by and large hold on trying to pick the market peak, something you don’t need to do when your focus is yield and capital base management more than medium or short-term capital gains.
Independent economist Tony Alexander: Investors tend to focus on yield, not short-term capital gains. Photo / Fiona Goodall
Some of the braver amongst them will be looking at the increasing number of developers running into trouble and no longer able to get more money from their bank. But they could be competing against Kāinga Ora, which is trying to boost our social housing stock from about 4% of all NZ houses closer to the OECD average of 8%.
Note that if average house prices fall 20%, the social housing stock will still be just 4% of the total. If prices fall 50% the proportion will remain at 4%. Falling prices currently underway do not change the housing situation for those most in need of housing assistance.
I would expect the older long-term investors to be putting in some gambit low offers on properties late this year when interest rates are higher, we will be talking more about the brain drain, the world economy will probably look a lot weaker, and the wave of vendors capitulating to market realities will be quite large.
First home buyers will follow, but because they lack experience of cycles probably won’t be back in big numbers until 18-24 months from now. Having said that, given the speed with which things are turning, the Reserve Bank may ease up LVR regulations within the next 12 months and that may start an early return of first home buyers making a purchase at exactly the point in the cycle which is most advantageous to them.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
