Guest post from Tony Alexander
There are five strong forces acting to pull back the level of intensity of buyer demand for residential property at the moment. But just because the boom has ended does not mean a crash is on its way. In my “Tony’s View” weekly publication of December 2, I run through 17 reasons why the housing market has flattened out and 19 reasons why there is not a crash.
The five main reasons for the slowing are these
- Banks have sharply reduced low deposit lending in order to make sure they do not breach a new Reserve Bank requirement that such lending be less than 10% of all home lending.
- To meet new requirements in the Credit Contracts and Consumer Finance Act (CCCFA) all lenders to consumers for all purposes have to prove, if asked, that they have fully assessed all the applicant’s expenses and all their income sources expected for the duration of the loan. This is leading to the closest scrutiny of expenses in particular that we have ever seen.
- Banks expect the Reserve Bank will introduce debt to income restrictions (DTIs) next year. So, they are experimenting with introducing the rules now to be ready for the official regime.
- Fixed mortgage rates have increased by 1.4% - 2.0% over the past six months and this is the fastest pace of increase ever seen.
- Many young buyers are very tired and stressed out after viewing multiple properties and failing at multiple auctions having gone through finance approval processes potentially a number of times and spent thousands of dollars on property assessments. They want to take a break.
These developments plus a few more have seen a substantial stepping back of first home buyers form the market with a drop in FOMO (fear of missing out) to the lowest levels since April last year.
Over 2022 and 2023 some more restraining factors will come along including a surge in house supply and net migration outflows of Kiwis – especially to Australia. Many investors are also likely to seek to bring some balance to their retirement portfolios by selling some investment property and shifting into other assets such as shares.
But we will also see many supporting factors in play and here are a few of the larger ones
- The labour market is strong and getting stronger. High job security and improving wages growth tend to support house buying.
- 165,000 migrants will be able to gain residency visas in the coming year and while most will not be able to buy a property immediately, some will. This will be especially relevant in Auckland.
- Rising construction costs and delays in house completions will see many buyers switch back to looking through existing listings.
- The number of new listings is rising and as vendors lose their fear of selling but not being able to buy again, we will see a potentially strong improvement in housing stock availability in the coming year. This will encourage the many frustrated and stressed first home buyers back into the market.
- Inflation is 4.9% and set to get close to 6% soon. The Reserve Bank expects the rate of inflation to stay above 4% through 2022. Investors tend to gravitate towards certain assets when they expect high inflation, and those assets include shares and property.
For first home buyers, once banks learn to live with the new lending rules and ease back from the recent tightening up, conditions will be better. Price growth will be far slower than in recent years and stock availability far greater. For investors the slowing market is also good news because it means pressure will come off the government to do something else to try and make housing more affordable for young buyers.
The chances of the majority Labour government doubling down on their March 23 tax changes and making other expenses non-deductible as has happened for interest costs are now very slim.
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