Tony Alexander Update February 2022
The boom is over
When discussing sharemarkets we usually talk about periods of strongly rising prices as being bull markets – people are bullish. Hence the bronze bull on Wall Street in New York. When prices fall for a sustained period we talk about a bear market – of which there is also one in Wall Street.
In housing markets people sometimes use the same terminology. But usually we will speak in terms of a price boom rather than a sustained bull run. And when prices are falling – now that is where things get interesting. Virtually no-one talks or writes of a bear market in housing. But they do use words like “correction”. Then some get excited and start writing “collapse” or “plunge”.
The NZ boom in house prices has already ended and if I had to use a single word to describe what I feel is going to happen over the next 2-3 years it would be “flattening”, rather than one of the more emotive terms you are about to get bombarded with.
Let’s address first off all the evidence that the boom is over. You won’t have yet picked up on it from looking at numerous price measures released each month because they exclusively focus on price levels compared with a year earlier and excitement/shock about million dollar suburbs. They are all ahead by 20-30% and the only one I pay attention to which comes from the REINZ showed a 23% rise in December 2021 from a year earlier.
But my interest as an economist is always in what is happening right now at the coalface and that means while I smooth the monthly changes to remove inherent volatility, I don’t ignore those monthly changes. The REINZ data tell us that average NZ dwelling prices fell by 1% in December.
When others realise what is going on we will see some people extrapolating the monthly changes into a sustained series of declines which they will call a “bust” or one of the words already mentioned above. But there are a large number of factors which will help offset the newly dominant negatives in the housing market and which will produce the broadly defined flattening which I am referring to.
Other evidence that the boom is over can be found in the range of monthly coalface surveys which I run. In the monthly survey of real estate agents which I run with REINZ we can see that FOMO – fear of missing out – has gone. In late-January only 22% of agents said that they were seeing FOMO on the part of buyers they deal with. In October that proportion was 70%, the average is 66%, and the previous lowest reading was 35% in April 2020.
We have switched to a buyer’s market. A net 11% of agents now say that sellers are the more motivated party in discussions rather than buyers. In October a net 53% said buyers were the mostdetermined to get a deal done. The average is 53% and since my survey started in April 2020 we have never before had a buyer’s market in place.
A net 65% of agents say that they are seeing fewer first home buyers and a net 56% say they are seeing fewer investors.
The boom in house transactions and pricing has ended as a result of some large factors. Interest rates late last year for fixed rate mortgages rose at their fastest pace since the early-1990s. Banks can only have 10% of new lending at low deposits compared with 20% before November 1. Net migration flows have turned negative. Many buyers have simply been burnt off by high prices, and the CCCFA Credit Contracts and Consumer Finance Act – has meant for many first home buyers in particular getting a mortgage from a bank in the short-term has become impossible.
Factors driving the end of the boom are strong and clear and since before the middle of 2021 I have been writing about us being in the endgame for the housing market booms since 1992, since the GFC, and since June 2020. But why will we not now see prices go back to pre-Covid levels as the Prime Minister last year said she would like to see happen?
Average fixed mortgage rates will probably exceed 5% late this year and for some people that will represent a doubling in cost. But banks lent funds on the basis of borrowers being able to service rates 3% and more above what they were starting at. So, if someone fixed for 2.19% mid-2021 and soon they pay 5%, they’ve already proved they can handle 5.5% or more. This means very few people will have to sell their property.
Of importance here also is the very strong jobs market. High job security will keep people willing to service their debt and willing to keep planning for a property purchase. Investors also already have little difficulty getting tenants and high job security means no wave of redundancy-fuelled rent arrears is likely.
Inflation is almost 6% and as a rule in a high inflation environment investors shift funds away from bank accounts into assets which tend to hold their value. That includes property.
Construction costs are likely to keep rising this year and next and as problems grow regarding purchasing off the plan, we are going to see more and more buyers switch back to looking through the growing number of listings for existing properties.
Some 165,000 migrants have become eligible for a special visa giving them permanent residency. As numbers gaining this special visa grow this year (5,000 so far) and they become legally able to purchase a dwelling, demand for housing will grow, especially in Auckland.
Another factor which will limit the extent of average house price declines this coming year is the $600bn surge in net household wealth over the past two years. People have become a lot wealthier through their holdings of assets such as property and shares. Deposits in bank accounts are also well above levels which they would otherwise have been at without the pandemic.
This means debt to asset ratios are not problematic. For instance, the ratio of owner-occupied debt to housing market value is about 22% compared with just 14% for investors. The government’s withdrawal of interest expense deductibility for landlords is not going to have as much of a depressing impact on willingness to hold property by investors as they probably think.
Having said that, some investors are selling in the face of cash flow difficulties due to rising costs, rising interest rates, tax changes, and banks demanding they shift from interest-only mortgages toprincipal and interest facilities. This however is leading to a reduction in the supply of rental housing, upward pressure on rents, and an increasing incentive for those in the sector who have not yet sold to keep holding their assets.
In fact well over 60% of investors say they plan holding their properties for at least ten years.
The upshot of all of these factors plus many others on the positive and negative side is that the boom is over, but a bust is not in hand. Instead we are going to see people being able to make their housing and investment decisions in less frenzied circumstances. Vendors will have to become more realistic in their pricing and acceptance of buyer conditions, and real estate agents will spend more time discussing market realities with vendors rather than buyers.
By Tony Alexander