Property investors backing away from the market

Guest post from Tony Alexander

The main thing of relevance to the residential real estate market which has changed over the past two weeks has been the high inflation outcome of 7.2% rather than the 6.5% rate which was expected. The number tells us that hopes of an early reduction to the inflation rate as a result of the monetary policy tightening which started just over a year ago have been dashed - and frankly hopes are all they were.

We economists know that it takes about 18 months for a change in monetary policy to have a decent impact on a country's inflation rate, so there wasn't a serious possibility that the recent inflation number would surprise on the low side. But it was still a bit too high for comfort.

As a result, wholesale interest rates have gone up

And banks have embarked on a series of fixed mortgage rate rises in order to rebuild their margins.

Mortgage rates are now generally sitting above the levels they were at back in June when for quite some time I was of the view that that was the peak. Such is the way these things go in a world replete with many shocks and uncertainties.

Can we see any impact in the real estate market as yet from the round of interest rate increases now underway?

I think we can going by the results from my two most recent surveys which have been undertaken since the surprise inflation result.

The monthly survey of residential property investors which I undertake with Crockers Property Management has shown a decrease in the net proportion of these investors thinking about buying another property from 10% down to only 2%.

This reflected a small decrease in the proportion saying they were looking to buy a property and a small increase in the proportion saying they were looking to sell.

There has been no change in the strong 65% who virtually every month say they intend holding their property for at least ten years or never selling it. So, all that's happened for the moment is some perturbations in the investment market.

We get confirmation of this disturbance from my monthly survey of real estate agents which is underway at the moment. With about half of the results in we can see that there has been a small pullback in the proportion of agents noting more first home buyers in the market but that the proportion remains firmly positive.

First home buyers are still looking to take advantage of the declines in house prices which have occurred and the slight loosening in credit conditions which has happened since the very tight situation of early this year.

But the most distinct outcome in the survey of real estate agents is a decrease in the proportion of agents saying that they are seeing more investors in the market looking to buy, and an increase in the proportion saying they are seeing more investors looking to sell. 

The movement of first home buyers back into the market is not being followed by investors

The latest data tell us that it is not reasonable to expect investors to move back into the market until we see interest rates coming down. That probably is not going to happen until the second half of next year. Having said that, if the political opinion polls continue to show that the outcome for next year's general election is likely to be a victory for the National opposition party then their promise of reinstating the deductibility of interest expenses will start to bring some investors back into the market from perhaps autumn or winter of next year.

Clearly things remain in an extreme state of flux. But I am still of the opinion that the endgame is underway for the period of decline in New Zealand's housing market. As previously stated, there is no upturn underway as yet and because of the new extra upward pressure on interest rates that upturn looks like it won't happen until maybe towards the end of summer and the start of autumn.

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