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13 December 2023

Housing cycle turns mildly upward – Tony Alexander

Early this year we saw a strong lift in the number of first home buyers deciding to bite the bullet and make a home purchase. They were driven by lower prices, slightly improved credit access, availability of Housing NZ assistance schemes, strong numbers of listings, and little competition from other buyers.

Their lift in buying has produced so far, an average 4% rise in New Zealand house prices since the cycle reached its low in May. Auckland prices are ahead 5.4%, Wellington 4.5%, and Canterbury 4%.

At the moment there is an expectation that this wave of first home buyer activity will now be followed with a wave of investor buying. We can certainly see increased investor interest in the surveys which I run each month. For instance, a net 22% of real estate agents at the end of November said that they were seeing more investors in the market. Three months earlier this was a net zero and back in April a net 44% of agents were seeing fewer investors.

Why are investors showing higher interest? The fact that prices are no longer falling will be a motivating factor for the many who have been holding back before expanding or starting their portfolio. Additional motivation will come from evidence of prices rising on average near 0.8% a month.

Heading into the election the shifting of polls towards suggesting a National-dominated government will have encouraged a few. The post-election confirmation that deductibility of interest expenses will return in full from April 1 2025 and to an 80% degree from 2024’s April will clearly be an encouraging factor.

However, when I look through my various surveys I can see no evidence that there is a flood of investors looking to buy. In fact, the net proportion of real estate agents saying that they are seeing more investors looking to sell has just risen to the highest level since late-2021 at 11%. Six months ago a net 6% were seeing fewer investors selling.

It looks like expectations of higher demand are encouraging some investors to sell without being in as weak a negotiating position as was the case through 2022 and the first half of this year.

In fact, when we consider the tax changes, surging population growth, and falling house construction, the scene looks like being set for a period of firm increases in average house prices once one more thing happens – interest rates fall.

Recently the Reserve Bank reviewed their 5.5% official cash rate and said there is no scope for easing at the moment. In fact they penciled in one further 0.25% increase next year and projected that no rate cuts will occur until the middle of 2025. It is extremely unlikely that rate cuts take that long to appear.

The Reserve Bank has failed to allow for a likely tightening of fiscal policy by the new government. They have also made no allowance for any negative impact in the farming sector from the El Nino weather pattern. Importantly, while they emphasised new upward pressure on housing costs because of the migration boom, they made no allowance for the boom restraining the pace of wages growth.

However, when we look at measures of labour market tightness we see a rapid improvement in staff availability is underway across most sectors, though not at all levels. There are still shortages of skilled people in some sectors.

The chances are high that in the next few months solid evidence will appear of slowing wages growth and some further decline in business plans for raising their selling prices. After all, offshore inflation outcomes in the past few weeks have surprised on the lower than expected side. Easing inflation offshore (including lower oil prices) will eventually feed through to inflation here in New Zealand.

There is a good chance that the Reserve Bank will start cutting interest rates in the second half of 2024. But it is impossible to take a strong view on how rapidly borrowing costs decline given the many uncertain local and international factors in play.

All we can say is that NZ house prices have started rising while interest rates are high and have gone higher in recent months. The pricing impact once they start falling seems relatively easy to figure out.

Tony Alexander

Independent Economist

This article has been provided for general information only. Tony Alexander is an independent economist.

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