Tony Alexander update April 2022

Scary stories inaccurate, but also helpful

Now that the media have acknowledged house prices are falling, we are seeing one of the key elements of a downward leg of the house price cycle coming into play – over-hyping of the downside risks. Only four weeks ago we had media highlighting house prices rising 25%+ ahead of a year ago and how difficult it is for first home buyers to make a purchase.

Now, we are seeing inaccurate reporting of an 18% fall in house prices in Auckland – something which has not in fact happened. Some in the media have seized on a particular measure which gets distorted heavily by changes in the mix of houses sold from one month to the next.

If we strip away that distortion by looking at the only price measures really worth following to get a feel for changes – the House Price Indexes compiled by the REINZ and Reserve Bank – we see prices have declined only 5%.

Still, they have declined, and this reflects a number of strong factors. One is rising interest rates; another is the credit crunch since mid-2021. We are also seeing net migration outflows from New Zealand, and FOMO – fear of missing out has disappeared.

My measure of FOMO extracted from the monthly survey of real estate agents I run has fallen to just 5%. That is, only 5% of agents say they see FOMO on the part of buyers. In October that was 70% and in April 2020 35%.

People increasingly expect that prices will decline and that means their attention is firmly fixed now on stories of falling prices and factors which will contribute to the declines. Hence the extra attention now being paid to net losses of Kiwis overseas. We no longer read stories of a flood of Kiwis coming home to buy houses. We read about us Kiwis going to Australia – as I noted from early last year would be the case at some stage.

The negatives will dominate the house price cycle for all this year and some of 2023. But there are positives in play as well which tell us that this is a correction in prices from unsustainable highs and not a crash. One such factor is the 14% rise in construction costs last year which looks like being repeated this year.

The continuing shutdown of factories, wharves, and cities in China is worsening supply chain disruptions on top of the disturbances related to Russia’s invasion of Ukraine. Higher building costs are already making people pay more attention to listings of existing houses and this will be reinforced fairly soon by deepening concerns about development projects being delayed, not going ahead, or closing down part way through.

Banks are rapidly tightening up finance availability to developers as they see buyers stepping back and pre-sales of townhouses and apartments failing to meet required targets.

Very few people now have concerns about a shortage of listings and that is bad news for the house building sector. We have probably seen the peak in the annual number of consents being issued and while construction levels will be high this year, they will probably fall away through 2023.

Some very strong support for house prices will come from the very tight labour market in New Zealand. If people feel secure in their jobs, then they will remain in the market looking for their first house and continue to service a mortgage already in place for one they might own.

I also have a view on house price support coming from an angle which at the moment sounds absurd – low interest rates. The Reserve Bank has already increased its cash rate by 0.75% so it now sits at 1.0%. Ultimately, they will take it to 3.0%. Some forecasters have recently increased their pick for how high the cash rate will go. If I make a change from the 3% forecast I have had for about a year now, it will be to lower it. Why?

When the Reserve Bank raises interest rates its aim is to crunch consumer spending and through that to make businesses think twice before raising selling prices when their inventories are already rising, and customers are looking for excuses not to buy.

My monthly Spending Plans Survey nearly three months ago revealed a collapse in spending plans and we can now see that sentiment appearing in monthly measures of consumer confidence. Business confidence has also fallen away sharply and while businesses still say they plan raising their selling prices, their ability to do so without risking substantial loss of customers is diminishing by the day.

Given that the Reserve Bank is aiming to influence inflation 18 months from now and given that the growth outlook for later this year through 2023 is already deteriorating, the need for them to apply extra braking to the economy is diminishing on a weekly basis.

For the next few months as the Reserve Bank moves to get the cash rate back towards the new average level, we will see stories warning about mortgage pain and mortgagee sales. But the more these stories appear, the less the extra increase in interest rates which the Reserve Bank will need to impose. The media will in effect be doing a good part of the Reserve Bank’s job for them, just as they are now with scary stories of rapidly falling house prices.

The stories may be inaccurate, but perversely they are helpful through this monetary policy tightening phase.

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By Tony Alexander

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