Why soaring house prices should slow down in 2021

Each month I run four surveys, two of which focus exclusively on the residential real estate market. The Mortgage Advisors Survey delivers good insights into how welcoming banks are to new customers, implementation of Loan to Valuation Ratio regulations, processing times and so on. The survey of real estate agents undertaken with REINZ gives insight into how busy the agents are, how active buyers seem to be, and the factors in play affecting buyers’ purchase decisions.

The first survey of mortgage advisors for 2021 showed that there were more enquiries being made to advisors from both first home buyers and investors than there were in November. I use that month as a basis for comparison because just ahead of Christmas a lot of people backed away from the market so they could have a rest. Now they have returned in force.

Interestingly, in my other survey of real estate agents there was a decrease observed by agents in the numbers of investors and first home buyers coming forward. We might be able to put the difference in results down to a lot of people making contact with their advisor to find out how banks are implementing LVRs and whether their ability to buy something might be constrained by the tightening of regulation which is underway.

Post-Christmas activity in the market

For the agents a net 46% said that they were seeing more first home buyers. This was down from 50% in December and 64% in November. A net 31% said they were seeing more investors, down from 45% in December and 59% in November.

Some people have backed away from the market – or is it just that the flow of new people entering the market is growing less rapidly? Probably the latter because a record net 48% of agents still said that they are seeing more buyers at auctions, and a record net 64% said they were seeing more people at Open Homes.

The housing markets around New Zealand remain in a relatively frenzied state and this has just prompted one bank to place a higher minimum deposit requirement on investors being referred to them by mortgage brokers because they are struggling to handle the volume of enquiry coming through.

How long can these frenzied conditions continue?

As long as interest rates remain low people are likely to remain highly engaged with the market. But there is one factor which should contribute to a slight cooling in activity soon.

At the moment many people are trying to purchase a property before tougher LVR regulations come into place. Once those rules are made effective by the Reserve Bank from March 1, a number of potential buyers will back off. Some will simply not have the required deposit, and this may especially be the case as the chances seem strong that the minimum deposit for investors will be set at 40% rather than the 30% which was in place early last year.

Will this however cause a massive slowing of the market?

No. There are plenty of investors who simply wish to purchase something because the money they have in the bank is going backwards in inflation adjusted and taxed terms when term deposit rates are below 1%.

There are other reasons why the coming slowing in activity and the pace of prices growth will initially be quite muted. We have just learnt that New Zealand’s unemployment rate fell to 4.9% in the December quarter from 5.3% in the September quarter. This is less than half the rate many people were predicting when the country went into lockdown last March and bespeaks of good owner-occupier demand for housing because of the high level of job security.

There is also likely to be continued demand from Kiwis offshore making a purchase before they are able to return without squeezing into a quarantine hotel for two weeks. Plus, although the construction of houses is growing, the pace of growth is going to be constrained for some years by shortages of builders and land.

It all adds up to still rising prices this year, but an easing off probably set to happen in 1-2 months once the new LVR rules come fully back into play. After that any further substantial restraint will probably require rising interest rates and that is looking highly likely from some point in 2022.

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