First home buyers should focus on choice, not potential for bargains

Guest post from Tony Alexander

The Commerce Minister a few days ago announced some changes effective from early-June to the much detested CCCFA – the Credit Contracts and Consumer Finance Act. What they add up to is that banks have been told they can take someone’s word that they will cut spending when they get a mortgage and that regular savings in the likes of KiwiSaver do not need to be classified as committed regular expenses.

These changes make sense and highlight how poorly drafted the legislation was in the first place.

Interestingly however, the Commerce Minister does not believe the changes will have any impact and instead the credit crunch underway stems from things like LVR changes, rising interest rates and new bank caution in an uncertain economic environment.

To some degree he is right in that there are more things in play than just the CCCFA changes. But the CCCFA was the last straw which broke the camel’s back of credit hopes for many people – not just the young first home buyers but older people seeking mortgage extensions also.

The changes will help, but overall, we have entered into a new period when the availability of credit for home purchases is not as generous as it once was.

Will this cause major weakness in the housing market?

Some people might say yes, citing the fact that prices are already falling and that the negatives overall are in the ascendancy. However, while house prices are now easing and further falls are to come, this is not a crash.

In particular there are some strong insulating forces in play which will cushion prices on the way down and set the scene for a period when prices may sit relatively flat for an extended of time. Prime amongst these factors is the strong labour market. It is very unusual to see prices falling by all that much when people are feeling high job security and businesses are reporting record difficulties in finding both skilled and unskilled employees.

Another supportive factor is the continuing escalation of construction costs.

The shutting off of Russia from much of the rest of the world is disrupting supply chains, as is the increasing closing down of factories, wharves, and cities in China as they continue to follow an eradication strategy towards Covid-19.

The strategy is failing and eventually there will be capitulation to the Omicron variant – but that might not happen for quite some time and in the meanwhile flows of building materials to New Zealand will remain quite fraught.

We also are likely to see a high number of Kiwis move to the booming Australian economy and operating a business in our country will become quite difficult for many owners.

Add in some demand coming from the 165,000 people able to obtain the special pandemic residency visa, the large backlog of frustrated first home buyers, and an absence of any evidence of a wave of investors selling and we get some good support for NZ house prices.

The expectation held by most of us is that average prices will fall about 10%. That sounds reasonable. But before anyone gets fixated on that number it pays to note something very important. This is exactly the forecast of price decline most of us had exactly two years ago when the pandemic started – and look how things actually turned out.

For first home buyers the best thing to focus on going forward is not how much prices might fall but how much the range of properties on the market is growing and how one can focus back again on finding a property with the attributes one initially started searching for many months in the past.

Focus on improving choice rather than looking for bargains or trying to pick the bottom of the cycle. None of us can do that other than by looking in the rear view mirror after the event.

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