Housing fundamentals are slowing shifting

There are a great number of interesting things happening with regard to the residential real estate market in Auckland and most of them fall on the positive side for turnover and prices - though not necessarily for the next few months.

The big negative in play is the high level of pessimism being felt by consumers and businesses with regard to the New Zealand economy this year. People commonly expect that there will be a recession and that naturally makes people wary of taking on more debt just in case they get made redundant. The other negative in play is interest rates. 

The Reserve Bank is raising interest rates in order to slow down the pace of growth in the economy, potentially creating a recession according to their forecasts. So far there is only light evidence that inflation is easing and that is why the Reserve Bank increased the official cash rate by another 0.5% on February 22.

They still expect that the rate will go from the now current 4.75% to a peak of 5.5% in the middle of this year. That means floating mortgage rates are going to rise about another 1.25% from levels in the middle of February. But fixed mortgage rates have already been falling and are likely to continue to go down through 2023, though at a very slow pace.

The cost to banks of borrowing money to lend out at fixed rates reflects market expectations for what the cash rate will do over the relevant period of time. Those expectations for some time have been that tightening monetary policy will work and the cash rate will start coming down in the first half of 2024. These expectations have not been changed as a result of the recent cash rate increase or the terrible flooding in parts of the North Island.

Therefore, bank fixed borrowing costs are broadly where they were a few weeks ago. At current levels there doesn't seem to be any further scope for cuts in fixed mortgage rates. But this is where we start to get into the positives.

Because real estate turnover is so low banks are no longer meeting mortgage sales targets. In order to win new business they are aggressively discounting one and two year fixed mortgage rates but not advertising these rates to the general public. One bank for instance is offering a 4.99% one year fixed rate. Another is offering a 5.99% rate for periods of 18 and 24 months.

Slowly, these rate discounting developments will elicit interest from buyers. In fact, I can already see from my various monthly surveys that first home buyers are returning to the real estate market. Many things are likely to be attracting them back in and one of them is the fact that despite house prices on average in Auckland falling around 22% from late-2021 levels rents continue to rise and rental shortages appear to be worsening.

In fact my surveys plus others indicate that the pace of rent increase appears to be accelerating. Why might this be the case? Net migration flows into New Zealand have radically turned upward. Six months ago, the annual net migration flow was a loss of 14,000 people, now it is a gain of 16,000. Most migrants go to Auckland and that means Auckland’s population growth rate is now picking up.

Also relevant to Auckland is the sudden lift in foreign students coming to study here courtesy of some rule changes in China.

Another factor coming into play is that people are backing away from signing up for a new build. Banks have severely cut their financing for new multi-unit projects and there have been many unfortunate media stories of people losing money as overstretched builders and property developers have folded. More and more potential house buyers are looking at the stock of existing listings. 

This does not mean that house building will collapse, just that the pace of growth in Auckland’s housing stock is set to slow down.

For the moment the negatives dominate. But with stocks at good levels, vendors increasingly willing to accept buyers’ terms, mortgage rate discounting appearing, migrants coming in, and rents rising, it may not be long before other groups join the first home buyers already active at open homes. 

Tony Alexander is an independent economist and produces a free weekly publication with a housing focus called “Tony’s View”, available for signup at www.tonyalexander.nz