BNZ economists are conceding that their previous expectations of continued improvement in housing affordability "have been flattened".
Late last year BNZ chief economist Mike Jones had compiled a new housing affordability index and said housing affordability was expected to continue to improve through 2023 as lower house prices (over the first half of 2023) and steady growth in incomes offset higher expected debt servicing costs.
He said then: "Based on our projections, affordability, as proxied by the [housing affordability] index, will have improved back to pre-Covid levels by around the end of 2023. This compares to our house price forecast which, if correct (a big ‘if’), would put house prices still 10-15% above pre-Covid levels by end 2023. Again, this is testament to solid household income growth."
But now, revisiting the situation in his latest Eco Pulse publication, Jones said his expectations have been flattened - "not completely, but based on our projections for income growth, house prices, and mortgage rates, the speed of any improvement over 2024 looks glacial".
"Our housing affordability index is projected to drift roughly sideways from here, as expectations of solid income growth and eventual mortgage rate relief run into higher house price expectations," Jones said.
"Firmer house price expectations, and hence higher deposit requirements, have done most of the damage here relative to our last affordability update in December," he said.
"Our expectations of strong, but slowing, household income growth and some mortgage rate relief are enough to hold back the higher house price tide over 2024, but 2025 is a different story and affordability starts to deteriorate again.
"We’re quick to reiterate here that all of this is very sensitive to our forecasts, particularly those for house prices which, as we all know, are very tough to get right."
Jones said the fact that the housing market has turned a corner "is increasingly old news".
He said national house prices stopped falling in March, according to the monthly REINZ House Price Index (seasonally adjusted). Over the past three months that we have data for (May-July) we’ve seen consecutive increases.
"The odds are that this tentative uptrend will be sustained, in some shape or form. When housing momentum turns, it tends to stay turned. Back in early June, we forecast a 3% lift in house prices over the second half of this year, followed by a 7% lift through next year. We’ve seen nothing in the run of play since to throw us off this view."
Jones said "the crux" of his affordabiliity index is that, of the long list of factors affecting housing affordability, there are three core components: the size of the required deposit, the cash required to service a mortgage, and the household incomes used to pay these bills.
"These factors often move at different rates and in different directions. By combining them and adding in some forecasts, we can get a rough steer on the likely future direction of affordability trends. It is just a rough steer – our index only gets at ‘the average’ and the reality is that any particular situation could be different. You can interpret the index as the average cost of a deposit and the first year of debt servicing payments, expressed as a multiple of the average household disposable income.
Jones said by re-examining his affordability index he could draw some conclusions. First, housing affordability has continued to improve (become less bad).
"Our index is up around 10% from ‘peak unaffordability’ in December 2021 (1.7 times average income compared to 1.9 times in December). Most of this reflects the fall in house prices over that time. Strong income growth has helped too, with higher debt servicing costs working in the other direction. Auckland has experienced the largest affordability recovery but unsurprisingly remains the most unaffordable market overall. Canterbury has changed little thanks to an outperforming housing market while Otago has the dubious honour of now matching Wellington in the unaffordability stakes (having surpassed Canterbury in 2017)."
Jones said given the uncertainty around forecasts, "it’s worth looking at a few scenarios. In the chart below, we’ve changed one or two of the forecast variables in each scenario and left all else constant".
Jones said in the first scenario, a situation in which house prices grow at "double our expectations" through calendar 2024 (+14%), this pulls affordability back down to near the December 2021 lows.
In the second, a scenario in which the Reserve Bank delivers early 2024 interest rate cuts provides a small boost to affordability, relative to BNZ economists' ‘central’ assumption. "But it’s small bikkies in the grand scheme."
Finally, in a possible but "unlikely" ‘goldilocks’ scenario in which household income growth holds at a healthy 7% and house prices flat-line for the next two years, the affordability index "roars back up" to above pre-Covid levels. "It highlights, again, how difficult it is to claw back affordability in the wake of a house price boom," Jones said.
