Welcome to 2021 and my first weekly column for OneRoof. Each week I’ll look at different aspects of developments and trends in housing markets around New Zealand, with a special emphasis on the market accounting for about two-thirds of the value of real estate turnover in New Zealand.
But first, a trigger warning. Having undertaken housing analysis through the four housing cycle peaks since deregulation - 1987, 1996, 2004, and 2015 - there are some key things I’ve learnt about housing. The most important is that getting emotional about house price changes can be a mistake.
Distress about the high mortgages first home buyers have had to take on these past two decades to secure a property has led many analysts to forecast substantial price declines and advise people not to buy. They have had their analysis distorted by focusing on what they believe “should” happen rather than what “is” happening and what most probably “will” happen.
Getting emotional about government policy changes favouring tenants and selling one’s investment property in disgust last year or earlier has probably also not worked too well for such investors. House prices have soared these past seven months and one reason may be those earlier sellers scrambling to get back in.
The analysis and commentary I present here will be solely based on what I see happening and why, and where I feel things most probably will go using experience in the housing sector since the 1970s, and the numerous factors in play.
Economist Tony Alexander: "FOMO – fear of missing out – has soared, driven not just by evidence of prices soaring, but the lowest property listings on record."
So, let’s start with a high-level overview of why house prices have risen so much since we came out of the nationwide lockdown in May. These aren’t all the factors, but they are the main ones.
• Interest rates were cut to record lows in 2019, producing accelerating price rises around the country immediately ahead of Covid-19, and acting as the trigger for Auckland to end its three-year period of lying “fallow” which started in 2016.
• Interest rates got cut again in March 2020 and the Reserve Bank since then has emphasised its determination to keep rates low for many years, even hinting at a negative official cash rate this year - which almost certainly will not happen.
• Banks have cut term deposit rates far more than mortgage rates and this has produced a structural shift by some investors away from low-risk low-return assets to higher risk housing. To illustrate, since January 2019 the average two-year fixed mortgage rate has fallen 1.8 percent to 2.49 percent, while the average two-year bank term deposit rate has fallen 2.6 percent to 0.85 percent.
• Almost every Kiwi believes that once the borders open, we will be flooded with returning expats and desperate foreigners. This anticipated flow of people (which probably won’t occur to the expected degree) is driving behaviour now, encouraging people to buy before the new arrivals do. Reinforcing this behaviour, many people are swapping anecdotes, true or not, of Kiwis buying properties sight unseen while still stuck offshore.
• Diversion of $10 billion we Kiwis were going to spend on offshore travel into home renovations, gardening, spas, motorcycles, boats, and house purchases. But more than that, some people have time-shifted their five-year plans away from travel, travel, binge, travel and then buy a home, to buy a home first, then one day travel and binge.
• FOMO – fear of missing out – has soared, driven not just by evidence of prices soaring, but the lowest property listings on record. I can measure this explicitly each month in a survey run with the Real Estate Institute of New Zealand. Amongst many other questions, I ask real estate agents throughout the country whether they see buyers displaying FOMO. Back in May, a net 2 percent of agents said they were not seeing FOMO. Come June that was a net 31 percent seeing it, August 57 percent, and December 88 percent.
Will prices keep rising strongly? I’ll start looking at that issue from next week.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz