By David Hargreaves
It may seem the height of absurdity to talk about the possibility of the house market taking off again, just at a time when it appears to be going cold, and with winter to come as well.
As we know though, it's always darkest before the dawn. Picking the bottom of a market is well nigh impossible.
I would say most people who 'pick' either the top or bottom of a market (by either buying at the bottom or selling at the top) usually do so by accident. Yes, there will often be signs that a market might be nearing the top or the bottom, but the actual turning point can usually only be visible in hindsight.
How many people were predicting in the midst of the post global financial crisis funk of 2009-10 that the Auckland house market would be roaring along again within about three years? But roar it did.
So, with that in mind, have we just seen a turning point for the house market in New Zealand?
Recent house market figures paint a picture of a declining market in Auckland and a cooling market in the rest of the country.
No CGT, whoopee!
However, we haven't yet been able to quantify the impact on the housing market of the Government's decision to torpedo any capital gains tax. The Government only announced this on April 17. Coming months will tell us what the reaction has been.
Given that various media outlets and commentators had been talking about a capital gains tax as if it was a stone-cold certainty, the whole issue must have been casting a cloud on the market.
So, I think there would have been a 'relief rally' in the market afterwards anyway.
And now, here comes the RBNZ with a cut to the Official Cash Rate. Fuel for the fire...
It looks like the banks are not keen to pass on anything like the full quarter of a percentage point that the RBNZ cut. That's significant. It means that the RBNZ will probably be forced to cut again in order to get the level of impact it seeks. I would reckon there will be another cut in August.
Mortgages are going down
Either way, and whatever the reluctance of the banks, the already historically low mortgage rates are going lower. And that's got to be an encouragement for anybody thinking of buying a house.
The other side of the equation is that bank deposit rates are coming down too, so, sticking money in a term deposit is not a particularly lucrative course of action at the moment. Buy a property instead, may well be the thinking.
According to the detailed background information released with the RBNZ's latest Monetary Policy Statement, the RBNZ in conjunction with CoreLogic, is forecasting house price inflation will rise from 2.1% as of the March quarter to 4% by the September quarter.
I presume that projection doesn't include the impact of the rate cut that's just been made and that it's just based on the impact of mortgage rate reductions prior to the OCR cut. It probably also factors in the perceived impact of the RBNZ's loosening of loan to value (LVR) restrictions that applied from the start of this year.
A 4% house price peak?
At the moment the RBNZ/CoreLogic project that the 4% annual price rise in the September quarter will be the peak and the rate of growth will slow again after that. But really though?
Remember, there will now be the impact of the OCR cut this week to add impetus. And there will very likely be more impetus from the follow-up cut that I think will likely occur in August.
It's therefore not hard to see a situation where the snowball effect begins in the housing market and price gains end up being rather more than 4%.
Nothing in life is simple though.
Several things have changed in the last few years. Affordability is much more stretched now than it was immediately post the GFC (although it is easing now). We have a new ban on foreign buyers. We have the bright-line test. And investors need to find bigger deposits than they did before 2016.
The imposition in 2016 of, originally 40%, deposit limits for investors, has seen investors' participation in the house buying market drop markedly since then.
I think the attitude of investors is likely to be key to what happens next, particularly as this time around there's unlikely to be a flood of offshore buyers into the market. Well, that's unless some way can be found around the recently introduced legislation banning foreign buying. (And you do have to say - where there's a will there's a way.)
More investors back in the market?
But to come back to the investors, they will be the real key. With the attraction of lower interest rates and freed of the worries of a CGT (as long as they don't sell within five years and get picked up by the pesky bright-line test), will they be back in the market in bigger numbers?
Of course, the investors do still have to find bigger deposits - but with lower interest rates on the way they might be more inclined to make the effort. And 30% deposits (as has been the requirement from the start of this year) are a lot less onerous than 40% deposits were.
The RBNZ releases its next Financial Stability report on May 29. The twice-a-year FSR is the forum in which the RBNZ generally makes decisions about LVR limits, which include limits both for owner-occupiers and investors. Indeed the last FSR release in November 2018 was when the RBNZ announced loosening of the investor deposit limits to 30% and loosening of the 'speed limits' placed on banks for their lending to owner-occupiers.
Reduction of LVR limits?
The RBNZ has said that further loosening of the LVR limits will be considered depending on market conditions. Would it look at a further reduction in the limits now?
