Holidays and house purchases

Each month I run a survey with the REINZ of real estate agents all around New Zealand, asking them what they are seeing. My latest survey, which yielded a good 369 responses, shows that FOMO, fear of missing out, remains as strong as ever.

A net 88% of agents say that they see FOMO amongst the buyers in their area. Unsurprisingly then, a net 88% (coincidentally) also say that they believe house prices are rising in their location. This is down from a net 97% in my November survey but is clearly a very high outcome which will not bring relief to buyers – hence their FOMO.

However, in spite of what is still a high level of interest from buyers, a number of indicators have pulled back for the first time since the survey started back in May. A net 42% of agents said that they are seeing more people showing up at auctions. This is down from a net 47% last month.

A net 38% said that they are seeing more people at Open Homes. But this is down from a net 59% in November and similarly high results in October and September.

End-of-year fatigue

These two indicators suggest that although buyers remain interested, they could be getting somewhat tired after many weeks and probably months of looking through numerous properties and attending increasingly packed auction rooms. The approach of Christmas is probably encouraging a few of these tired buyers to take a step back and take a break.

Will they return once the holidays are over?

Almost certainly yes. For investors there are two key things which matter – yield and momentum. The yield on property taking into account even the most conservative assumption of long-term capital gain, is seen as far superior to the yield on alternatives such as cash in the bank.

After ten years, a deposit of $200,000 at an interest rate of 1% per annum and tax rate of 33% will produce an amount of $214,000 which adjusted for inflation will represent a fall in wealth of about 6.5%.

In contrast, if someone uses their $200,000 as a deposit and borrows $460,000 to purchase a property, after ten years assuming a 5% per annum capital gain and that a rule change means they pay a 33% tax on the capital gain, they will have $478,000. To that or from that they add or subtract the net rental return each year to get the final outcome which is likely to be considerably higher than $214,000.

Property investing isn’t going anywhere

Even if the government extends the brightline test to ten years it will make virtually no difference to the decision whether or not to invest in property versus other assets like simply leaving cash in the bank.

This perhaps explains why in my survey a net 45% of agents say they are seeing investors in the market. This is in spite of banks lifting their deposit requirement back to 30% well ahead of the March 1 date when the Reserve Bank have all but stated they will be restored compulsorily.

Partly this investor interest will reflect the second factor which tends to motivate people – momentum. Prices have been rising strongly since July with nationwide gains averaging 2.3% a month since then. Newspapers every day have stories of property shortages, rising prices, and people looking at locations further and further away from their initial search zone.

This is something we have seen in previous cycles whereby with a lag prices increase sometimes by exceptionally high percentages in far-flung locations. One factor likely to accentuate these price gains in more distant towns is the timing of summer holidays right as the housing market is most frenzied, right when FOMO is at its highest, and right when a large proportion of the population have indicated they intend taking to the road to see the country.

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