Be careful of media hype
Recently in the media, much attention was paid to reports that house prices in Auckland have fallen by 18%. Such reports are not accurate and instead the decline in prices so far is about 5%. The problem is that the 18% calculation is based on comparing the median (middle) price of properties sold in February with the median in the peak month late last year.
But this measure can get heavily thrown around by changes in the mix of properties sold from one month to another. In this case the February tally of sales included a lot of low-priced dwellings compared with November.
Instead, if we use the REINZ House Price Index which was developed with the Reserve Bank and adjusts for changing in sales mixes, we see that average property valuations in February were just over 5% down from November which was over 3% higher than any other month. In other words, hardly anyone has a house worth less now than in September or so last year in Auckland.
My desire in making this point is not just to give a warning to watch out for the price measure you may be using or reading about. It is to highlight that the media tend to take whatever the prevailing mood is on an issue and seek out sensationalist data and words to highlight the mood. That leads to a lot more clicks than saying nothing much is changing.
My pick from a year ago has been that this shift in media focus was on its way for 2022 and it has come earlier than I expected, courtesy of the extra weakness in the residential real estate market caused by the credit crunch underway since the September quarter of last year.
Many people have been unable to get the finance they wanted, and many have seen their bank withdraw what they thought were firm offers of finance availability. The credit crunch alongside rising interest rates and now a rising cost of living has caused buyers to pull back from the housing market. But at the same time more sellers are stepping forward.
Some are acting in a hurry because they expect further price declines. But many more are looking to sell because they have grown confident that when they sell, they will then be able to find something suitable to buy. These existing owner-occupiers are not usually much affected by whether prices are trending up or down. For them what matters is supply and the supply of houses – both new and existing on the market – is rising rapidly.
This is not so much happening because of an unusually big wave of sellers, but more because sales volumes have pulled back and the stock of properties on the market has naturally built up a bit
For buyers this is good news. FOMO (fear of missing out) has all but disappeared, and worries about a lack of listings now rank well down on the list of things which buyers have concerns about. Of far greater importance now are concerns about getting finance, followed by worries about rising interest rates, and then worries that prices will fall soon after buying.
Will prices in fact fall further? Probably, yes. Interest rates look like rising to about 5% - 5.5% for the one-year fixed mortgage rate. Net migration flows are now negative and likely to become more so, and new house supply is rising. But will prices crash? No.
There is tremendous support from the very strong labour market, construction costs have risen 14% in the past year and may rise the same amount again in 2022, and there is a large backlog of frustrated buyers who may only now be coming back to the market having given up due to a lack of listings in recent years.
Housing markets move in cycles. We have had the mother of all upward legs recently courtesy of the pandemic. Now we are in a retracement phase which may last all this year and add up to something close to 10%.
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