Impact of the cycle turning

I was speaking with the head of a nationwide real estate firm the other day and he spoke about his firm’s stock of listings quadrupling in the past few months and sales falling away to a greater extent than during the Global Financial Crisis.

After speaking a bit, I realised he was not accessing the REINZ data on sales and prices nor the data on listings and that perhaps he was being overly dramatic on the basis of feedback from his many new agents.

A lot of people have entered the real estate sector over the past few years drawn by high levels of turnover and rapidly rising prices which translate into rapidly rising dollar revenues for commissions priced as a percentage of sales.

The trouble with that is that real estate moves in cycles and there is always a period of weeding out where those newer to the sector learn that life is not always roses and that one needs to focus on long-term presence and personal branding in the sector rather than just riding the upturn part of a cycle.

The same comment applies to newer residential property developers. A lot of people have become developers in recent years because buyer demand for property has been extremely strong (in a panicked manner). But that demand is now easing off rapidly and not everyone has developed property over a long enough period to know how to exercise restraint on the way up and handle uncertainties surrounding costs, materials availability, labour supply, and working professionally with councils.

The same comment about over-exuberance by newbies on the way up applies also to some property investors. It is not always the case that property prices rise, and banks are not always falling over themselves to help you find ways around Reserve Bank and government rules to borrow as much as possible.

New restraints are now in place, prices are falling, and it is inevitable that some investors will find themselves over-stretched and in need of selling some of their property to remain afloat.

These things happen every cycle – probably for every sector. Such is the nature of cycles and capitalism. The question is whether there have been sufficiently excess elements of exuberance on the way up to produce a large rout on the current way down for the likes of these investors, newer, smaller developers, and many real estate agents.

For investors the answer is probably no. The period during which investors could borrow with minimal deposit was restricted to less than a year from May 2020. Since May last year they have needed a 40% deposit. Banks apply high test interest rates to gauge ability to service debt before advancing funds, and house prices have risen a long way above levels those gearing to the max would have paid pre-pandemic.

For developers it is hard to know. But I take personal solace in the fact that there are many bankers around who lived through the GFC and remember the pride felt by those who exercised restraint ahead of the 2008-09 downturn.

This caution by bankers, the ongoing tightening of lending rules and capital requirements by the Reserve Bank, and the lack of a surge in non-bank development financing this cycle suggest that the developer cleanout won’t be a rout which leaves thousands of home buyers exposed. More a tidying up at the extremities.

And agents? I would suggest looking not at numbers for one’s own firm but at those produced for one’s location and the country by REINZ and Those data show that total sales in the three months to March of 16,300 dwellings were just 17% below average for the March quarter over the past 10 years.

Listing stocks at the end of March were 23,400 which was a 32% rise from March 2021 but lower than all other March months apart from March in 2021 and 2020.