Last year, house-hunters made the most of record-low interest rates and loosened lending criteria to increase their portfolios or get on the ladder. This year, things are different: the Official Cash Rate has been hiked and is expected to be hiked again; interest rates are rising in accord, and loan-to-value and debt-to-income ratio rules have decreased. Meanwhile, there's record-low housing stock in parts of NZ, demand and prices remain high, but we're also told prices might have peaked.
Tony Alexander, an expert on the macroeconomic drivers of the housing market, answered subscribers' questions about what's going on, in a live Q&A today. Here's what he had to say.
Q: What are your thoughts on the new lending laws? How does the government think these will help first home buyers when essentially people can only borrow around six times their income?
A: I'm assuming you are referring to the RBNZ being granted the power to apply debt to income (DTI) ratios to banks and not the CCCFA changes. The aim is not to drive up home ownership. It is to limit the number of borrowers who will be caught out when interest rates rise and debt servicing becomes a much larger part of people's disposable income. DTIs are a tool aimed at reducing financial system risk and economic damage when shocks come along. These tools are not aimed at boosting FHB home ownership – except when they are tougher for investors as is the case with LVRs.
Q: Much of the rise in house prices has been fueled by overseas returnees. Do you predict that flow to reverse (mainly to Oz) and consequently affect the housing market?
A: Actually, on average over the past 10 years the net migration gain for NZ has been 39,000 people a year. But the past two years have been below average at 33k. For Kiwis, the net flow has averaged 17k outward since 2002 but there was a gain of 24k in the year to September 2020 and 9k this past year. So there has been a net Kiwi boost and I do feel some returnees for sure and many Kiwis not leaving for the moment also have contributed to the 39 per cent rise in prices since March 2020. But low interest rates are the main culprit, and real estate agents have long been reporting falling offshore interest.
Q: Do you agree with John Key's remark that the property boom is over?
A: It is almost over, but not yet. We are in the endgame of the price boom, whether you measure that as the 39 per cent rise since March 2020, the 190 per cent rise since the start of 2010 after the Global Financial Crisis (GFC), or the 770 per cent rise since the start of 1992 when inflation consolidated at 2 per cent in NZ. FOMO (fear of missing out) measured in my monthly survey of real estate agents remains elevated, anecdotal feedback as you note is that the frenzy continues. But as the months advance, we will see more and more restraint from rising mortgage rates, etc. and things will look quite different after mid-2022.
Q: When international travel resumes, do you see that resulting in at least a levelling off of demand for houses, and therefore prices?
A: Yes. My analysis suggests we spent about half of that $10bn and put the rest into savings and investments including 5 per cent into an investment property, 4 per cent into a house to live in, and 2 per cent on a holiday home. I expect borders reopening will see spending once again allocated to foreign travel. But also, I feel border closure led many young people who had been planning to travel, travel, binge, then buy a house to reverse the order of these things. They will now revert to offshore travel having either bought a house (subject to having locked in their interest rate) or give up on ownership for a few years.
Q: Isn't it too early to call the price acceleration peak as being over?
A: I agree. The feeding frenzy is still underway and one might better describe the FOMO-driven housing market now as being affected by the sort of factors driving money into cryptos – except in this case there is an actual need for the asset in question. A further 10 per cent seems like a reasonable expectation, as opposed to the 30 per cent gain this past year and 13 per cent gain the year before. This is what endgames look like – talk of a peak but disbelief that it is imminent.
Q: How do house flippers affect the housing market?
A: I believe such activity is a very small part of the market and the monthly survey of property investors I run with Crockers Property Management repeatedly shows 65+ per cent of investors intend to hold their properties for at least 10 years. Nonetheless, bidding by flippers does push prices up and stories of people making seemingly "easy" money by flipping are one aspect of a hyped-up market driven by FOMO – until it ends. Then some pain arrives for those who have overpaid at the cycle's top and end up selling at a loss. I see that happening within 12 months, maybe less.
Q: Economists got the picture horribly wrong last year. Why should we believe what they have to say now?
A: In webinars back then I would invite people to remember what usually happens when we have a global pandemic - none of us had the foggiest idea. But these hardly sounded like things that would boost one's economy. So, the universal expectation was that things would weaken. Our models stopped working after the GFC and have been of little worth in this pandemic period. Focus on managing risk rather than blindly relying on someone else's view be they a high profile economist or Steve down the pub. We're all fairly useless with predictions in this pandemic.