To my mind it would appear more prudent to wait and see how the house market reacts to the OCR cut first, but who knows? Under Governor Adrian Orr the RBNZ is not shying away from bold decisions. The decision to cut the OCR this week was pretty bold when to all intents and purposes there would have been little lost for the RBNZ by keeping the OCR unchanged but forecasting cuts in future.
Will this bold behaviour lead the RBNZ into trouble with the housing market? What would be the reaction of the central bank if house price inflation did begin to spark up? My guess would be that in the first instance at least there would be no reaction. At the moment the RBNZ appears focused on actually getting people spending and stimulating the economy.
As we've seen in the past though, once the house market gets away on you, well, it gets away...
28 Comments
Not what he indicated in his statement.
It was more about providing economic stimulus to the NZ economy in anticipation of a slowing global economy. Yes, some support for housing (and hence homeowners perception of wealth) plus possibility of lower mortgage costs both encouraging continued spending and so directed to providing economic stimulus; therefore providing support to manufacturers and employment through continuing demand; and especially exporters due to the effect on $NZ.
If he was directing action solely at supporting the housing market as you suggest, then LVRs would have been the more appropriate tool.
Hi Sluggy
Yes, you will be well aware of where the $NZ dollar was heading. With a cut in OCR imported goods - such as petrol - are going to be more expensive.
As an importer - and presumably on-selling - you will be please at least with at least some local economic stimulus if it is necessities you are importing.
The major problem is that the OCR is currently so low, there is little to room for significant cut(s) and therefore significant impacts.
If my suppliers didnt put prices up 3% yoy on average, fuel and freight prices remained static, I didnt pay my staff more or give them bonuses, my landlord didnt want more each year, power prices remained static, the bank charged me less than 9% ...and I could retain existing margin, and all of this coincided with an OCR rate increase then sure, Ill decrease them.
Depends on bank - I think some maybe nz banks have a servicability rate of floating + 2% so lower actual rates will mean banks will lend more per unit income.
Others may use set values eg 7.5% as assumed rate (asb) and so unless they update their models to lower this value then cuts won't make any difference.
Mortgage brokers feel free to correct me.
PN already running super hot at 14% yearly growth (qv index) - can see this maintaining for another couple of years yet esp in light of rate cuts and the ruling out of capital gains tax
Even if interest drop slightly more, will it help as instead of paying $800 Plus one will $780 or for $900 will be $880 a week, still a lot of money for many, specially FHB and investors who are looking for rental yield will have to go to regions, may be as not possible in majot city like Auckland AND so called Investors (Speculators) are aware that is hard to get quick money in near future (More chance of Capital Loss if cannot hold for few years and also may have opprtuinty to catch the market at a slightly better price - lower than now) so is better to stay away from falling market and one of the main reason for fire in housing market is not Supply but money Laundering (Denied by almost everyone in NZ as have vested interest) and now with money laundering law in place along with Foreign Buyer Ban, things will be difficult and very hard for the market to rise from this peak (Also affordiability - how many can buy near around million dollar house - million is still a million unless you have some sort of asset that you are selling and getting CG).
So little bit rate cut (Law of diminishing return as a result interest rate will not fall substantially from here) is just trying to raise the sentiment.
Was going to say but you mentioned it at last line - all about sentiment- markets where people can buy (first home or investment) due to generally lower values (say under 600k medians) will react very positively to recent news as sentiment drives demand. Tapped out markets like Auckland may not see as much of a lift.
This OCR rate cut, in conjunction with LVR, is perhaps the RBNZ trying to engineer a soft landing in Auckland.
LVR means an interest rate reduction will most directly assist the (LVR exempt) new build sector. Auckland's current high pricing resulted from speculative demand under supply constrained conditions (2010-2016), an opening of supply conditions (2017-current) has resulted in a soft fall in Auckland pricing. As this cut seems aimed at encouraging more supply, it is likely it will cause further price declines in Auckland.
"getting people spending" - ie more indebted.
If you want more spending, give it to people who have higher propensity to spend - ie both 40%, who DO NOT BUY houses.
Prices are always going to do better in a few months, like everything else economists forecast. Always jam tomorrow. Sorry, but the deflationary mindset is on buyers domestically.
Also, you, like most others, are unable to breakdown the word "investor" by how much money is in their pocket and where they come from. Rate of return property for rent in Auckland is pathetic now and you may have noticed that number of houses owned (and proportion of people owning) continues to fall.
