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Easing in price gains underway

Towards the end of last year, average house prices around New Zealand were rising at an annualised pace of over 35%. That is clearly an unsustainable pace of increase and things will slow down. In fact, much as we continue to see stories of some unusually high prices being paid by some buyers frustrated at missing out on so many other purchases, we already have evidence in hand that things are cooling off slightly.

The main indicator comes in the form of the REINZ’s monthly house price index which after rising 3.9% in November increased 2.2% in December then 1.3% in January. We could easily see a stronger gain reported for February as some investors would have scrambled to lock in a purchase and finance drawdown before the new 40% minimum deposit requirement became mandatory. But the easing trend is clear.

There is also an easing trend in the pace of annual growth in dwelling sales – but one might argue that could reflect a deficiency of stock. At the end of February, data from realestate.co.nz tell us that the number of properties listed for sale was down by 23% from a year earlier.

True, but the number of fresh listings received in the month was 14% higher than in February 2020. So, there is actually good growth in the flow of properties coming through – but also strong growth in the number of buyers looking to make a purchase.

There are other signs that things might have turned the corner and a reduced underlying pace of growth in prices is in the offing. My monthly Tony’s View Spending Plan Survey shows that whereas in December a net 13% of respondents reported that they intended buying more residential property, and in February a net 11% reported this, come March only a net 5% planned investing more in property.

This result is highly likely to reflect the new 40% minimum deposit rule for investors. But it will also likely reflect the simple tendency for demand to ease in response to an increase in supply, while supply can tend to go up.

Anecdotal evidence is in fact suggesting that some investors with large portfolios are easing off on their purchasing for the moment, but increasing their sales of some properties which perhaps require a tad more than average “attention” in the near future.

In the REINZ & Tony Alexander Real Estate Survey a net 5% of agents reported that they are seeing more investors bringing their properties forward to sell. This is the first time that this measure has switched from negative.

There might also be some buyer caution associated with discussion about what the new instruction to the Reserve Bank from the Finance Minister implies. The Finance Minister now requires the Reserve Bank to take the government’s housing policies into account when making its decisions, and to report on how its actions or inactions will affect desired outcomes.

Specifically, the Minister mentioned achieving more “sustainable” house prices, and reducing investor demand for existing properties. There is little agreement on what a sustainable price is and no number for average prices growth has been set. So that requirement may not have much impact. With regard to moving to ease off investor demand for existing property, this tells us that the government is probably well aware of the extreme pressures which are developing in the rental market – especially toward the lower end of the price range – and they do not wish to stand in the way of investors financing the construction of as many new rental properties as possible.

Given this deepening need, it is not likely that we will see exceptionally onerous new rules introduced either by the Reserve Bank – if they introduce any at all – or even by the government in their mid-May Budget.

Come the end of this year, the chances remain that average house price inflation will have eased down towards 10% with a further slowing likely over 2022 – especially as mortgage rates start rising. But that is a topic for another day. In a nutshell though – fixed rates almost always rise well before floating rates

and borrowers might want to keep that in mind before committing all their debt to just the one-year fixed rate term.

To sign-up to my free weekly Tony’s View publication go to www.tonyalexander.nz