House price boom not quite over just yet
Since we emerged from the first nationwide lockdown in the middle of May last year, average house prices around New Zealand have risen by almost 37%. How can this happen when our economy briefly shrank 11% and the unemployment rate rose from 4.0% to 5.2%?
There are plenty of reasons, but as the Reserve Bank of Australia said last week with regard to the record 6.8% rise in Australia house prices in the three months to June, the main cause is record low interest rates.
For us in New Zealand it wasn’t just the 0.75% cut in the official cash rate to 0.25% in March last year. There was already the acceleration in the pace of house price growth coming about because of the 0.75% cut in NZ interest rates in mid-2019.
Along with the stimulus from low mortgage rates encouraging buyers and low bank deposit rates discouraging sellers, we also saw the removal of LVRs. Plus, with $10bn normally spent on overseas travel unable to be spent as such, around 12% has been diverted towards the housing market.
This is one of the key results from a special survey I recently ran regarding what people did with money unable to be spent on foreign travel. 26% went on home renovations and 20% on domestic travel. 18% went directly to savings and 12% to reducing debt. Overall 47% went into savings and investments of various sorts including property and shares.
Prices have also soared near 37% since May 2020 in response to FOMO (fear of missing out) taking hold. Plus, the economy has picked up quite strongly and produced strong jobs growth and a quick fall in the unemployment rate back to 4%.
Kiwis have also been buying property ahead of expats expected to return, and construction costs have soared while the supply of sections has substantially declined.
For the moment it looks like the upward trajectory of prices noted in this column last month is going to continue. FOMO has increased during lockdown, more first home buyers are back in the market, fewer investors are backing away, and the Reserve Bank has delayed its rate rise until at least October 6.
One cause of people re-engaging with housing more strongly in lockdown is awareness of what happened when last year’s lockdown ended. These various forces suggest that average prices will continue to rise at a firm clip into early-2022 and that the shortage of listings will probably get worse.
But the underlying forces which have driven our house prices up so strongly this past year and since the 1990s are starting to unwind.
Interest rates look set to rise about 2.5% over the next couple of years. The net migration flow of Kiwis is falling away rapidly and looks set to turn negative next year as booming foreign labour markets encourage many Kiwis offshore to boost their earnings.
House supply is booming, even allowing for some disruption from supply chain problems and Auckland’s lockdown. There are new restrictions on bank lending to home buyers, with more set to come soon because the government has given the Reserve Bank power to apply new restrictions if needed.
The Reserve Bank have in fact as good as said they will use new restrictions because they have stated that they do not consider the current level of house prices to be sustainable.
Also, we have new rules from the government which reduce the returns to investors, with a chance of new tax-related measures next year if house price inflation is still above 10% come March. And on top of that we have household debt already at record levels almost triple the multiple of income as three decades ago.
Add in our borders eventually opening up and money again flowing overseas and it seems quite reasonable to expect that over 2022 the pace of house price inflation will rapidly slow down.
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