Tony Alexander Update June 2022

The housing market cycle

Housing markets don’t move in straight lines. Instead, there tend to be periods of rising sales, prices, and construction followed by falls then periods when things are relatively flat. The flat periods can last for a number of years, one example being prices in Wellington going nowhere for eight years after 2008 – after which they soared.

We have just seen three decades of rapidly rising prices with gains averaging 7% a year across the many ups, downs, and flat periods. This well exceeded consumer goods and services price rises which averaged 2% a year, and wages growth which averaged about 4%. The strong house price rises reflected restrictions of land supply, inadequate investment in infrastructure to support urban sprawl, rising construction standards, increasing average house sizes, and government encouragement to people to build an asset base for retirement. Many people chose housing.

Since, shortly after the end of the Global Financial Crisis from 2008-09 house prices showed surprising strength in New Zealand in response to unusually low inflation causing our central bank to cut interest rates to record lows even as the unemployment rate fell away to 4%.

Then, prices got another very unusual boost from mid-2020 as borrowing costs were reduced even further, lending restrictions on banks were relaxed, money was printed to stimulate liquidity, asset prices, and growth, and people focussed on their immediate living environments.

Now, no matter whether you start your period of house price boom from 1992, 2012, or 2020, the key point I made over a year ago was that we had entered the endgame for the price boom. And so, it has turned out to be the case. Average prices have fallen 6% since November with Wellington and Auckland down around 10% from their peaks.

Falling prices, annual sales declining to 78,000 from 100,000 in June 2021, stocks of listings jumping 70% ahead of a year earlier, and FOMO (fear of missing out) almost falling to zero, reflect a number of factors all occurring at once.

1. Loan to Value Ratio rules returned in February 2021 then were strengthened in May and again in November.

2. Fixed mortgage interest rates have jumped 2% - 3% in anticipation of rapid monetary policy tightening by the Reserve Bank.

3. Reopening of the borders has encouraged a shift in spending back to offshore travel and a flow of young Kiwis across to Australia for better wages, lower house prices, and a cheaper cost of living.

4. The rapid rise in NZ’s cost of living has taken home ownership off the table for many Kiwis for now.

5. Tax rules have changed to reduce the incentive for investors to buy and provide rental housing.

6. The Credit Contracts and Consumer Finance Act has been changed so that only the most frugal of people are now considered eligible for finance by lenders.

History tells us that once a cycle turns and sentiment shifts, people can remain out of a market for a very uncertain period of time. Pessimism and withdrawal tend to feed on themselves and even people wanting to buy a house will actively look for reasons to justify sitting on their hands.

In this cyclical downturn they are likely to focus for instance on false talk of a property oversupply in Auckland, scary stories about where interest rates may go, collapsing property developers, and the loss of people offshore.

But this current and coming weak period is exactly the time a committed buyer should be stepping forward to search for a property. As mentioned above, the number of properties listed for sale is running around 70% ahead of a year earlier. In fact, in some parts of the country listings are up by over 150%. There is now a range of properties available which has not been seen for a number of years. Buyers have a far greater chance of getting a property which exactly matches the list of desired attributes they may have drawn up 18 months ago than has been the case for quite some time. Plus, vendors are becoming increasingly willing to negotiate.

Many potential buyers will nonetheless remain standing back, thinking that they will be able to pick when prices have reached their cyclical low-point. If they manage to transact at that point, it will be purely good luck as not even those of us with decades of experience in analysing housing markets can pick the timing of cyclical tops and bottoms.

Still, when might the cycle bottom out? My best pick currently is that we will see the broad ending of falling prices by the middle of 2023. That timing might seem early to some people, but it is driven by the fact that interest rates look like peaking very early in this monetary policy cycle. Plus, I believe there are already firm indications in hand that consumer spending is being crunched as intended by the Reserve Bank.

However, picking a cyclical low is one thing, but forecasting when the upward leg of the cycle returns is something quite different. Markets can rise, fall, and sit flat for extended periods of time as noted in the first paragraph above. We could see a new period of rapidly rising prices not appear until after 2025. We simply don’t know.

What does this mean for buyers? There is a difference between vendors wanting to get a transaction done because they fear prices falling further, and not being in a hurry because prices are no longer changing. The period of greatest bargaining power for buyers may be reversing over the second half of 2023. But a seller’s market might not appear again for a few years. These are all very uncertain things in the best of times, let alone the environment we have now of war in Europe, an energy and food price crisis, and lingering supply chain and economic effects of a global pandemic.

Will the general election of late-2023 have an impact? Maybe it will. If it looks like there is a good chance of National returning to power, investors who might be thinking about selling will be incentivised to hold off. That is because National have stated quite clearly that when re-elected they will reverse the government’s investor tax changes of last year. The brightline test will go back to two years and deductibility of interest expenses will be restored.

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By Tony Alexander

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