It is long overdue that commentators started using real language: ie a market means buyers and sellers - not just defined by whether prices are rising. 2005-17 Auckland prices rose by more than 10% pa when wages rose abut a quarter of that. Reversion to mean is plainly due. Go back to 2012 and you will get a picture of where sales and prices were b4 Chinese money flooded market. Currently, by the way, sales are running (last 4m) in Auckland 25% lower pcm than they were in the 8m from Jan-Aug 2018 when the OBB front running splurge was on. They are also, in Auckland, running 19% BELOW 2007-08 for same 4m. And so, you are suggesting that trend is suddenly going to alter? Very important factor to note here is Anti-Money Laundering from 1.1.19 and its impact on fact that buyers have to show where money for purchase is from. Buyers are no longer confident and think prices will drop. 25% fewer sales in Auckland than 2018 is 7500 fewer. That is a big hit to house furnishers and multipliers. This is also ignored by commentators. GDP is dropping world wide and so is trade. Recession is coming and food prices are rising. Orr cut at wrong time and will have to reverse next year. But the cut is irrelevant to forces acting on the market. For more, please see my LinkedIn page
Good on you Mike for doing the analysis. The volume of sales is back to post GFC levels and therefore not enough new debt is being created (albeit April’s C31 data not released yet, my guess is that it was a pop gun rather than an oozy on the lending numbers). Hence the RBNZ does what all central banks do, they lower the cash rate and try once more. As they say in the markets, if your going to panic, panic first.
Why the RBNZ would want more house price rises now is beyond me. It seems irresponsible. Do they actually want NZ prices, and affordability, to remain among the most expensive few places in the world? It’s more likely they are trying for flat prices, rather than expected declines (like the declines happening across the ditch). Whether it works or not is another matter.
There is little to no chance of house prices rising in Auckland. As other comments have mentioned imported inflation will erode real incomes if the NZD continues its downward trajectory.
More importantly though the FBB has taken liquidity out of the top end of the housing market ~ that isn't going to change if fixed rate mortgages are reset at marginally lower rates.
As for the rest of the country perhaps it will pour a little more petrol on the flames of the overheated market.
Respectfully the RBNZ has not had its finest hour this week.
Trust me, even if house prices increase 10% over the next 12 months, RBNZ will be bricking themselves if consumer spending falls off a cliff. Now the last thing they would expect is for consumer spending to collapse if house prices continue their steady march, so on the inside they will be feeling smugly satisfied. My intuition tells me that their attitude (if not openly expresssed) is "we're damend if we do, damned if we don't."
Well since the CCP clamped down on foreign nationals spiriting money out of the country its just been a matter of time till things slowed down, took a while which goes to show how much money was in play. Anti laundering laws squarely aimed at realestate sector now in force so paying for houses with boxes of cash is going to be just a little more difficult. Don't expect it to stop though, theres some very sophisticated criminal enterprises involved and plenty of motivation to succeed.
Very impressive at the same time, i'm going to be making - was stupendous! Thanks so much.
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Really don't see large capital gains for a while. Scrapping of the CGT and a slight ease on interest definately will keep Kiwis in property. Looking at Auckland there is a lot of apartments at the lower end getting built and going forward more competition in the rental market with less direct foreign ownership. I think the RBNZ are happy with a flat market with some growth in first home buyers and the modern model is to ease early before recession. I was always of the thinking that we followed Sydney two years later and the rest of NZ followed Auckland up or down, maybe not anymore?
Though I gain from the OCR cut-through my share and property portfolio-I think it was absurd. If and when such a cut is needed some time in the future,then ok,but it wasn't needed right now for the wider economy.
I welcomed Orr's appointment,but no longer. The much vaunted Dashboard is a con job. It is barely known outside financial circles and no effort has been made to publicize it widely and in any event,it is incapable of doing the job for which it was supposedly designed. The RB's continued dislike of Deposit Insurance leaves NZ alone globally. Just what makes us so much smarter than all these other countries? Now we know that the proposals for significantly higher bank capital was put together without the benefit of a proper cost/benefit analysis. This would be funny if it were not tragic.
Very impressive at the same time, i'm going to be making - was stupendous! Thanks so much.
Can't wait until Auckland prices are double Sydney. Kiwi central banker clowns are second to none.
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