Tony Alexander Update July 2023
Housing market turning upward
In the middle of the column I wrote here last month I mentioned that FOMO had yet to pick up. The data and my surveys suggested that although the housing market was bottoming out people did not display any evidence of a sense of urgency. Now, one month later, that is changing.
I have just completed my monthly survey of residential real estate agents undertaken with REINZ. I’ve been running this survey since the first pandemic lockdown early in 2020 and it provides coalface insights into what is happening in the real estate market.
It showed the frenzy of mid-2020 to the March quarter of 2021, how this frenzy then eased off before returning in the second half of 2021 as property listing numbers fell to record lows. Then it showed the wholesale withdrawal of buyers following the credit crunch at the end of 221. Now it shows people returning.
Of great interest is the measure I have of FOMO – fear of missing out. The average reading for this gauge over the past three and a bit years has been 40% of agents seeing buyers display worries about missing out. The latest reading is still below that average at 20%. But this result is well outside the range of 4% to 9% in place between February 2022 and May this year. People are starting to feel that time is running out to take advantage of the buyer’s market.
In fact, the buyer’s market has almost gone. Only a net 7% of agents now say that the buyers have the upper hand in negotiations. This is the weakest such result since November 2021 and in fact in Auckland we are already in a seller’s market with a net 8% of agents seeing vendors as in the more powerful position now.
Things are changing quickly and perhaps this is not surprising when we consider the speed with which net migration numbers have turned from -20,000 a year ago to a gain in the year to April of 72,300. This 1.4% boost to our population can do nothing other than help support the economy and place extra pressure on the housing market. Initially this pressure will manifest itself in the rental market and we can see that in a separate survey I run of property investors showing that they are finding it increasingly easy to secure good tenants.
The next pressure will come in the housing ownership market and because the bulk of immigrants go to Auckland it is perhaps not surprising that Auckland is leading the housing market upward this cycle.
We can also attribute the return of buyers to the market to the increasing discussion of the housing market bottoming out. Forecasts of prices going up for the remainder of this year are appearing. There is still however a general view that the upturn will be mild and buyers will have plenty of time in a non-frenzied market to make their choice. No they won’t.
My survey of real estate agents already shows that a net 42% are seeing more people attend open homes. This is the strongest result since February 2021 and well above the three year average of a net 7% of agents seeing fewer people physically pursuing properties. A net 19% of agents now say that they are seeing more people attending auctions. This is a rapid turnaround from a net 18% who two months earlier were seeing fewer people. Again, the result is the strongest since early-2021.
The chances are strong that house prices will rise towards 10% on average over the coming year. There will be some hesitancy of investors to purchase until the outcome of the election is clear. There is also the fact that for many people with a deposit the possibility of buying is not there because they cannot meet debt servicing rules while mortgage rates are near 7% and banks are applying test rates above 9%.
But once interest rates start falling away this large group of frustrated buyers will be able to enter the market and that is likely to be the story of 2024. Before then, those with more cash and better incomes will have likely scooped up the best buys out there and come mid-2024 the stock of properties listed for sale is likely to be considerably down from the near 25,000 at the moment.
When might the first easing of monetary policy come from the Reserve Bank? There is no reason for placing faith in anyone’s forecast of this given the huge uncertain factors in play and the poor record of interest rate forecasting since 2007. But opting for mid-2024 seems like a reasonable position to take.
There is some evidence that the influx of migrants is alleviating some of the strains in the labour market. It also pays to remember that the Reserve Bank not only does not have any goal involving a particular rate of increase in house prices, but its requirement also to give thought to the government’s housing desires has just been weakened following a five yearly review of the Policy Targets Agreement between the Reserve Bank and Finance Minister.
For borrowers perhaps the biggest area of uncertainty is not really when interest rates start falling, but how rapidly they go down. If I thought the pace of decline would be near as rapid as the falls following the two previous recessions, then the overwhelming incentive for any borrower would be to fix only in the one year period.
But it doesn’t seem likely that inflation will plummet and for that reason borrowers should not ignore the 18 and 24 month periods.
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By Tony Alexander