The anatomy of a turning housing market

Here is a quick high level run-through of the main things happening in the residential real estate market on average in New Zealand.

Sales in the past 12 months amounted to just over 81,000 from 100,000 in the year to June last year. Based on past cycles we are probably headed down to around 65,000 annual sales, but actual turnover is likely to be higher than that. The data do not in a timely manner capture pre-sales by developers or direct sales from new subdivision developer/builders to clients.

Prices have fallen 2.1% over the March quarter and all-up will probably decline around 10%.

But the extent of declines will be limited by an absence of any wave of investor selling. Investors face fresh turbulence and weakness in other assets such as shares, returns on bank deposits are negative after allowing for tax and then taking off 6.9% inflation.

Plus, rents are soaring and price declines will be cushioned by still rapidly rising construction costs.

The credit crunch is slowly easing with my recent survey of mortgage advisers revealing more view the willingness of banks to lend as getting better than getting worse. But availability of mortgage funding is still a lot more difficult than a year ago and the Reserve Bank has just indicated that debt to income restrictions are likely to be in place come mid-2023.

The supply of new homes is booming with annual consent numbers at a record level just below 50,000.

But a downward shift has started, and construction is likely now to fall for the next 3-4 years partly as more and more smaller developers find themselves unable to proceed. Some buyers will also revert to looking through listings of existing properties now that those listing numbers are trending firmly upward.

It took 36 days on average to sell a dwelling in March compared with 28 days a year earlier. Sales have slowed down but only to the average seen for the past ten years. However, with buyers still stepping back from the market we are likely to see properties sell increasingly slowly as this year advances.

Real estate agents in my monthly survey alongside REINZ report that an increasing proportion of their sales are for higher-priced properties. This may be because credit restrictions and rising interest rates are placing hefty restraint on the ability to buy of those on lower incomes who target low-priced properties. In contrast, buyers on upper incomes tend to have less need for mortgage financing.

FOMO – fear of missing out – has gone, but FOOP – fear of over-paying - is on the rise with 64% of agents observing such fears on the part of buyers.

People can see discussion about falling prices and this naturally injects extra caution into the decision-making of buyers – especially investors and first home buyers.

In contrast, for those selling and buying the shift in prices is not so important as they are trading in the same market. For these people things are getting better with regard to an improving range of stock to choose from, and perhaps greater willingness of real estate agents to bargain on selling fees.

Overall, the housing market around New Zealand has turned and the recent trends are likely to continue for practically all of this year, especially with interest rates set to rise further and migration outflows likely to worsen.

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