Have house prices really hit a floor?

Sunday, 4 June 2023

ANALYSIS: In recent weeks, there have been a number of reports that house prices have fallen about as far as they are going to go.

Commentators have pointed to interest rates probably having peaked, migration having taken off, and the total number of properties on the market having dropped.

But how much of a tailwind are these factors likely to be? And are they a permanent change, or just a blip?

Claim one: interest rates have peaked

If Covid-19 taught Kiwis anything about the market, it was how linked to interest rates house prices are.

The 42% price increase the market experienced during the pandemic happened despite demand falling as more people left the country than arrived, and supply surging in the biggest building boom in over three decades, which added 27,875 new homes in a year.

The house price surge began when the official cash rate (OCR) was cut to rock-bottom lows of 0.25%, and loan restrictions imposed by the Reserve Bank were suspended, meaning banks could lend to people with smaller deposits.

Now the OCR is at 5.5%, the floating rate average sits at over 8.2%, and any market positivity stems from the fact rates might not go much higher, rather than any prospect they will come down quickly.

The Reserve Bank surprised most economists in late-May, when it increased the official cash rate 0.25%, but did not change the projected peak, keeping it at 5.5%.

This was one of the big things ANZ economists pointed to, when they claimed prices were bottoming out. Some fixed-term rates have fallen in recent months because the wholesale market is pricing in future cuts.

However, while noting the short-term benefits of the Reserve Bank’s “dovish” outlook, ANZ also noted in its May Property Focus report that inflation was expected to prove stickier, partly due to high net migration and an inflationary Government Budget.

The bank’s economists expected, come November, the Reserve Bank would have to increases the OCR again by 0.25%, suggesting interest rates had paused, rather than peaked.

CoreLogic head of research Nick Goodall also saw the decision as the Reserve Bank sitting back and waiting to see how recent rapid increases to interest rates would play out.

“We have to see the impact of a 525 basis point lift over 20 months,” he said.

“So they are happy to wait and see, knowing that they have got the tools in the future if they need to tighten or loosen monetary policy.”

Claim two: Total listings are down

Tony Alexander, an economist and regular speaker at investor conferences, pointed to a dip in total listings as a sign of change.

CoreLogic’s figures show the total sits at just under 35,000, down from 37,000 in March, and a peak of 40,000 just before Christmas.

This put the total number of properties for sale about 13% below the peak, but Goodall said this was still well above the level of recent years years.

Back in 2021, for example, there were 12,000 fewer homes on the market.

Goodall said compared to previous seasonal falls, the recent dip was probably about normal.

So while total listings are down, it appears buyers still have plenty of choice.

Claim three: Net migration is back in force

Statistics New Zealand recorded a provisional net migration gain of 65,400 in the year to March.

QV’s Simon Petersen said the shift would not revitalise the real estate market overnight, but “they may provide some relief at a time when activity is at historic low levels”.

More people meant more demand, particularly for rentals, which led to property investment being more attractive, which added a headwind to house prices.

But rental prices have actually been stagnant for three months in a row, and comparing rental price to rental asking prices shows many landlords are not achieving the rents they want.

In March, when Trade Me’s median asking rent was recorded at $600, data from the Ministry of Business, Innovation and Employment showed median rent sat $40 lower, at $560.

This might suggest that rents are already as high as the market can demand.

Data from the Australian Bureau of Statistics also showed a brain drain gathering pace.

There is no reliable real-time data showing which workers New Zealand is losing versus gaining, meaning the country could be losing high earners and gaining lower wage migrants, which would have an effect on the money competing both for rentals, and to buy homes.

This could become an important factor in the market, as the Reserve Bank considers implementing debt-to-income rations (DTIs) which would restrict how much buyers could borrow, to a multiple of their income.

There was also likely be a delayed effect from a sudden upswing in migration, as new arrivals face restrictions on buying homes when they first arrive.

Claim four: The speed of house price falls has eased

Commentators heralding an end to house price falls started speaking up in April, when a number of outlets recorded the rate of price falls had eased.

It remains to be seen if commentators have seen a blip, and inferred a trend.

Take CoreLogic’s data for example – it found prices fell 0.6% in April, compared to 1% in February and March, leading chief property economist Kelvin Davidson to suggest it might be a sign the bottom was not far off.

But come May, prices fell another 0.7% - an increase on the month before. This was not the first time the rate of house price decline eased, and then sped up again.

In December, CoreLogic found property values fell only 0.2%, far below the 0.6% in November and 1.3% in October, but the pace of price falls increased again in January.

QV recorded a similar phenomenon (a 0.6% fall in April compared to a 1.4% average fall in March) which spokesperson Simon Petersen said might be a “small sign” the marked was approaching equilibrium.

Claim five: The relaxation of LVRs will benefit prices

The Reserve Bank’s decision to remove all loan-to-value ratio restrictions (LVRs) in 2020 is widely considered to have boosted the pandemic-era buying frenzy, as investors who had previously not had sufficient equity to purchase another property had more leeway to buy at time of historically low interest rates.

LVRs were reinstated in 2021, but the damage was done, and FOMO (the fear of missing out) gripped the market.

Compared to that decision, last week's changes are more of a tweak.

From Thursday, the amount of new lending that banks could lend to borrowers with up to 20% deposit increased from 10% to 15% of all new loans.

They would also be able to lend 5% of new lending to investors with a deposit of less than 35%, rather than the 40% previously.

Commentators have said the change was unlikely to have a significant impact on the housing market, and the change is unlikely to create anything like the artificial boost created by the Reserve Bank’s previous decision to scrap LVRs entirely.

Claim six: There’s more optimism in the market

For a period in late-2020 and early-2021, a survey of real estate agents conducted by Alexander found the number of customers for whom FOMO appeared to be a factor was around 90%.

This year, that figure has fallen to sit between 4% and 7%.

FOOP meanwhile (the fear of overpaying, or that a property would fall in value post-purchase) is still strong among buyers.

Since March 2022 FOOP has been at the forefront of between 60% and 70% of buyers’ minds, and in April, it still sat at 68%, suggesting buyers still believed the market was overpriced.

That might not be surprising, given prices are still $194,000 higher than pre-Covid, inflation is still running high at over 6% (more than double its maximum target rate), and the prospect of a recession is still looming.

Real estate agents also appeared to share buyers’ sentiment, with a net 58% believing house prices would continue to fall.

The upcoming inflection point

Arguing over the impact of recent changes in lending rules, interest rates, and market conditions may miss the biggest factor that is holding prices frozen – the October election.

There is mounting evidence that sellers, and particularly investors, are holding back from listing their properties in the hope that National will get back into power, but will sell if Labour remains in power.

National has promised to return a key tax advantage to investors, and pull the bright-line test back to two years, effectively making any tax on capital gain easily avoidable.

The election is shaping up as an inflection point, with prices likely to be weaker under Labour, as the party intends to stick to its phase-out of interest deductibility for investors, and firmer under National.