It’s around this time of the year that I take an educated guess at what will happen with house prices and mortgage rates.
As I’ve said time and time again, the strongest correlation that exists is between house prices and interest rates.
Lower interest rates combined with confidence will increase house prices.
I’ve already forecast previously that the average house price in New Zealand will hit $1 million by 2030. The way house prices are skyrocketing right now you’d think that could happen sooner!
I’m uneasy about the current market, once again driven by a shortage of good properties and a supply and demand imbalance. Whenever we get a bit of confidence in the market, buyers surge back in and there is never enough property available, with buyers prepared to pay more and more for the same house.
This activity is not driven by first home buyers.
If there is one market driven by affordability it’s first home buyers. On a positive note for this market, there is a significant Increase in the number of entry-level new builds. The nature of new builds is also changing from standalone houses to townhouses and low-level apartments.
The challenge is coming from homeowners who have built up equity in their property over the past 5-10 years and now want to upgrade to a better property. They are selling up for a high price and then being forced to pay more to buy back into the market. That’s how a $1.3 million property sells for $1.9 million.
It’s also driven by builders converting an 800sqm site into five townhouses. They are buying up anything that is subdividable and paying top dollar. This is simply a function of a housing shortage and a transition to higher density living in the city. Some builders are happy to work on relatively low margins which combined with higher density will pass-through into the market as higher land prices.
I think there is a strong basis to expect higher prices over the next decade. That will also bring investors into the market and a continuation of a supply and demand imbalance. We will continue to see volatility with a period of flat or slightly lower house prices followed by a period of explosive growth until policymakers get on top of housing supply issues.
If I look ahead to 2021, I think there is a likelihood that the current momentum will run out of steam. At some point the reality of an economic recession will bite, confidence will weaken, and the Reserve Bank will look to restrict credit growth with the reintroduction of LVR restrictions and pushing ahead with higher capital requirements for our banks. The LVR restrictions will be back in place within weeks, not months. The 30% deposit requirement for investors will help slow momentum. The speed limit for first home buyers won’t have a big impact as credit is already restricted in this market by the banks themselves and they haven’t exceeded the speed limit even with it not currently in place.
If there was some price softness to come through next year, it should not concern first home buyers.
Entry-level prices are underwritten by build costs. In recent history any price risk has largely been felt by higher value properties and land. And I’m still of the view that with historically low mortgage rates the longer-term trend is for house prices to keep increasing. I see similarities with the share market where you need to look through short-term volatility and not try and second guess the market. Nobody can accurately predict when or when not to buy, and plenty of people got it wrong over Covid.
The world is pretty uncertain and asset prices are bubbly with our economies awash with newly printed money. Fundamentals have gone out the window when it comes to the share market. It feels speculative. Investors are betting on more money printing pushing up stocks as opposed to the actual performance of publicly listed companies. A lot of this will be driven by passive investment strategies that dictate money must continue to flow to overvalued stocks simply because of their weighting in the index.
I’m not going to dive into this as it could be an entire book on its own trying to dissect current economic theory and the implications for the real economy. In your world, it’s simpler.
In short, they will go lower. The Funding for Lenders program proposed by the Reserve Bank will push mortgage rates below 2.00% in 2021. Basically, the RBNZ will borrow very cheap money and pass that on to banks. Lower interest rates will help protect asset prices and reduce default risks. We’ve seen that through mortgage repayment deferrals initially for six months and now 12 months, and more manageable debt servicing.
There is so much debt in our economy that there is no reason for rates to go up by much. I’d expect to see the Reserve Bank use its macro-prudential tools to keep rates low and keep house prices in check. I’d also expect to see increasing pressure on the Government to deal with wider housing factors to get prices under control rather than rely on monetary policy.
From a mortgage perspective our advice is to fix short-term for 12 months. Don’t bother staying on a floating rate as the floating rates are too high and any benefit of waiting for rates to fall is quickly eroded.
Next year you can expect to see even lower rates, and it’s never been a better time to be a homeowner!