Tony Alexander update October 2020
Back in March, as we all tried to make sense of what a global pandemic meant and how much economic damage would ensue from something unheard of
called a lockdown, the outlook most of us had for the residential real estate market was bad. There was a near universal expectation that prices would fall
as turnover shrank, that mortgagee sales would jump, and that house construction would fall away quite rapidly. Things have turned out to be quite
different – thankfully.
In the three months to August, the number of dwellings sold around the country was ahead 22% from a year earlier. The number of properties listed for sale was down by 13%. Prices initially fell 3% during April and May, but they have since risen to sit 1.5% ahead of average levels in March. Why have things turned out this way?
There are numerous factors which help explain why our economy has not collapsed as much as expected, why the unemployment rate has not soared, and why the housing market looks to have an entirely new lease on life. Principal among these factors is the cutting of interest rates to record low levels.
In March, the Reserve Bank cut its official cash rate by 0.75% to just 0.25%. This caused the likes of the one-year fixed mortgage rate to fall from 3.4% to 2.5%. But it pays to remember that the March cut was preceded last year by another 0.75% worth of cash rate cuts which had seen the one-year fixed mortgage rate decline from 4.1%.
The rate cuts of 2019 meant that our housing market entered this crisis with accelerating momentum, assisted by last year’s confirmation that no capital gains tax would be imposed.
But it is not just the cuts to current interest rates bringing new buyers into the housing market. The Reserve Bank, like other central banks overseas, has indicated that it will keep interest rates low for a great number of years. They have also indicated that they might cut the cash rate below 0% next year.
This matters, because what drives asset markets is not just conditions on the ground, but where people believe things are going. Expectations matter in markets and those interest rate expectations help explain why so many investors are looking to move their funds out of low interest rate term deposits and into other assets including shares and property. The low rates also explain why many people who were planning to sell their investment property and live off earnings from other assets have decided not to. They simply won’t generate the returns which they have been earning on their housing investment and which they are likely to continue to earn. This helps explain the shortage of listings.
Another factor explaining listings shortages is unwillingness of people to sell before they have bought. They are scared of being caught having to rent a property for some time while they search for a suitable new house, and ending up potentially paying more for an eventual purchase than they would currently. So, people have switched to buying first then selling.
This fear of missing out on a purchase has in fact become a strong element once more in the property market. FOMO is short for “fear of missing out”, and it mainly refers to people feeling fearful of not making a purchase and not enjoying capital gains.
Back in May, in the monthly REINZ & Tony Alexander Real Estate Survey, I asked real estate agents all around New Zealand whether they felt that buyers were feeling FOMO. A net 2% back then said no. Now, in the September survey, a net 77% say yes. Similarly, back in May a net 17% of agents said that they felt house prices were falling. Now a net 81% feel that they are rising.
But it is not just low interest rates generating FOMO and the self-perpetuating momentum it generates in the housing market. In the year to March there was a net immigration boost to our population of 90,000 people. This has since eased to 76,000 in the year to July, but that 76,000 includes an unheard of net 20,000 gain in Kiwis.
All of these extra people in the country mean we have already accumulated the population gain most of us analysts expected would accrue by August of 2021. These extra people will not largely be staying in motels, hotels, campervans and tents. They will be using rental accommodation – including Airbnb. They won’t be buying houses if they are foreigners, but their presence has removed downward pressure on house prices which can come from downward pressure on rents.
Since April, net migration inflows have averaged only just over zero a month, and going forward the numbers will remain low until the borders open. However, every few weeks the government has announced an easing of rules allowing more people into the country and more migrant visa workers to stay. There are also discussions underway regarding private accommodation providers contracting to quarantine skilled workers. One could imagine that extending to foreign students ahead of the 2021 academic year if things go well.
But more than these sources of upside to monthly migration numbers is the increasing expectation that over 2021 much of the world will be vaccinated, and by the start of 2022 our borders might be open again. This will not only bring a flow of tourists back which will provide an economic boost, but restoration eventually of previous firm net migration inflows.
And that loops us back to the point made above regarding expectations driving asset markets. The expectation in the housing market is that the next change in border control will be an easing which will boost housing demand. And there is more.
For now, banks are running very tight eligibility criteria for home loans. Staff shortages are making processing times very long, and many applicants who in the past would have qualified for a loan, are now having difficulties. For some it is because of the sector they work in, for others the volatile nature of their income.
The expectation is growing that the next change in bank lending criteria will be a loosening up. This might not come to any noticeable degree until the first half of 2021. But when it comes, it will make purchasing a home accessible to more people. That will place upward pressure on prices.
Another source of upward pressure is bond buying by the Reserve Bank (money printing), which swaps a bond asset for a bank cash balance asset on the part of the investors selling those bonds. For some of those investors, the low returns on bank deposits may not be a problem as those returns will be better than they were getting on bonds. But for others the low interest rates on offer will encourage the purchase of other assets such as shares, commercial property, finance company debentures, and again, residential property.
None of these and other factors suggest house prices will boom – not with slowly rising unemployment and high global uncertainty. But they do suggest that the chances of house prices turning back down again as they did on average nationwide during April and May, are exceedingly slim. Rises are more likely than declines from here on out.
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By Tony Alexander