The property market is so hot heads are being scratched in amazement along with admissions of “we got it wrong”.
Billions of dollars are being spent on property with agents’ appraisals being exceeded at every turn as Kiwis desperate to buy pay over the odds.
This booming property market is unexpected and “not normal”, says economist Tony Alexander.
Structural changes are taking place with low interest rates bedding in globally and resulting here in a hot market which has defied even the most hopeful of predictions, “even mine”.
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Where it’s heading is anyone’s guess, Alexander says.
“I’ve never seen anyone’s model for picking prices actually work, no matter how many variables you put in there. The answer in the end simply is one of well, prices will rise or fall to where the equilibrium lies.”
When the market does clear, that equilibrium will sit higher than where it is now.
“But you never know how high – that’s the lesson history teaches us. You never know where prices will settle down in the future or even necessarily when but when the ball gets rolling those that get in early in the cycle obviously have the potential for better capital gains than those that wait thinking, ‘oh, it’s expensive, there’s got to be a decline.”
‘You can’t put a number on this’
Values are sitting simply where people are prepared to pay, Alexander says.
“All the evidence is people are prepared to pay higher than what the prices were six months ago, 12 months ago and last month. You can’t put a number on this.
“We have all just proven we can’t forecast house prices – we’ve just proven it in the last seven months so there is no better proof out there of the inability of anyone’s model to work, whether it’s mathematical or just sitting in your head.
“The world we look at is not the same as seven or eight months ago and one of the big changes, of course, is interest rates. They were falling into this, they fell again in March and April, the Reserve Bank is hinting they may cut again and central banks around the world are saying, ‘hey, we’re not going to increase interest rates for years.’”
House are selling fast post-Covid. Photo / Fiona Goodall
That makes it a great time for buyers and owner-occupiers, who are seeing values rise, and also for investors given term deposit rates have sunk to only just above one per cent.
“This is a structural shift and it’s going to encourage more money to go into residential property.”
Alexander thinks there are still elements of catch-up at play and that the market is being buoyed by bargain hunters who will go away again when the bargains don’t appear, but also driving the buying frenzy is the shortage of listings and the fear of missing out factor.
There’s also the $10 billion not being spent on overseas travel and the fact that most of those losing jobs are young or on below average wages so are not home owners anyway.
Anyone waiting for prices to fall will likely end up disappointed with Alexander now saying the market will keep rising for the next two to three years.
“I thought house prices would fall on average five to 10 per cent because we’ve got no experience of a global pandemic – but now we do. One thing we’ve learnt is ‘oh, when there’s a lockdown and a global pandemic people buy houses.’”
‘Insanely’ low interest rates
Gareth Kiernan, chief forecaster for Infometrics, says the extent of the heat in the market is surprising and points to the spike in Covid-related population growth and migration and the downward track in interest rates as drivers.
“That comes through into the property values in terms of people are able to service a mortgage that’s that much bigger, assuming they meet the criteria the banks put in place, therefore if there is buyer demand it does seem to result in those prices being bid up further, as ridiculous as that seems.”
Kiernan also points to the impact of Covid-19 on the job market not being anywhere as bad as first anticipated but says the question is how much that will worsen as the effects of the wage subsidy run out.
So far, with job losses limited, nobody is under pressure to sell but “it’s a question of do the more negative factors re-emerge next year and take the heat out of the market.”
Valuer James Wilson, from OneRoof’s data partner Valocity, still sees pent-up demand post-lockdown as a factor fuelling the market, combined with the “insanely” low interest rates and a huge shortage of stock.
“There’s just not the supply of stock coming to the market quick enough to trip that appetite or demand which means we’re getting incredibly hot market conditions.”
The market is so hot it’s making the job of valuers difficult. Wilson says they can’t crystal ball gaze and must look at the evidence of past sales but with the market moving so fast valuers are getting on the phone to question agents about their latest sales.
“It’s a complex time to be a valuer, that’s the long and short of it.”
Wilson does wonder if the pent up demand will become the new normal or whether it will ease off next year when net migration is flat and if there are any further negative impacts on the employment market because that could dent confidence.
Surprised by lack of caution
Even so, it’s unlikely values will fall.
“This is not normal, right? You’re not talking a normal economic event, it’s the likes of which we really haven’t seen in the modern global economy. What we’re also beginning to see is a move towards more unconventional monetary policy by the likes of the Reserve Bank and the banking and finance sector in new Zealand and globally and, of course, when you enter that world who knows what will happen next because it’s not been done before.”
For those paying well over CV for properties, Wilson says to relax because CVs are not designed to provide a market valuation, especially at a time like this.
“The key question is are you paying over the odds? I would argue as a valuer you’re just simply paying the market value.”
REINZ chief executive Bindi Norwell: "Ultimately, we’d like to see a long-term stable property market."
Liz Kendall, senior economist for the ANZ, sees the low inventory as a key driver.
“I think in terms of it being really hot partly it’s this tightness we’re seeing and that tightness could slacken a bit. The question is whether or not we start to see some of the other headwinds - migration is now extremely weak and the economy is expected to go through a slightly more challenging period ahead.”
“I’m a bit surprised there isn’t just a bit more caution out there in terms of willingness to pay, given there is so much uncertainty from an economic perspective.”
Bindi Norwell, REINZ’s chief executive, says values continue to defy expectations across most of the country and are outpacing wage growth, citing the record low interest rates and shortage of listings as key drivers.
“Ultimately, we’d like to see New Zealand have a long-term stable property market, but until we start to see more listings come to market and start to build more properties at scale, we’re likely to see values increase across most parts of the country at least in the short to medium term.”
