Housing markets move in cycles and although the cycles can sometimes be hard to pick, there are times when it seems clear that things are going to head back the other way.
That was the case over a year ago when in my commentaries and presentations I noted that we had entered the endgame for the boom in house prices regardless of which short, medium, or long-term cycle one was talking about. These were respectively the price boom from June 2020, the boom from 2012-2015 depending upon the region, and the boom from 1992 which has produced average nationwide price gains of 7% a year.
My expectation was that come the June quarter of this year we would see the market heading back in the other direction. But the turning point came six months earlier than I expected and the downward leg of the cycle is proving to be particularly fierce.
The main factor causing the market to turn from an Auckland price peak in November and peak elsewhere in February was the credit crunch. This came in the form of reduced ability for banks to undertake low deposit lending from November, then new rules for responsible lending effective from December. But other factors were already in play.
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Loan to Value Ratio rules returned in February 2021 and were strengthened in May. Tax rules affecting investors were toughened from the end of March. Fixed mortgage interest rates rose between 2% and 3% from early-2021 to late in the year.
More recently we have seen a rise in discussions of a brain drain from New Zealand, a soaring cost of living, higher energy prices due to the war in Europe, and concerns about completions of new dwellings amidst newly worsening supply chain disruptions and soaring materials prices.
It never rains but it pours, and we can see the extent of the turning in the market in a range of indicators. The main one is the REINZ House Price Index for all New Zealand which from data released in mid-January showed prices to be falling. They are now down near 10% in Auckland and 3% in the rest of New Zealand.
In my monthly survey of real estate agents undertaken with REINZ, we can see that back in October 70% of agents said they were seeing buyers display FOMO – fear of missing out. That reading fell to 21% in January, 7% in February, and in my latest survey declined to only 4%. In contrast, in October 19% of agents said buyers were showing FOOP – fear of over-paying. Now that stands at 73%.
In October 60% of agents said prices were rising in their area. Now, 70% say they are falling. To sum it all up, in October a net 53% of agents said that we were in a seller’s market. Now, a net 47% say we are in a buyer’s market.
Economist Tony Alexander: “Rejected vendors can be caught in a downward spiral of cutting their asking price, turning down an offer below that, then cutting again.” Photo / Fiona Goodall
The turning of the market has been brutal and comments from agents at the coalface tell us why annual turnover has already fallen from a peak of 100,000 sales in the middle of last year to 78,000 and look headed below 65,000. It is not just that buyers have stood back feeling that time is now firmly on their side. Vendors have shown a high reluctance to accept that the absurd prices of late-2021 will not return.
That attitude is costing many sellers dearly because in a declining market the first offer is often the highest and if that gets rejected vendors can be caught in a downward spiral of cutting their asking price, turning down an offer below that, then cutting again. But this is where things get interesting.
As previously noted, this is not a downturn in the housing market associated with a wave of distressed sellers. The unemployment rate is at a record low and job security is very high. In fact, when I ask agents what buyers are worried about only 8% at the end of May said employment and incomes. In October that was 13%.
The main concern of buyers is rising interest rates observed by 83% of agents, followed by problems getting finance seen by 74%. Only 7% say lack of listings is an issue, down from 66% in October.
Interest rates have risen sharply since October, putting pressure on the housing market. Photo / Fiona Goodall
Very few people who currently own a house will end up paying a mortgage rate higher than the test rate their bank used for assessing their ability to service their debt over an interest rate cycle. This comment might seem overly optimistic in light of the Reserve Bank’s recent bringing forward of the time when it sees interest rates peaking to mid-2023 from mid-2024 and lifting their predicted peak by 0.5%.
But the economy is already showing signs of the weakening they are seeking by raising interest rates. In particular, retail spending fell in the March quarter and my monthly survey of people’s spending plans shows a net 20% of us are planning to spend less in the next 3-6 months. Back in December this reading was a net 17% of us planning to spend more. The retailing outlook has turned on a dime and that is very positive for inflation coming down. The chances are good that mortgage rates will reach their peaks late this year and at levels not as high as implied by the Reserve Bank’s hawkish numbers.
There will be very few mortgagee sales. Those that do occur are likely to be mainly partially completed developments.
Again, as noted previously, one characteristic of this downturn will be the failure of many newer developers who lack the capital, finance, and experience to see themselves through a construction demand pullback and the biggest materials supplies shock on record. Feedback from the banking sector tells me that the large developers have good finance in place and the experience to handle the weakness. But the newer ones who have had to partially rely on second-tier finance will have issues and they are the ones most likely to face liquidation.
If we entered the endgame for the cyclical boom in early-2021, when will we enter the endgame for the bust? My current best guess is early-2023 with a prices plateau towards the middle of that year. As for when the next upturn starts, history suggest a few years of things being relatively flat usually arise before prices start jumping again.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
