Economist Tony Alexander spoke at a OneRoof business breakfast held at Mavericks Conference Centre, Taupō, on Wednesday last week. Photo / Rachel Canning
Economist Tony Alexander spoke at a OneRoof business breakfast held at Mavericks Conference Centre, Taupō, on Wednesday last week. Photo / Rachel Canning
In his first purely residential talk in a long time, economist Tony Alexander's message to Taupō real estate experts is that market indicators are strong but people's outlook is gloomy.
"Houses are taking longer to sell, and I predict people will focus on negatives for the rest of 2022."
OnWednesday last week, Tony spoke at a OneRoof breakfast at Mavericks Conference Centre.
Every mont Tony gets "coalface" survey results from real estate agents, mortgage advisers, portfolio investors, residential property investors and consumers to gain real-time insight into what is happening in the New Zealand economy.
He then takes into account patterns in a number of indicators, including: the number of real estate listings, number of days it takes to sell a house, interest rates charged by banks, the official cash rate, migration, inflation, and central bank sentiment according to current pressure.
He says people seem to latch on to one or two of the above concepts, and from this they make assessments and predictions that often catch on.
First up, he knocked back a common perception he is hearing at the moment "house prices will fall and then things will settle down", saying he doesn't expect this to happen.
A snapshot from March 2020 to August 2022
As background to the incredible house price hikes the country has experienced, he says Auckland house prices were already on an upward trajectory from 2012 to 2019 due to inflation being too low. Then record-low interest rates meant Auckland went into lockdown in 2020 with good upward momentum in house prices and the rest of the country followed suit.
By May 2020, house prices fell 3 per cent, three months into the initial lockdown. Other factors then came into play: loan-to-value ratios (LVRs) were removed and the Reserve Bank cut interest rates again.
"Lockdown caused people to spend their overseas travelling money on home renos.
"As a nation we advanced our five-year plan to move out of the city and into the regions, to places like Taupō or Rotorua."
Tony Alexander speaking to an audience of Taupō real estate experts. Photo / Rachel Canning
He says we convinced ourselves the one million Kiwis living overseas would come home, and they would all want houses.
The result of these three factors was a "frenzy" in the six months to February 2021, when house prices went up 2.7 per cent each month. By the end of the 2020 calendar year, house prices had risen 18 per cent.
In April-June 2021, the Reserve Bank reintroduced LVR restrictions, tightened finance rules for investors (no more deducting interest), and after that house price growth slowed to 0.8 per cent per month. Tony's survey results show that from this point on, investors have withdrawn as buyers but did not sell their property as was widely speculated.
He says from June to July 2021, first-home buyers were cautious, but fear of missing out (FOMO) kicked in and they started buying in August 2021.
"I wanted to know why the residential property market would accelerate when interest rates were rising, credit rules were tightening, and net migration was negative?
"It was because the number of house listings was down, there were 18,000 listings in March and by August this was down to 14,000, and this was driving FOMO."
He says the effect of first-home-buyer FOMO ended when then the impact of the new Credit Contracts and Consumer Finance Act banking rules kicked in at the end of 2021. Banks were allowed to lend only up to 10 per cent of their lending to low-deposit lenders. The penalty for breaking the rules was a $200,000 fine, and Tony says the banks took on a highly cautious approach.
Last year Tony told a building industry conference to start being cautious about developers. He says the boom brought in too many new developers who are inexperienced, under-capitalised, over-optimistic and facing difficulties due to a building supply issue.
"There is a two-to-three-year adjustment to come in the developer sector."
Supply of property
Social housing in OECD countries represents 8 per cent of new builds, but Tony says in New Zealand social housing represents only 4 per cent of new builds.
"We're not building enough entry-level homes, but we are building houses in the upper price brackets. Many people are wondering who is going to buy the Auckland townhouses coming onto the market?"
He anticipates people saying "there's an oversupply of new builds" but says this is too simplistic.
Another pressure is an increased demand in the regions from city dwellers making the move to the provinces, "but this pressure may well have ended". He says councils around New Zealand are saying 'we don't have enough land' and this created hype in the regions, but says this is really just the long tail of the exodus from the city and Tony suspects population growth in the regions has already slowed "but it will take a while for the data to come out".
His data shows that first consumer and business confidence falls, and then house prices fall. House prices have fallen 9.5 per cent since peaking in November 2021.
"In 2008, house prices had already fallen 9 per cent before the Lehman Brothers collapsed and the global financial crisis (GFC) began. After the Lehman Brothers default [in September], house prices [in New Zealand] only fell 2 per cent."
Economist Tony Alexander presents his views on the residential housing market to a Taupō audience. Photo / Rachel Canning
New Zealanders living in Australia will buy houses in New Zealand
Over the past year a net 11,000 people have left New Zealand and Tony expects that number to rise to 20,000 by the end of the year. There are 750,000 New Zealanders living in Australia and he says data shows it is wrong to assume those people leaving now will ever return and make an impact on the New Zealand housing market.
To build or to buy an existing house?
Tony says people thinking about building a house are changing their mind and instead buying an existing house "because construction costs have gone up 25 per cent, holy cow".
FOMO and FOOP
Tony says his survey of real estate agents shows FOMO is gone, apart from in Queenstown, and FOOP (fear of overpaying) has arrived.
"The prices of 2021 are gone, and comments from last week's survey show that vendors are starting to drop prices.
"I say to house buyers, go and find three properties that meet your needs and get the agents to get the vendors to capitulate."
He says recently the Reserve Bank chief economist Paul Conway said the RB would consider house prices to be sustainable when they have fallen 15 per cent.
"In that case, we've done 9.5 per cent and therefore in three or four months' time headlines will appear along the lines of the RB saying house prices are now sustainable," Tony says.
End game of rising house prices
Tony says we are almost at the end game of house prices rising.
"People's negative attitude is dominant at the moment. But my indicators are for a return of a strong house market."
Fixed interest rates have peaked
His analysis shows markets have already priced in for banks' fixed interest rates to drop, and he predicts the official cash rate will fall late in 2023.
He says fixed mortgage rates change before interest rates change.
"The [New Zealand] banks are busily competing with cashback offers - what the heck, how did we get into this situation?"
He also predicts inflation will begin to fall next year.
Depositors
Tony says depositors are now looking at non-bank investments as they can get only 4 per cent for a year.
Finance availability
Tony expects once house prices have fallen, that LVRs will also fall.
The return of buyers
Looking back at the GFC, unemployment rose from 3.5 per cent in 2008 to 6.7 per cent in 2012. He says we are in a "job secure" market and expects unemployment to rise to 4 per cent.
"I think buyers are in the shadows and will come forward when house prices stop falling and when interest rates fall.
"My view is that house prices will rise 5 per cent in 2023."
Investors
Tony predicts investors are ready to buy residential houses, "especially if National wins the election and the Bright Line test goes back to two years [currently it is 10 years]".
Small and medium-sized enterprises
Are taking a hit, profits are down and costs are increasing.
Lifestyle market
Demand is still good.
Entry Level HousingTony says the figure of 51,000 consented dwellings is a red herring and predicts many of these homes will not be built. He says only 48 per cent of these consented dwellings are for stand-alone homes that will actually be built, with investors tending to build townhouses.
Someone in the audience said it takes Taupō District Council 52 days to process a building consent, and Tony replied that demand will be there for a while.
"I expect a bit of blood in the water for bare sections."
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