House price boom turns to construction boom

Housing Market Written by Tony Alexander, Nov 13 2020

Head shot of Tony Alexander

Over the past four months we have seen average house prices rise by 7% all around New Zealand so that they now sit 4% above where they were in March as we were heading into lockdown. Initially we could attribute the lift in prices to a surge of demand coming from first home buyers.

In my June REINZ & Tony Alexander Real Estate Survey, a net 55% of real estate agents around the country said that they were seeing more first home buyers in the market, and a net 25% said they were seeing more investors. In October these proportions were 59% and 38% respectively.

But in my November survey recently released, while the net percent for first home buyers was little changed at 64%, for investors it jumped to a net 59%. Investors have dived into the market over the past month as they can see rapid price gains being achieved and wish to gain exposure to a rising market.

This is a version for the housing market of what the predominantly young people seem to have done with share investing via apps back in May and June – diving in as prices rose and making some quick (and possibly continuing) capital gains.

The recent surge in investor presence in the residential real estate market has been accompanied by a relatively quick lift in the proportion of lending to investors where the deposit is less than 30% of the purchase prices. This latter development, in the content of a soaring housing market, has attracted the Reserve Bank’s interest.

Will LVR rules come back into play?

The RBNZ have just announced that they will undertake a review of Loan to Value Ratio regulations with lenders in December with a view toward bringing them back in come March 1. They made no mention of a distinction between investors and owner occupiers, and for that reason they have set the scene for an even more frenzied housing market over the next three months.

The chances are extremely high that LVRs will return earlier than the May 1 date the Reserve Bank had earlier indicated was the earliest that they would be returning. In fact, they had promised no return before that date.

Potential property buyers, now expecting LVRs to return, will look to make a purchase before they do if they do not have the required 20% deposit for owner occupiers or 30% for investors. But in expectation of these buyers diving into the market all other buyers with the necessary deposits will dive in as well.

The economy and housing market are stronger than expected

What the Reserve Bank should have done is more strongly admit that the economy and housing market are in far better shape than they anticipated and said in light of that the LVRs for investors at least need to come back into force right away.

Will the restored LVRs be at the old 80% and 70%, or maybe 60% for investors as was the case from 2016-2018? The 60% LVR (minimum deposit 40%) essentially stopped house prices rising in Auckland and about halved the pace of increase elsewhere. But the Reserve Bank actually wants house prices to go up.

Why should house prices go up?

Rising house prices deliver a small positive economic impact as people feel wealthier and spend a little bit more. But the much, much bigger economic boost underway now and for the next few years is coming from people switching from buying on the frenzied second-hand house market to getting a new house built.

The number of consents issued for the construction of new dwellings rose 7.2% in seasonally adjusted terms during the September quarter and builders report booming orders. Once again, all categories of tradies are in high demand and shortages are starting to reappear.

Growing house construction is a substantial boom for the economy through extra business for materials manufacturers and distributors, architects, inspectors and so on. Scope for people to set up a small business servicing the growing house construction sector is now very strong and for young people the likely benefits of entering the sector have blossomed.

To sign-up to either my free weekly Tony’s View publication, or weekly Tview Premium plus extras, go to www.tonyalexander.nz

We can help. Have a chat to one of our advisers.