Tony Alexander update August 2023

More solid upturn signs

The list of indicators showing improvement in the residential real estate market around the country on average has continued to grow over the past four weeks since my previous column. From the REINZ we have data in hand showing that after adjusting for seasonal factors sales rose almost 20% in the June quarter while prices in the month of June improved by 0.7% after sitting flat over the previous two months.

From my latest survey of residential real estate agents we can see that for the first time since the very end of 2021 there is a greater proportion of agents saying that buyers are worried about missing out than say they are worried about over-paying for a property.

This is not to say that buyer jitters have really set in and that the market is about to soar. Interest rates remain at levels designed by the Reserve Bank to restrain the pace of growth in the economy, incomes, and employment and we can truly only guess as to when they fall.

The first monetary policy easing may come before the middle of 2024, but before we get there, we need to see considerably more easing of inflation measures than we have seen to date. For instance, the headline rate of inflation has just fallen from 6.7% to 6.0%. But underlying inflation remains stuck near 6.5% and in fact for the June quarter was more than the Reserve Bank expected.

So, not only is no easing of monetary policy imminent, but the Reserve Bank are also unlikely to signal high comfort with the track for inflation for a considerable time – probably not ahead of the general election on October 14.

Speaking of which, while I can cite literally a dozen indicators from my real estate agent survey showing the market improving, I cannot see any evidence that other than investors paying with cash are showing increased market presence.

There is still a net 12% of agents saying that they are seeing fewer investors in the market. If the election produces a win for the National Party, then we can expect restoration of the ability of people running rental property businesses to deduct all their expenses including interest costs, while the brightline test will be taken from ten years back to two years.

At this stage I am not detecting many investors willing to take a punt on the election outcome and purchase now. But if National win then it seems reasonable to expect the return of many investors and an acceleration in the pace of house price rises.

A net 59% of agents say that they are seeing more first home buyers in the market. This is the highest reading since October 2020 and there are a variety of factors explaining why young people have been re-entering the market in large numbers since February this year.

House prices on average are down 18% from their late-2021 peaks. Banks are making credit more readily available. Wages growth has outpaced the increase in the cost of living, deposits saved up have grown, and job security is high.

I cannot as yet detect much of an increase in the number of owner-occupiers buying then selling or selling then buying. But such activity will pick up perhaps when there is slightly more confidence that interest rates are going to fall.

A key thing which potential property buyers need to keep in mind however is that the quantity of stock available to choose is shrinking. Nationwide the number of properties available for purchase was 14% lower at the end of June than the end of December last year. But it is when we look at the change at the regional level, we start to get interesting insights perhaps supporting my view that the cities will lead the cycle this time around.

In Christchurch listings peaked in March and have so far fallen by 10%. But in Auckland they peaked in August last year and are now down by 18%. In Wellington they also peaked in August 2022, but the fall to date has been about 44%. Stock is drying up in the capital and 2021 taught us an important lesson. Stock levels matter a lot when it comes to price movements.

Back then we saw prices rise 11% in a five month period from July to November in spite of negative migration flows, rising mortgage rates, the return of LVRs in February, strengthening for investors in May, and tax changes dissuading investors from buying late in March. Why did prices jump despite these negative factors?

Probably because the stock of properties for sale fell to a record low near 13,500 in July that year.  People could not find a property to purchase, and FOMO rose.

Now, there seems to be so far only mild awareness that stock levels are falling. This is likely to change. History tells us that when dwelling sales rise there are more vendors which step forward. But the new flow of buyers is larger and stock levels decline.

Come the first half of next year stock levels are likely to be back below 20,000 and this will be one of many factors likely to produce an average nationwide gain in house prices through 2024 of perhaps 10%. Other factors will include falling interest rates, strong net migration inflows, and falling new house construction.

For the moment, regarding interest rates – banks have recently increased fixed lending rates because their wholesale borrowing costs have been pushed up by rate rises in the United States. The chances are that now, finally, surely this time, rates have hit their peaks. But declines seem unlikely until very late this year.

If I were borrowing at the moment, I might loom quite favourably at the 18-month term, or at least explicitly recognise the many uncertain factors in play by spreading my risk over one and two years.

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By Tony Alexander