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The good & bad of rising interest rates

Maybe because winter is the time of year when turnover in the housing market is seasonally weakest, up until the lockdown I was speaking at a number of conferences of real estate agents around the country. Each talk has been different, but they all centred around some key themes relevant to agent, buyers, and sellers of residential property.

First, much as the 31% jump in average house prices this past year is ridiculous from an affordability point of view, there are solid reasons explaining the rise. Topmost of these is the cutting of both mortgage and bank deposit rates to record lows in 2019 and again in March as we entered lockdown. There was also the removal of Loan to Value Ratio restrictions (LVRs), anticipation of a flood of expats coming home, diversion of the $10bn we’ve been unable to spend on overseas experiences, rising construction costs, FOMO (fear of missing out), and a soaring jobs market.

Second, both the Reserve Bank and government are trying to cool the housing market. Are they succeeding? Both Treasury and the RB in May predicted house prices would rise only 1% in the year to June 2022. In the month of July alone they jumped 2.4%.

What's the value of my property?

The Reserve Bank have more than restored LVRs with investors now needing a 40% deposit versus 30% early last year. Treasury/the government have removed ability to deduct interest expenses for new investor purchases of existing properties and extended their brightline test.

Initially, the housing market was definitely impacted by the changes over February and March. House sales soared over the second half of 2020. But they fell 12% seasonally adjusted in the three months to April and were down 7% in the three months ending in July. Average house prices rose 9% in the three months to April but only by 3.6% in the three months to July.

But there is now strength returning. On a monthly basis average house prices rose by 0.5% in April, 0.8% in May, 1% in June, and 2.4% in July. The monthly survey of real estate agents which I run with REINZ shows that perceptions of FOMO bottomed out late in April with this feeling of angst reported by just 49% of agents. Late in July that proportion had recovered to 66%.

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Late in May 37% of agents said buyers were concerned about falling prices. That proportion is now only 19%. Why has strength returned? The labour market is exceptionally strong and delivering high job security which traditionally underpins firm willingness of people to buy a property. Construction costs are rising and many potential buyers who had decided to get a house built are switching back to looking at listings because builders and sections are in short supply.

Investors have done the sums and realised the best investment option for most is still residential property in light of their ability to gear using bank debt – something not possible for most other assets. Plus interest rates remain low and there is the established record of virtually every forecast of falling house prices being wrong for the past three and a half decades.

So, where to now? There are more new factors in play which will cause a slowing in prices growth than an acceleration. The Reserve Bank has recently cut the ability of banks to lend to people with less than 20% deposit. Population growth is set to slow further as many Kiwis shift to Australia for better incomes. House supply is rising rapidly.

Plus, interest rates will be going up when lockdown ends and rises of 2% or more are likely in the next 18 months. The bad news for borrowers is obvious. But with good budgeting and an acknowledgement that rates will still be extremely low by NZ standards should, the buying plans for many will remain unchanged. The good news for those yet to purchase is that rising interest rates traditionally bring forth increased listings as sellers cease waiting for higher and higher prices. And one more factor to consider is that with house prices still rising strongly, additional steps by government to dissuade investors from buying existing properties are highly likely.

What could I sell for?

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