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As some of us are painfully aware (especially our first home buyers), the median house price across New Zealand has more than doubled in the past seven years. In Wellington, the median sale price for a house in September 2021 was a staggering $845k (Statistica, 2021). The average number of years required to save for a deposit on a house seemed like infinity to many.
For our first home buyers, this has been a discouraging and frustrating time, to say the least, and has left many wondering if they will ever be able to get onto the property ladder.
However, due to changes in the economic landscape, some are starting to question if the craziness of the New Zealand housing market has finally reached its peak. Based on my recent observations working the frontline in this market, I think the answer is clearly yes!
Demand is slowing, and there are more houses coming to market
Here is my list of reasons that I believe will slow down the housing market and flatten market prices.
House prices just couldn't keep going up for ever. The multiple of the average house price compared to income is simply unsustainable, with house prices now running at more than 10.5 times the median disposable income. In fairness, I have been saying that for some time, however, the market is now listening! Property markets are cyclical, and while I am not necessarily saying house prices will fall (more on that later), I do believe the changes in the economic landscape means the market is quickly moving from a "sellers’ market" to a "buyers’ market" – which is music to the ears of some of our clients.
Law changes impacting investors are starting to have an impact on investor portfolios. Both the changes in tax treatments for interest, and the cost of complying with new Healthy Homes regulations, are encouraging investors to sell off stock, leading to an increase in supply of housing.
These laws are also discouraging investors to purchase existing property. However, there is still significant interest in investors purchasing new build properties, which is partly due to the different tax treatment (and lending requirements)for this type of property.
We are now seeing a flood of properties coming to market. The number of house listings on the real estate market has bounced back up from all-time lows. Wellington, which bottomed out at 361 listings in August, has leapt up to 654 listing in December (at time of writing). Despite this, the average number of attendees to open homes has dropped out significantly. We are hearing from agents in our network that where earlier in the year they would expect around fifty parties through the door, are now seeing less than ten. The reasons for this are below.
Rapid interest rate increases are starting to concern potential purchasers. As I commented in my last blog (Fixed vs Floating), interest rates have risen over 1% in only four months. The difference in repayments for a current one-year rate of 3.6%, as compared to the market low of 2.19%, is a significant $1,410 more, per year, for every$100, 000 of debt. Increases in repayments like this are leading buyers to relook at their figures and are discouraging many from purchasing.
Recent legislation changes to the Credit Contracts and Consumer Finance Act (CCCFA)means that banks have toughened up on lending. It is hard to be specific around the lending implications of this, however, putting aside the extra paperwork being required, I would guesstimate this change alone is leading in reduction of lending to 'average' first home buyers by approximately $50k-$100k.
Reserve Bank has also imposed limits to low deposit lending and it is now almost impossible to get into a home without a 20% deposit, which makes borrowing much harder for first home buyers.
So, what happens now?
With the recent changes to the market, many experts are waiting to see if house prices will flatten out for a period, or if they will decrease. No one in my network, or anything that I have read (including from government sources) predicts house prices to continue the current surge. However, bank economists are divided on whether median prices will flatten or fall.
ASB economists have just come out predicting house price falls in 2022. In an ASB Housing Insights Economic Note ASB senior economist Mike Jones now sees "small falls" in house prices over the second half of 2022.
Tony Alexander, BNZ economist, doubts this however. Given the strong labour market, and unemployment dropping to 3.4 percent in the September 2021 quarter, Alexander doesn't expect property prices to fall. "I like to think the market is ending the unusual period of the price boom, rather than starting a sustained decline," he said.
The Reserve Bank sides with the ASB economists on this one. “We expect to see an easing in house prices over the medium term because of these supply-demand dynamics. This means house prices would be moving back toward a more sustainable level – a level that can be explained by underlying economic fundamentals.”
The move toward more sustainable house prices will be incentivized by slowing demand – as an outcome of higher interest rates and low population growth, and an increase in space to build. (Housing Matters - Reserve Bank of New Zealand (rbnz.govt.nz)
It’s a given that uncertainty will reign in 2022. As we have seen with the latest Omicron variant scare, we just don't know what is around the corner. Current mainstream predictions are for increasing interest rates and some kind of economic recovery... but who really knows?
Currently it is almost impossible to secure a Home Loan without 20% deposit/equity. As it was in the last time the Reserve Bank imposed tight restrictions(i.e., only 10% of their lending with 'small deposits’), banks adjusted, got on top of their figures, and started lending to those with lower deposits again. I would expect this to happen again in the New Year.
Mortgage holders will adjust their outgoings as interest rates continue to increase. Although we have been "enjoying" lower interest rates in the 2%, banks were stress-testing lending as if rates were at 6%. In theory at least, Home Loan holders should be able to cope with the increased interest rates. Yep, it may mean some belt tightening, but for at least the majority this should still be manageable.
Due to the changes in the CCCFA, it is as hard as I can remember to secure a Home Loan from a bank. Banks are declining many of my deals that would have been approved three months ago. Although we are told banks are now applying the new legislation, and this is the "new normal", I am sure that when their profit starts to take a hit (which it surely will, at their current approval levels), they will start finding ways to "loosen things up a little". Banks’ lending practices follows cycles, just like property and interest rates, and will change based on market factors.
The last three years have been quite a rollercoaster ride in the New Zealand housing market. It has been a ride that some have relished and that some wish they never hopped on. We all watch and wait now, with bated breath, for where this crazy ride will take us in 2022. Hopefully for those in a position to buy property, there will be more choice, and a little less pressure, through the process. We all have our collective fingers and toes crossed.
Hi, I'm Brendon, one of the Directors and Advisers at Velocity Financial. I have been giving advice on mortgages and insurances at Velocity for over 15 years, and it is great to be able to work with people to achieve their financial goals. Prior to giving money advice, I worked as a youth worker and managed teams for a not-for-profit organisation. I live with my wife and one of my sons (the other one only stays when he needs food) in Berhampore, and if I'm not talking revolving credit accounts, I can be found running the trails of Wellington.
brendon@velocityfinancial.co.nz
0272426496
Disclaimer: Brendon Ojala (FSP119244) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should betaken based on the information in this blog alone. Please see Brendon’s disclosure statement on our website.