Progress of the housing cycle
I am starting a great number of my articles currently with some version of this sentence. Housing markets move in cycles, and we are in the downward leg now.
The upward leg was unusually strong on the back of record low interest rates, printing of money, temporary removal of some lending restrictions, and a scramble by people to focus on their home living conditions amidst the first global pandemic in living memory.
House prices got pushed to absurdly high levels and are now in the process of edging back down by perhaps 10% - 15% all up. If they fall 20% then that will take prices broadly back to where they were at the end of 2020, sitting some 17% above where they were at the end of 2019.
There are a number of reasons why house prices are correcting downward.
- Loan to Value Ratio rules were returned in February 2021, strengthened for investors from May 2021, then tightened for all borrowers from November 2021.
- Fixed mortgage lending rates have risen between 2% and 3% for 1-5 year terms since this time a year ago in anticipation of the Reserve Bank raising the cash rate from 0.25% to near 3.5%.
- Reopening of the borders has encouraged people to shift spending away from trying to purchase a house towards overseas travel.
- The border reopening has also prompted talk of a brain drain of Kiwis seeking higher incomes and freedom.
- The soaring cost of living has removed the ability of some people to raise a deposit or service a mortgage.
- The tax rules relevant to investors were changed last year and that has reduced investor demand for more property.
- The Credit Contracts and Consumer Finance Act changes effective from December last year have greatly reduced the ability of banks to lend to people with less than stellar records of personal spending restraint.
- The frenzy has ended and people who were buying simply because other people were buying have now stepped back out of the market.
The decline in prices is associated with a fall in turnover and annual sales by licensed real estate agents now total just under 80,000 from a peak of 100,000 in June last year. A fall towards 65,000 looks likely.
With fewer sales the stocks of listings are rising and now sit some 70% above levels of a year ago.
We are also likely to soon see some swift declines in the number of new consents being issued for dwellings to be built around the country. In fact, a large number of consents already issued will not be acted on. Shortages of materials, staff, and finance mean many projects cannot go ahead.
When will the market likely bottom out? Probably mid-2023. That might sound early to many people. However, one characteristic of the current turning of the cycle is that it has been greatly accelerated by the rapid speed with which monetary policy has been tightened and the unusual negatives of tax changes, a credit crunch, and border reopening.
Until the turning comes, and people accept it, a lot of people who want to buy will actively look for reasons to sit on their hands and do nothing. They will seize on the brain drain talk, rising debt servicing costs, and thoughts of property over-supplies in some parts of the country.
This means two things. First, when the cycle turns upward again there will be a period of catch-up buying. That upward leg may not come around again until 2024-25 if not longer for many regions where prices have a history of sometimes sitting still for 5 – 10 years at a time.
Second, for buyers who can step back from the negativism and consider true market conditions will find their ability to get exactly the type of property they are after is soaring. Vendors are more willing to negotiate and the volume of stock to choose from is likely to keep rising all through this year and much of 2023.