Sold stickers in a real estate office window in Auckland. Buyers demand is starting to drop. Photo / Fiona Goodall
The New Year is upon us and forecasts are coming thick and fast for how much house prices will change this year. Let’s start this fraught exercise by noting that no one correctly predicted what would happen with average house prices in 2020 or 2021. So, whatever numbers you see being bandied around, you’d probably do best to ignore them.
But there’s something I learnt in this field three to four decades ago. It doesn’t matter how many ifs, buts and caveats one sticks around a subject, people still want to know what your forecast is for it. So, much as I personally wouldn’t assign more than a 10% chance of this prediction being correct, my best guess is that on average New Zealand house prices this year will rise by about 5%.
The two main factors which will cause house price growth to slow from around 25% in the past year and 18% in 2020 will be a credit crunch and higher interest rates. The credit crunch is due to new rules under the Credit Contracts and Consumer Finance Act making bank directors personally responsible for any bad consumer lending their business does. Understandably, they have become more gun-shy to lend than perhaps any other time since the Great Depression.
The crunch also comes from the Reserve Bank cutting back on the volume of low deposit lending which banks can do, and those banks also choosing to impose debt to income (DTI) ratios ahead of the Reserve Bank probably officially requiring them from late this year.
Higher mortgage rates are already in place, but as the year advances and inflation more and more dominates the thinking and actions of central banks overseas and here, we can expect more rises.
These two factors will curtail the number of people able to get a mortgage. But the ball of flattening house prices will really get rolling when the sentiment factor takes over and people able to make a purchase decide to voluntarily step back. There are a few things which will cause able and willing buyers to take pause and sit back to either see what happens, or to shift their buying attention to other things like shares.
One is the eventual reopening of borders. The restored ability to travel offshore will see some people turn their spending to offshore experiences rather than a cosier Kiwi nest. Alongside this outcome will be the likely loss of a large number of Kiwis offshore, to Australia in particular where labour demand is exceptionally strong and wages much higher than here.
As the net migration numbers deteriorate we can expect to see people resurrect talk from previous house price cycles of how migration flows drive Auckland’s housing market. This talk will dissuade some purchases and encourage more vendors to come forward willing to meet the market.
Tony Alexander: “Does the flattening of house price growth mean falls are likely? Not really.” Photo / Fiona Goodall
In fact, a positive story for those first home buyers able to get a mortgage will be rising listings. Contributing to the better listings will be potential vendors slowly losing their fear of selling and not being able to buy again. They will revert to listing and then rebuying.
The sentiment factor which helps account for the feeding frenzy in our housing markets since mid-2020 has already started to turn away from the feeling of a visceral need to buy. My last monthly survey of real estate agents undertaken alongside REINZ in 2021 showed that late in November only a net 39% were seeing buyers display FOMO – fear of missing out.
This was down from 70% in October and a peak of 92% a year ago and the lowest reading since 35% in April 2020. The residential real estate markets around New Zealand have already turned away from frenzied conditions in all but a couple of regions.
But does the flattening of house price growth mean falls are likely? Not really. The labour market is strong, our economy well underpinned across many fronts, construction costs are rising rapidly, and there is still a lot of excess money sloshing around the economy looking for a home. These factors mean it would be unreasonable to think that 2022 will be a year in which buyers will be able to snap up bargains.
– Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz