Tony Alexander update March 2023

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House prices are still falling in New Zealand and very few people feel any need to hurry up and make a housing purchase just in case house prices runaway upward on them again. I can see that explicitly from my monthly survey of residential real estate agents around the country where I ask them to note the main concerns which buyers have.

On average 42% of agents say that buyers are concerned prices will fall after they make a purchase. This is something we call FOOP - for fear of overpaying. The peak for this measure was 73% in May last year, it was still 71% in December, and it is still at a high level of 65%.

FOMO – fear of missing out - remains near completely absent at about 5%. But there is one result from the survey which backs up something I observed about three weeks ago from my monthly survey of mortgage advisors. First home buyers are back in the market.

A net 24% of real estate agents around the country say that they are seeing more first home buyers. This is up from a net 16% seeing fewer such young people in December and above the average reading for the past three years of 3%.

These are early days yet and with no sign that investors are returning to the market now or likely to do so perhaps ahead of the election in October it would be premature to start talking in terms of the housing market turning upward. But there are some supporting factors gaining strength behind the scenes which eventually will come out into the open and encourage the growing queue of buyers to start stepping forward into the open homes and auctions.

One thing which is eventually going to attract a lot of attention but is being lost in the focus on flooding issues at the moment is the rapid turnaround of net migration flows for New Zealand. Six months ago the net migration flow was a loss of 16,000 people. Now the annual flow is a gain of 16,000 and at the pace things are going we could finish 2023 with a net gain somewhere close to 40,000 people.

Another factor to keep an eye on is the likelihood that fixed mortgage rates peaked almost two months ago. Banks are failing to meet their mortgage sales targets so are running behind the scenes discounting campaigns having already cut their two to five year fixed rates publicly a few weeks back.

There is no reason for believing that interest rates are going to fall away in a hurry considering the inflation risks which still persist in New Zealand. But as each week goes by more and more people are likely to move away from the worst case scenarios they embraced after their November 23 record tightening of monetary policy and no longer believe fixed mortgage rates are headed towards 8%.

The absence of extreme fears about interest rate levels will encourage a few more people to start looking at the housing market, but maybe not immediately.

Another interesting development is that some pressures are starting to re-emerge in the rental accommodation sector. There is new demand coming from the 10,000 people displaced by recent flooding events. The faster than expected rebound in tourism is leading investors to redirect their properties back towards short term holiday rentals and away from long term leasing. The quick return of foreign students is also increasing demand for rental accommodation.

In my survey of residential property investors I can see a lift in the proportion of landlords planning to raise their rents and a slight increase in the average rental increase which they will target. But again, these are early days for the development of this factor and it is extremely unlikely the rental market will tighten up sufficiently to bring a whole new wave of investors into the residential property market. But the mild changes underway will work towards encouraging a few more investors to hold onto their properties for longer than they may otherwise have been thinking.

Another factor to consider is that as the months go by more people are likely to come around to my view that the forecasts by the Reserve Bank and Treasury of New Zealand’s unemployment rate heading towards 6% are too pessimistic. Business surveys show that businesses are still struggling badly to find the staff that they want. Their employment intentions are starting to improve and it is likely that feelings of job security will remain relatively firm this year. If people expect to keep their job they are more likely to consider a house purchase than if they live in fear of unemployment. Wages growth is likely to remain relatively good and again that is supportive of home purchases.

Things are looking fairly bad when it comes to construction of new houses later this year. Banks have pulled back aggressively on financing new residential developments and a lot of media exposure to some people who have lost money because of the collapse of builders and developers is encouraging home buyers to focus back on the stock of existing properties rather than a new build.

We don't know the extent to which new home construction will fall away from late this year, but the decline is likely to last for two or three years and at some stage this will lead to questions again about shortages of property in some parts of the country. Not now, somewhere down the track.

Once we add in the fact that the stock of properties listed for sale has now fallen for two months in a row, we start to get an environment in which we can once again talk about the endgame being underway for the period of decline in the New Zealand housing market. This means that we should still anticipate weakness in sales and prices over the next few months but that the extent of that weakness will get smaller and smaller on average as each month goes by.

Chances are improving that we will see the bottom of the housing market generally towards the middle of this year. But what does this mean for interest rates? Principally that although they have probably peaked the speed with which interest rates decline over the next couple of years is likely to be very slow because of the persistence of inflationary pressures, absence of a deep recession, and inability of the Reserve Bank to send easing signals for quite some time.

This means that while for many borrowers fixing one year will be the optimal choice, people should not ignore the two year fixed rate given the slow speed with which monetary policy is likely to be eased starting at some point in 2024.

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By Tony Alexander

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