Mark Fowler: The housing market conundrum

Some of the drivers of the house price boom have now fallen away. Photo / NZME

Opinion

OPINION:

Predicting the path of house prices in New Zealand is a bit like economists attempting to forecast future inflation - an interesting exercise but ultimately a futile one.

That is not to throw "shade" on economists but more an acknowledgement that it is a very challenging task and none of us have the benefit of a crystal ball.

What is now becoming apparent is the negative shift in sentiment from market commentators around the upward trajectory for prices of residential houses.

It has gone from a moderating in price, to in some quarters a market crash just around the corner. To be clear, I sit in the former and not the latter camp but let's look at the drivers.

There is no question that the three key drivers that have pushed the market higher over the last two years are disappearing. Most notably, historically low interest rates, easy access to credit and investor tax advantages.

Mortgage rates repricing is not a new story and we have around 60 per cent of all residential mortgages up for renewal in 2022.

For many, the jump from servicing debt at 2.50 per cent to now around 4 per cent is likely to be felt quickly, with the RBNZ reaffirming last Wednesday that they have no intention of slowing down when it comes to raising interest rates this year.

For new entrants to the market, accessing credit is becoming increasingly difficult, with the banks scrutinising household spending, in some cases at an itemised level.

This impact is not limited to first home buyers as it affects those looking to "trade up" and their ability to increase existing lending.

We are also yet to see how the withdrawal of interest deductibility will impact property investors, but needless to say, it's not likely to be a positive driver, particularly when you consider the impact to cashflow.

If you throw in household debt to disposable income which is running at around 170 per cent, then chances are you would have to be wary about entering the market, particularly as an investor.

However, it is never that simple when it comes to housing. Many a commentator has been left looking foolish when predicting the demise of the housing market, remember prices were meant to plummet 20 per cent post the Covid outbreak.

I was reading as recently as last week that "It's easier to sell a $5 million property at the moment than a $2m one," all adding to the confusion of the overall picture.

So, there is clearly capital to be put to work and maybe for those who aren't so exposed to the three key risks I discussed above.

Furthermore, there is evidence to suggest that post-Covid, we can reopen the immigration channel that many saw as a positive catalyst for house prices in the John Key era.

Household and business confidence can erode quickly for New Zealanders, particularly considering a lot of our wealth is directly linked to the value of our houses.

So while many see a storm coming in residential houses, my sense is it's more likely to be a squall.

• Mark Fowler is the Head of Investments at Hobson Wealth. This article contains market commentary and factual information only and does not constitute financial advice.