The endgame starts - again

Guest post from Tony Alexander

Back in the middle of last year I started talking about the downturn in the housing market entering its endgame. What I meant by that was prices would continue to fall and sales weaken, but as each month went by the extent of each decline would get smaller and smaller. I recall mentioning a good chance that the housing market would bottom out around the end of 2022 then stage a small recovery over 2023 with prices maybe rising by 5%.

But then came inflation

Unfortunately things got somewhat interrupted on October 18 last year when the annual inflation number turned out to be much higher than expected. This told us all fairly clearly that a lot more work still needed to be done by monetary policy in order to get inflation under control and wholesale borrowing costs which banks must pay increased sharply.

Most fixed mortgage rates went up relatively quickly by about 0.5%. Then on November 23 the Reserve Bank got their chance to react to the worsened inflation outlook by raising the official cash rate a record 0.75%, increasing their expectation for the peak in the cash rate from 4.1% to 5.5%, and warning about imminent recession.

Interest rates rose by another 0.5%

With everybody scared by the Reserve Bank’s talk we saw a new decline in housing turnover and falls in prices as buyers essentially went on strike. In my first surveys for the year in January I picked up signs that the extent of pessimism in the economy overall and the housing market in particular was pulling back from the brink. I didn't produce any indicators actually saying that things were getting better - just that the degree of pessimism was improving slightly.

Things are slowly starting to turn

This month in my survey of mortgage advisors located all around the country we saw a solid sign of improvement coming along in the residential real estate market - from first home buyers at least. The net proportion of mortgage brokers saying that they were seeing more first home buyers coming into their doors looking for advice jumped to a net positive 30% from minus 13% in January. This is not as high as the positive 48% in October before the inflation numbers came out but does tell us that first time buyers are re-engaging with the real estate market.

There are many factors likely to be motivating their return. One is the fact that banks have recently cut their fixed mortgage rates for periods of two years and beyond as signs have emerged of inflation starting to trend down. This doesn't mean that people are suddenly expecting mortgage rates to fall strongly over the next few quarters but it does mean that people are pulling back from worst case scenarios involving fixed rates moving to 8% or thereabouts.

Young buyers are probably also starting to feel that house prices are more affordable

On average prices have fallen over 16% from November 2021. They are still 20% above pre pandemic levels, but wages have risen by almost 20% in the past three years so the ratio of house prices to wages is almost back to where it was before the pandemic came along.

Young buyers can also see that the labour market remains strongly in their favour and that feeling of job security is likely to be encouraging many to step back into the mortgage market. Banks have also started easing up their lending criteria slightly in an environment where they are no longer meeting their sales targets.

None of these factors and developments signal that the housing market is about to turn around. But they do tell me that the end game has started up again. What I expect to see in the next few months is that the pace of house price decline will slow down and the monthly worsening in sales levels will bottom out.

My best pick for when things start to show some actual improvement is towards the middle of this year.

But we have to remember that considerable uncertainty remains here in New Zealand and overseas with regard to how quickly inflation will come down. This is also an election year and we know that this tends to make people and businesses cautious about spending large amounts of money.

So, people shouldn't really be expecting a true cyclical upturn in the housing market to start until maybe very late this year at the earliest. But hopefully, this time around, we are firmly on the track to the worst being over within three to five months.

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