40% deposits and a slight slowing in rising house prices

In my last column two weeks ago I wrote that the many factors in play strongly suggested that average house prices would continue rising this year – though at a pace slower than the frenetic speed seen in the latter months of 2020. Imposition by the Reserve Bank of a 40% minimum deposit requirement for investors does not change that outlook.

On the face of it one might think that requiring investors to stump up a large 40% could have a serious impact. After all, back in July 2016 when the 40% rule was applied by banks at the request of the Reserve Bank we saw house price inflation in Auckland stop while it halved elsewhere around the country.

But there’s a difference between then and now

Back then Auckland was due to take a rest after four strong years. This time around Auckland prices have only been rising very strongly since the start of 2020. So its cycle is not tired as was the case in 2016.

Back then average mortgage rates were around 4.5% as compared with 2.5% now. So affordability of housing is much better than five years ago. Back then also term deposit rates in banks were near 3.3%. Now they are 0.8% and after tax and inflation the deposited wealth of people is going backwards by 1% - 1.5% a year.

Property is still more appealing than money sitting in the bank

This loss of wealth is a big factor encouraging people to shift out of cash into something which either earns a higher yield or at least delivers an opportunity for some capital gain. Hence, around the world billions of dollars are flowing into assets like commercial property, shares, housing, and more exotic assets such as cryptocurrencies.

Finally, in the monthly Spending Plans Survey I run I can see that the age group which most bit the bullet and newly dived into the property market as investors last year was the 50-65 year age group. These are people who have probably paid off their first mortgage and built up some savings. Unlike those over 65 the bank is probably strongly willing to consider giving them a mortgage because they probably have a job.

Unlike those aged from 30 – 49 they are probably not still burdened with a mortgaged house. And unlike those under 30, they are probably not seeking their first house with investment far back in their minds.

The group which has become most motivated as the frenzy developed is the group most able to come up with a 40% deposit.

Therefore, as much as the new requirement will contribute to a minor slowing in the market, it will not remove the underlying level of angst in many quarters, including Parliament, regarding the pace of house price rises.

Now, having said that, we have just received monthly data from REINZ. They show that whereas average house prices around New Zealand rose by 3.9% in November and 2.2% in December, they rose only 1.3% in January. That is the slowest pace of monthly rise in seven months.

In addition, whereas in November and December house sales were 35% - 45% stronger than a year earlier, in January the annual rise was only 3%. There is some evidence of an easing in the frenzied pace of housing market growth. But my various surveys tell me that an intense level of interest still exists out there and that many buyers are eager to snap up whatever comes on the market.

Therefore, the chances do still remain strong that prices will rise firmly this year. But taking into account the January data, the 40% rule, and whatever is to come before the end of this month from the Finance Minister, a pace of annual price rise closer to 10% than the near 20% seen in the past year seems a reasonable expectation.

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