"Stretched affordability will be a key factor limiting the extent of house price gains next year (we forecast a 7% lift). Still-high mortgage rates and a slackening labour market are the other factors expected to keep a lid on things."
24 Comments
Diddums for them to be perfectly honest.
If I borrow $100k and invest it in dividend paying shares, but the dividends don't cover my interest payments and the share price fell, I wouldn't expect to be able to whinge to the PM about the tax I am still required to pay on those dividends.
That would be considered a really crappy investment.
Wrong. If a person borrows $1m (at 10%) to buy shares in Company X. Company X pays a dividend of $50k but the interest costs are $100k. Loss of $50k can be claimed in that person's income tax return and offset against their other income.
If a person buys a residential house for $1m (at 10% interest) and rents it for the year for $50k. Interest is $100k, however, despite making a loss of $50k the person will be required to pay tax on the $50k rent. That is, made a real $50k loss (money paid to bank) and then has to pay $16.6k to IRD (assuming 33% tax rate).
Just noting the different treatment. Clear policy to make sure people don't borrow to buy rentals.
I wonder how these bank economist statements will age.
Will we be able to make our own edit to rival this:
5 Years of The Irish Times Headlines Related to House Prices - YouTube
All pretty obvious, but good work nonetheless.
And backs up my view that with affordability so stretched, we are unlikely to see anything other than a very modest uptick in house prices over the next 1-2 years.
FHBs should be in no hurry whatsoever. I’m suggesting to my son that he keeps plowing tonnes of $$$ in to his Kiwisaver (cash fund), and look to potentially buy late 2024. But also to monitor the situation rather than having an inflexible plan.
No way of measuring,but I'm guessing who ever gets in power at the next election,they will trigger an exodus of people offshore...a left leaning government will send one cohort overseas,and if a right leaning government throws petrol on the property market again with these interest rates,,,well good bye to our youngest & brightest.Sad indictment of both sides of the political spectrum.
Inflation negates any wage increases and with NZD tanking this will devalue incomes even more. Huge amount of people will also be having to refinance on much higher rates and people who rent will be paying more.all this will put pressure on family’s I would be surprised if house prices go up at all over next two years it looks more likely for house price to continue downward trend.
What about all the new immigrants, and newly minted residents that can now buy property with cash from overseas? NZ property will be looking like a bargain with the weak NZD. Looking at what is happening in Australia with the inflow of people, and affordability is hugely stretched, but the property market is still heading higher. Housing is completely disconnected from incomes. Unless DTI's come in now, NZ is on the same path.
Good try BNZ. All theories are valid at this point. Depending on who gets to hold the levers of power, I can't see housing getting too much higher for the next 1-2 years. The biggest issues I see are offshore ones with the Chinese economy at the top of the list. There doesn't seem to be any confidence from the Chinese consumer towards their leaders right now. Perhaps the covid debarcle has finally flicked a switch, but they have pretty much closed their wallet from everything I'm reading. No more OTT spending, no more new homes & no more babies all makes for a tricky situation for our largest trading partner. Let's hope it doesn't last or, if it does, let's hope the price of milk & cheese back here reflects the new realities. I'm looking at you supermarkets.
It could be worse. We could be Aussie, according to the media. But word came to me from the water cooler team that house prices are going up in the Lucky Country. What a strange world we live in.
Aussies’ borrowing capacities have plunged by almost $300,000, due to the Reserve Bank’s 12 interest rate hikes.
Compare the Market research found a couple with no dependents on a combined $150,000 income, could borrow $980,900 in May before the interest rate hike cycle began. Now, their borrowing power has shrunk to $688,900 - $292,000 less.
It’s a similar story for a family with two kids who earn $150,000 per year. They previously could borrow $868,400 in May last year. Now, that has dropped to $609,000 - a $259,400 decrease.
https://au.news.yahoo.com/rba-rate-hikes-slash-borrowing-power-by-30000…
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