The boom has ended
In the almost two-year period since we first went into nationwide lockdown in March 2020, average house prices around New Zealand have risen almost exactly 40%. This is the complete opposite of what everybody expected as we contemplated recession and a collapse in confidence associated with the global pandemic.
Initially prices did fall by about 3% over April and May. But then buyers flooded to the auction rooms and online sales in response to some very stimulatory factors. Interest rates were cut from already record low levels to even lower ones and kept falling through to the middle of 2021.
Loan to value ratio restrictions were removed and the $10bn which we Kiwis normally spend travelling overseas got diverted to other factors, including buying up each others houses. Around the world people focussed on improving and modernising their lockdown nests, and with only so many people having renovation skills or able to find the relevant tradespeople, for many this meant purchasing a different house with more of what they were seeking.
We also saw many people bringing forward in time plans which they might have had for purchasing their first home, shifting to a retirement location, or becoming a property investor.
It all added up to a feeding frenzy which saw the annual turnover in properties sold by licensed real estate agents peak at 100,000 in the middle of 2021 from 79,000 in March 2020. Turnover has now decreased to 88,000 and the most recent data from REINZ tell us that average house prices all around the country fell by 1% in December.
That is probably best interpreted as signalling the end of the boom rather than the start of a sustained period of price decline in response to many suppressing factors. Many young people can no longer get mortgages because of the government’s Credit Contracts and Consumer Finance Act changes and the Reserve Bank’s tightening of LVR rules.
Many investors pulled back from fresh purchases in April last year and some are now selling in response to the growing loss of ability to deduct interest expenses, rising costs, and banks requiring they shift from interest-only to principal and interest mortgages.
We are also seeing net migration outflows from New Zealand, interest rates are rising, and new house supply is booming. Already FOMO – fear of missing out – has gone. My latest survey of real estate agents alongside REINZ shows that only a gross 22% of agents now say they are seeing FOMO on the part of their buyers. In October that proportion was 70%, the near two-year average is 66%, and the previous lowest reading was 35% in April 2020.
A net 11% of agents say that sellers are now more motivated to transact than buyers. In October a net 53% said that the buyers were the most motivated party in a transaction. This means we have quickly shifted to a buyer’s market.
But while vendors now need to be a lot more realistic in their price expectations and their acceptance of conditions in purchase contracts, buyers should not begin thinking that a large downward correction in prices is going to occur.
Prices largely will flatten and in some regions undergo small declines. But there will be support from the backlog of buyers who have been waiting for the frenzy to end, the very strong jobs market and high job security making many people keep looking for a home, rising construction costs underpinning prices, and high overall inflation encouraging investors to hold onto assets which tend to keep their value as general consumer prices soar. That means housing favoured over bank accounts for instance.
The house price boom has ended. Listings are already rising as vendors grow confident of being able to buy again if they sell, and new-build supply continues to grow. For buyers this is good news. Now, all
that’s needed is for the government to alter the Credit Contracts and Consumer Finance Act so banks can restart much of their lending again!
To sign-up to my free weekly Tony’s View publication go to www.tonyalexander.nz