Update on the market from Bernard Hickey

Latest newsletter from Bernard Hickey.  Always interesting reading. 

House prices falling in Auckland, but not everywhere

House prices continued to edge lower in Auckland during the slowest mid -winter month and are cooling in surrounding areas.

But prices remained buoyant and activity was robust in some major cities that are still benefiting from the tailwind of Auckland’s boom through 2015 and early 2016.

The outlook for interest rates also moderated through July, and the prospects of a centre-left Government likely to significantly increase housing supply and reduce tax advantages for housing also receded.

Real Estate Institute of New Zealand figures show the house price index for Auckland fell 0.5 percent in June and fell 0.3 across New Zealand. The index for Auckland is down 3.2 percent from its peak in mid 2016. Prices also fell slightly in Taranaki, Northland and Bay of Plenty. The effects of the Reserve Bank’s 40 percent deposit requirement for rental property investors is still rippling through the most highly valued cities in the market.

But prices were particularly buoyant in June in Waikato (up 1.1 percent), Gisborne/Hawkes Bay (up 2.3 percent) and Wellington (up 0.8 percent) as these centres still play catch up on the 60-80 percent price rises seen in Auckland from 2012 to 2016.

The underlying drivers for house prices remained robust. Migration rose to yet another record high of 72,300 in the year to June. Wholesale interest rates edged lower through July as global and local inflation pressures eased. New Zealand’s annual inflation rate fell to 1.7 percent in the June quarter from 2.2 percent in the March quarter and prices were actually flat in the quarter itself.

The Reserve Bank itself is still forecasting that it will not raise the Official Cash Rate until late 2019. Economists had forecast the OCR would start rising in mid 2018, but the weaker than expected June quarter inflation data caused many to think the Reserve Bank’s cautiousness was justified for now.

Yet again, inflation is failing to fire globally despite relatively robust economic growth and unemployment falling below five percent. The increasing use of apps that drive down prices in previously domestically sealed industries such as taxis, advertising and accommodation is effectively evaporating the services sectors into the globalized cloud. This is globalizing services in the same way that manufacturing was globalized from the 1980s onwards.

Banks have also stopped increasing their margins and putting up mortgage and term deposit rates. During late 2016 and early 2017 the big four Australian banks were concerned about a widening gap between their lending and deposit growth locally. Led by ANZ, they increased their fixed mortgage rates by 30 to 50 basis points by March 2017. But those rate hikes have eased off.

But ANZ said in mid-July that the gap had closed and the pressure was coming off as interest rates globally had stopped rising and term deposit growth has picked up. The big banks have started advertising discounted deals again and rate hikes have stopped.

The political outlook for house prices has also improved.

The prospect of a Labour-Green-New Zealand First Government reduced somewhat during July as the leaders of the three parties dissolved into insults and infighting. Green Co-Leader Metiria Turei accused New Zealand First Leader Winston Peters of being racist. Peters said Turei pursued racially separatist policies and her comments would have “consequences.”

Labour Leader Andrew Little then accused Peters of leaking internal poll results showing Labour falling to just 26 percent and Little’s preferred PM rating falling to a record low. Little accused Peters of being a “blowhard and a big swinging dick.” Peters said in return that Little would not make it into Parliament as a list MP if Labour fell to 22 percent and that he didn’t give a “rat’s derriere” what Little thought.

National’s campaign manager Steven Joyce highlighted the infighting on the centre-left and wondered aloud how they could run the country if they couldn’t organize themselves in opposition. A re-run of the advertisement showing National rowing eight powering ahead vs the circling opposition rowboat is a prospect. Pollsters are picking a National-NZ First Government will be formed after September 23.

That matters because Peters is implacably opposed to a capital gains tax and wants the Reserve Bank to operate with lower interest rates. The National Government is also promising to build less than 10,000 affordable houses over the next decade, while the Labour-Green opposition want to build over 100,000.

In theory, Peters may be able to demand sharp reductions in migration, but would struggle to do it without crippling the international education, aged care, tourism, dairying and horticulture industries, which are reliant on temporary migrant labour. This is a particular issue in the provinces, which Peters wants to retain. Also in theory, Peters would want to ban foreign buyers of homes and land in New Zealand, but National would be reluctant to agree to that, and similar rules in Australia have been circumvented.

The bottom line: 

House price inflation has slowed nationally and prices fell a bit more in June in Auckland and some surrounding cities, but not much elsewhere. 

The Reserve Bank has forecast an unchanged Official Cash Rate through all of 2017 and all of 2018. It does not see the first hike until late 2019.

Banks have stopped lifting longer term mortgage rates.  The Reserve Bank is unlikely to be able to introduce a DTI limit in 2017. It has to do lengthy consultation and it has said it would not use the tool right now even if it had it because of the market’s moderation.

The key variables to watch in 2017 are China’s bad debt situation, Europe’s financial and political dramas, global inflation and interest rates, New Zealand’s election result, and Donald Trump’s twitter account.

 

By Bernard Hickey