Housing market shows signs of life

Guest Post from Tony Alexander

Data recently released by REINZ confirm what many of us have been observing over the past couple of months – turnover in the residential real estate market is picking up. In rough seasonally adjusted terms the number of dwellings sold around the country over the three months to May was ahead 19% from the three months to February.

This gain puts an end to a period when sales have been falling largely ever since the credit crunch occurred late in 2021.

Why are we seeing a lift in turnover?

A key reason is the return of first home buyers to the market since February. These generally young people have seen average house prices fall about 18% from their late-2021 peaks. At the same time they have grown their home deposits through the continued strength in the jobs market along with some firm wage rises in many sectors.

They have also seen their rents continue to rise and in recent months have been reading about the growing migration boom which now adds up to an extra 72,300 in the country in the year to April compared with a loss near 20,000 a year earlier.

They are certainly not returning because interest rates are falling. In fact, recently banks have slightly lifted their fixed lending rates despite the Reserve Bank firmly signalling that they feel they will not need to raise the official cash rate from the current 5.5%.

The key factor causing higher bank funding costs has been increased worries about inflation overseas coming from surprisingly strong labour markets in the likes of Australia, the United Kingdom, and the United States.

Higher offshore rates have slightly fed through to higher rates here while at the same time placing some downward pressure on the NZ dollar – which is good for our exporters and bodes well for the summer tourism season.

While young buyers are back in the market, there is no sign of a lift in buying by investors.

A monthly survey I run of property investors shows deepening concerns about the loss of interest expense deductibility and a shortening of the average time which investors plan to hold their properties for. My survey of real estate agents also still shows investors holding back.

I can also tell from another of my monthly surveys that owner-occupiers are not yet returning to the market in any great numbers to buy/sell or sell/buy.

For first home buyers, this means that with banks slightly easing their lending criteria, listings well up from 2021 levels, and little competition as yet at auctions, the window of opportunity to secure the purchase of a property with the attributes desired continues. But the clock is ticking.

As noted here previously, at some stage there will be widespread recognition of the impact which the migration boom will have on the property market. We are not there yet. At some stage people will realise construction of new houses is falling.

That realisation doesn’t look like it's happening until 2024.

At some stage people will believe interest rates are set to fall 1% - 2%. That also is not something likely to happen this year but instead from an uncertain point in 2024.

These and other factors mean that at some stage the long queue of buyers which has built up since people started stepping back from the market in 2021 will become activated. It is impossible to pick when these tens of thousands of people will get “triggered”.

But the way things are developing this year, pre-election in particular, is still likely to be a weak period overall for the housing market. But 2024 is shaping up to produce a more solid upturn than people are willing to believe will occur.

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