There are three specific things which the Government wants to see happen in the housing market and they were stated in the recent change to the remit given to the Reserve Bank instructing it what to aim for when setting monetary policy:
• Support more sustainable house prices;
• Dampen investor demand for existing housing stock; and
• Improve affordability for first-home buyers.
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There is no definition of what “more sustainable house prices” looks like so lets just read that as prices rising on average less than 5% a year around the country.
It will take many years before we can say where the new average rate of increase will sit. But if in a year’s time prices are still rising above 10% per annum, we could reasonably expect some more government measures, probably focussed on their second point.
So far, the Government is succeeding in dampening demand. Three of the four surveys I run each month give insight into investment property demand and they all show pullbacks. The survey of mortgage advisors with mortgages.co.nz shows a net 78% of advisors are seeing a decline in enquiries from investors.
The survey of real estate agents with the Real Estate Institute of New Zealand shows a net 63% are seeing fewer investors and a net 12% now say they are seeing more investors coming forward to sell. My monthly Spending Plans Survey shows a net 9% of the over 1,200 respondents are cutting back on their intentions of buying investment property.
But that just brings us to the Government’s third goal and the reason why I’ve written this week’s article. Is affordability improving for first home buyers? Once the Reserve Bank starts raising its cash rate, probably late next year, the Government will outright fail on this target because mortgage servicing costs will go up.
For the moment, though, there is little change as rises in fixed mortgage rates for terms of three years and beyond are being offset by small cuts in the one-year rate. But we’ve still not quite reached why I am writing this.
In my monthly Spending Plans Survey I also ask people whether they plan buying a dwelling to live in. This month a net 4.3% of respondents have said yes, up from 2.9% in April and 3.8% in March. Sounds good from the Government’s point of view.
But I can break these results down by age group and what they show is this. For all three of my age groups aged 31 and over the measure rose between April and May. But for people aged 30 years and below there was a decline from a net 26% in both March and April saying they will buy a house to live in down to just 15% this month.
Economist Tony Alexander: "Investors have an established record of spitting the dummy." Photo / Supplied
Right at the time when conditions are moving in their favour, first home buyers are stepping back from the market. This can also be seen in my other two surveys. A net 13% of mortgage advisors in April said they are seeing fewer first home buyers. A net 8% of real estate agents said the same.
This is the catch-22 situation which faces young people as they contemplate their biggest financial decision so far. Borrowing hundreds of thousands of dollars is a huge undertaking for most, and naturally they will be nervous. They will be reading numerous articles speculating on what the impact will be of government policy changes, with some people talking about prices falling.
They will have engaged with social media where the desirability of falling prices will be a frequent topic of conversation. They are young, naïve, and still taking their guide for appropriate behaviour from their elders and those they see as having more experience.
So, when they see investors pulling back, they do too – though not to the same degree.
My message to these young first home buyers is this. Investors have an established record of spitting the dummy and hating on the Government when moves are made which reduce their returns. They threaten to sell their properties and deprive tenants of homes to live in. There is zero record of widespread follow-through on such threats.
In an ongoing environment of record low mortgage and term deposit rates, expectations of many expat Kiwis coming home, a strengthening economy and strong labour market, rising construction costs with more to come, and Auckland only 18 months into the upward leg of its price cycle, the chances of prices falling for anything but a handful of “corrective” months are low.
Make your own assessment on the basis of what suits you best and what you can afford. But it pays to note that none of the Government’s housing goals explicitly involve pushing prices lower.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