Q: When is a good time to buy a second house for investment?
A: We are very late in this loose money-pumped housing boom and risks of getting it wrong price-wise are higher than at any time since 2007. Mortgage rates are rising with inflation at 4.9 per cent and wages yet to take off. Credit criteria are tightening, Australia beckons for our young workforce members, the biggest house supply boom since the 1970s is underway, everyone is convinced there is a shortage from Auckland to Bluff and beyond, and many inexperienced, undercapitalised operators have entered the construction sector.
If one's investment horizon is long, then time is on your side and one can afford to wait or devote six months to open homes and auctions until the right property comes along. But a person has to be sure property is for them rather than other assets of good long-term returns such as shares, and we've all got to factor in the risk that a majority Labour government declining in the polls heading into the late-2023 general election hits investors again with the removal of the ability to deduct other expenses. You would do best to speak with an advisor who can dig deep to find out your goals, your vulnerabilities, your level of understanding, and your risk tolerance.
Q: With interest rates expected to continue to rise, how should I think about fixing my mortgage - at what rate, for how long, etc.?
A: Your best bet is to speak with a mortgage advisor so they can take into account fluctuations in your income, other debt and such-like. Last year and up until four months ago, I strongly emphasised that I would bypass the candy-like low one-year fixed rates and lock in for five years at the 2.99 per cent which prevailed from May 2020 to April this year. Hardly anyone did and history tells us Kiwis tend just to grab whatever is the lowest rate, and hardly ever fix longer than three years. Now, if I were borrowing, I'd probably fix three years given the five-year rate is almost 5 per cent with most lenders...
Q: What situation are first-home buyers facing?
A: As rates and prices go higher, fewer people will qualify for a mortgage, especially as banks roll out debt-to-income ratios. The housing market will slow. In every cycle there comes a point when for many people it is just too risky to make a purchase – more because of the risk of rising borrowing costs and loss of income rather than having one's house fall in price. It is the combination of income loss at a time of high interest rates which always causes tough times for many recent home buyers and the need to sell (in a weak market) for an unfortunate few.
Q: What are the chances of buying a first home with a large mortgage, only to see one's equity disappear as the market falls back say, 10 to 15 per cent, and then stays flat for a few years?
A: As a rule, NZ house prices only fall when we are in a recession or financial crisis preceded by a decent hike in interest rates. At this stage, I am not predicting a recession. But the longer the Reserve Bank waits to bring the hammer down on high inflation, the greater the risk they will have to repeat what they did over 2006-08 which was throw the economy into recession. They caused a 9 per cent or so fall in house prices before the GFC sent them down another 2 per cent or so. I have never given thought to the price outlook when making a property purchase...
Q: Do you think young people will leave in droves to Australia because of unaffordable housing and high living costs? How can people want to immigrate here?
A: Yes, I expect a large flow of Kiwis to Oz. It is what we have done for generations when their labour market is strong. The NZ government have promised to restrict visa issuance when borders reopen, and there is no business/government drive to rapidly boost migrant inflows to assist the economy, as is in play across the ditch. Our government, unlike Australia's, is not focused on economic development, for which people are vital - especially those bringing skills and drive from offshore. The flow out will offset expected house demand from 165,000 migrants gaining visas and some buying a house.
Q: The current mortgage loan offering of table loans exclusively (with front-loaded interest) is a recipe for disaster if there was a correction. Do you see those loans ever being offered again, or are we stuck with table loans?
A: Anyone can structure loan repayments to reduce principal over time and interest-only debt is becoming very difficult for people to access now.
Q: I read on CNBC an international pundit suggesting that interest rates may stay low indefinitely...
A: I was such a strong advocate for a year of fixing five years at 2.99 per cent because of my expectation that interest rates would rise. So far, NZ mortgage rates are up 1.3 per cent - 1.8 per cent with rises of that magnitude again still to come for most fixed terms. Inflation is 4.9 per cent and is set to go higher. Wage growth has yet to hit rates from 2003-08, a record low 25 per cent of businesses say lack of customers is their main output constraint, a record net 83 per cent of households expect higher inflation and more than 60 per cent of businesses plan to raise their selling prices - with supply chain problems giving the power to do so.