House price inflation to gradually ease
In my last column for 2020, written a couple of months ago, I retained a positive outlook for house price rises on the basis of the Reserve Bank wanting to maintain record low interest rates, surging FOMO (fear of missing out), lack of listings, plus a few other smaller factors. Have things changed?
On balance no. In terms of restraint on the pace of house prices rises we have evidence of all banks now applying the old LVR rules (minimum 20% deposit for most owner-occupier buyers and 30% for investors, with one bank demanding a 40% deposit from investors. We also saw some stepping back from the market of a few buyers ahead of the summer holidays.
But we have also seen competition for market share between banks cause a one-year fixed mortgage rate of 2.29% to become available from 2.49% previously. We have also seen various surveys show surging business and consumer confidence, with a strong lift in business employment intentions likely to provide extra housing market support this year.
There is however growing pressure on the government to do something about the rapid increase in house prices (11.7% over the four months to December), and this resulted in the Finance Minister penning a letter to the Reserve Bank. The Finance Minister suggested that the RB should look at ways of restraining the pace of house price gains.
But the Reserve Bank replied noting that they are not required to do this, that they alter the loan to value ratio rules merely to restrict growth in higher risk lending, and that if they were tasked with supressing house price gains this would lead to worse outcomes for growth and employment. That situation would arise because suppressing house price inflation would imply interest rates higher than would otherwise be the case, and that would restrict growth by pushing the NZ dollar higher, and discouraging both consumer spending and to a lesser extent business investment.
So, will we see the government take other measures to try and suppress the pace of house price gains? Probably yes. But any changes they might make will be extremely limited in impact because the constituency in favour of higher prices vastly exceeds the number of people wanting house prices to fall.
No first home buyer who has taken on a large mortgage in the past five years will want house prices to fall, potentially wiping out their equity. No investor will want the value of their asset to decline. And although owner occupiers may sell and buy in the same market – so price changes are not hugely relevant - many have an eye toward one day trading down. For them falling prices will be a net negative because trading down will not free up as much cash as would otherwise be the case.
The chances are very high that over 2021 through 2022 average house prices around New Zealand will continue to rise. However the pace of increase is likely to slow. Why? Two key reasons.
First, behind the scenes the Reserve Bank is likely to encourage banks to restrict their home lending growth. Banks are likely to accede to the RB’s whispered wishes in the interests of good relations, and as they quietly lobby for the ability to once again send profits to their parents in Australia and encourage further watering down of new capital requirements.
Second, and this will be the bigger factor, markets will simply approach new price equilibriums. The higher prices go the more potential buyers will back off while a few more sellers will step forward. In asset markets, as opposed to normal markets for goods and services, this process is often forestalled for a while as investors look to ride a rising wave.
But as lending criteria tighten up the layers of new investors start to get thinner, and that is a process now already underway as LVRs get reinstated.
All up, even adding in high levels of house construction, the case cannot be made for prices falling or even flattening out. But a slowing in house price inflation as we advance through the next two years is highly likely.
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