Reserve Bank promotes higher house prices
Last month I wrote about what I had learnt regarding housing markets over the past few decades, concluding with an emphasis on the current important factors.
- Record low interest rates.
- A pre-lockdown migration boom with another surge expected once borders reopen.
- Lack of listings.
- Labour shortages.
- Absence of many forced sales because job losses have been borne substantially by non-homeowners.
All of these factors help account for the exceptionally strong numbers on the residential real estate market which we have seen over the past month. Sales for instance in the three months ending in October were 31% ahead of the same time last year. Auckland was ahead 53%, Queenstown 34%, but Dunedin was down 4% and Gisborne up just 3%.
Experiences have been highly variable with regard to sales. But this is not so much the case for prices. Nationwide average prices have risen by almost 11% since the low point of May. Wellington is ahead 16%, Auckland 11%, Dunedin 12%, Queenstown 10%, Canterbury 8%, Gisborne 19% and so on.
The pace of price rises has been very unusual, and we can put a lot of the surge down to a sharp lift in FOMO – the fear of missing out.
Each month in the REINZ & Tony Alexander Real Estate Survey I ask agents all around the country what they are seeing, including whether they are observing FOMO.
Back in May a net 2% of agents said they were not seeing FOMO. In June that lifted to a net 31% positive and the response has risen every month since to reach a net 88% in November. This tells us that people can see prices rising strongly, can see the shortage of listings, and can see lots of other people trying to buy properties.
The sentiment has fed upon itself and produced a massive surge in the number of people attending Open Homes and auctions and borrowing.
In particular there has been a surge in borrowing by investors with less than the 30% deposit which was required up until March this year when the Reserve Bank removed all LVR rules.
Up until three months ago about 15% of lending to investors involved less than a 30% deposit. Over the past three months that proportion has surged, reaching almost 37% in September. For first home buyers the situation is quite different. There has been no change in the near 42% proportion of loans to first home buyers where the deposit is less than the old required 20%.
Banks have started restricting low deposit lending again, well ahead of the Reserve Bank undertaking consultation and restoring LVRs from March 1 next year – over four months from now. Will reimposition of LVRs now have much impact?
For first home buyers no. For investors yes. The scramble will ease slightly. But will prices stop rising? Almost certainly not because of all the factors mentioned above – plus one more. The Reserve Bank wants house prices to rise.
In fact, the RB are so desirous of house prices rising that they have described the alternative of prices falling as reflective of a Great Depression. This is somewhat absurd, but it does not change the fact that they will not alter policy so much that prices no longer rise. Why?
Rising house prices tends to make people feel wealthier so they spend more to a greater degree than potential buyers might save more. More importantly however, rising prices tend to promote construction of houses and the home-building sector is now on the cusp of a boom.
Orders placed with builders are literally soaring, sections, developable land, and subdivisions are being snapped up and developed.
Builders are expanding and seeking staff, and this has many benefits for the economy. More jobs on building sites and for manufacturers and distributors of building materials and the numerous consulting services associated with house building.
In a nutshell, the Reserve Bank has great power and for five years they have been using it not just to try and promote slightly higher inflation, but to directly push house prices higher to gain greater jobs growth. There seems little reason to expect they will alter behaviour now and take any actions which will stop house prices rising. It is only high-risk lending which they are interested in containing for now.
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