Tony Alexander update June 2023

The cycle seems to be turning

Once bitten twice shy. Having described the residential real estate market’s cyclical decline in sales and prices as entering its endgame in the September quarter of last year – then being blasted out of the water by the shock October 18 inflation number – most of us have been more cautious this time around in calling an imminent market bottoming. But the signs are good.

Looking at the pure numbers on what has already happened we can see that house prices nationwide on average were flat in March and April and that sales actually recovered 11% in April after adjusting for seasonal factors. Looking at survey data I can see from my monthly survey of landlords that they are increasingly finding it easy to secure good tenants and plans for rent rises are lifting.

This tightening in the rental market will reflect three things which are outweighing the growth in closely-positioned townhouses in the likes of Auckland in particular. Net migration inflows have boomed from a loss of 19,000 people in the year to March 2022 to a record gain, just over 65,000 this past year to March if we exclude the initial effect of the pandemic in 2020.

More people means more demand initially for rental accommodation and down the track as availability worsens, we can expect more people will be encouraged to advance their plans for becoming owner occupiers.

A second factor accounting for the rental market tightening up is the influx of tourists and properties going back towards short-term rental purposes rather than long-term letting. Third, the foreign students are back and that is relevant in Auckland’s inner city in particular.

Another insight I can glean from my survey data comes from my monthly poll of residential real estate agents all around the country. I have in hand about half the results which usually come in each month, and they show a decline in the net proportion of agents saying that buyers are worried about prices going down. FOOP – fear of over-paying – is easing.

Moreover, there is the strongest net proportion of agents seeing more people at open homes since early-2021 before the LVRs returned and tax changes were made. Many more first home buyers are in the market, though investors still remain few and far between.

FOMO is yet to pick up – but I would expect that interesting measure to start moving once we see prices actually going up. This is very important because of a key thing. For two years now buyers have been stepping back from the market. Initially they were waiting for the frenzy to end and the supply of properties to improve. Then they were waiting for prices to stop falling.

At some stage this large queue of buyers will be activated and the factors likely to do so are appearing and growing in strength. As noted, net migration is soaring. Listings are also falling. There is increasing media attention on now falling house construction, and group home builders are reporting a very strong withdrawal of demand for off the plan units.

The labour market remains very strong with job numbers up 0.5% in the December quarter of last year and 0.8% in the first three months of 2023. The Reserve Bank have also announced that from June Loan to Value Ratio rules which banks must meet are being eased. Banks will be able to have up to 15% of their new lending at less than 20% deposit rather than the 10% limit which was imposed in November 2021.

Finally, on May 23 the Reserve Bank raised their official cash rate by 0.25% to 5.5%. But they signalled that they do not believe they will need to make any further increases and anticipate easing monetary policy late in 2024. The chances are they will cut rates well before then, but that is not the key issue for the moment and there remains very large uncertainty about how inflation will track in the next few quarters.

Add everything together and the signs – this time around – are good for the housing market being at the bottom of its cycle. However, this tells us nothing about exactly when prices start rising on average and how quickly they will go up. A key factor in play, as discussed above, is the large queue of buyers ready to step forward.

How much have they grown their deposits as house prices have fallen nearly 18% on average nationwide? How much have their wages grown? Are their rents rising firmly and are they finding it hard to get the type of rental property which they want? How much of the migration involves extra boots on the ground as we speak and how much is simply reclassification of people who arrived 16 months ago and haven’t left yet?

All we can reasonably say perhaps is this. The payoff to delayed buyers of holding on a bit longer is getting smaller and smaller now as each week goes by. If I were a young buyer, I would keep an eye on the stock of listings which is already 11% down from its peak at the end of 2022 in seasonally adjusted terms, and remember that when sales rise, stocks go down, not up.

For borrowers we economists might not actually have all that much to say for a while. It seems muchtoo optimistic to think that mortgage rates will decline by any appreciable amount by the end of the year. But some declines are likely as banks compete for business. In that regard I look forward to the traditional bank Spring specials this year once September comes along.

Until then, Winter will provide some still good buying opportunities for home seekers, keeping in mind that investors are still very thin on the ground because of their worsening tax obligations.

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By Tony Alexander