The housing market could be set to see the return of FOMO - the fear of missing out - but if so, it won't last, economists at the country's largest bank say.
In ANZ's latest Property Focus, ANZ economist Andre Castaing, senior economist Miles Workman and senior strategist David Croy said house prices have been moving higher at a steady pace, rising 0.7% in each of the last three months.
"Annualised, that’s a solid 8.7% p.a. While each of these monthly rises have only been slightly above our expectations, collectively, they show that the housing market has more momentum than we previously thought."
They've therefore revised up their near-term house price forecast upwards and now see prices lifting around 4% (previously 3%) over the second half of this year, with house prices rising at around their current pace until autumn next year.
"Applying our forecast for growth in the national house price index to the median sale price implies the median home selling for approximately $812,000 by Christmas, up from $780,000 currently."
The economists expect some of the house price growth will be caused by "animal spirits".
"With the market clearly having rounded the corner, FOMO could make a comeback," they said.
But it not for long, they reckon.
"...We doubt it would last, given upside interest rate risks, and unemployment expected to rise. Our outlook is for annual house price inflation to come in around 5% over 2024, then moderate to around 3% in 2025.
"Once mortgage rates begin to subside, we expect house price growth to return to its long-run average of around 6% y/y. However, it should be noted that any forecast that far into the future is a best guess and should be interpreted as indicative only."
In noting the various uncertainties, the economists said that if the economy fails to slow sufficiently to cool core inflation, the Reserve Bank may be forced to respond with a higher Official Cash Rate (which is at 5.5% at the moment) than anyone is currently forecasting.
"And this would be expected to put the brakes on the housing market pronto."
Alternatively, if the labour market weakens significantly more than expected based on the monetary tightening we've already had, forced house sales may pick up just as prospective homeowners may find they don’t have the income security to enter the market or to upgrade their existing home.
"...At the end of the day, when it comes to the medium-term housing outlook the feedback loop between CPI inflation and house prices should be considered. That is, if upside housing pressures result in upside CPI inflation pressures, the RBNZ is likely to respond with hikes, stopping the housing upswing in its tracks. Be careful what you wish for."
In discussing the recent momentum in the housing market, the economists have noted the role of the first-home buyers.
"First-home buyers tend to be income-rich and asset poor. They tend to be younger and have well-paying jobs, but likely found the deposit required to purchase a house got ever more out of reach during the house price bubble of 2021.
"While house prices have been falling, these prospective buyers have been growing their deposits and may have been holding off buying in case house prices fell further.
"Now that house prices are 14.5% below their peaks, the deposit first-home buyers require is looking more attainable. For example, a home that was worth $700,000 in November 2021 will only sell on average for about $600,000 today, meaning that at an 80% loan-to-value ratio, the prospective buyer’s required deposit has shrunk from $140,000 to $120,000."
But the economists say there are also many first-home buyers whose incomes are not able to service a 7% mortgage rate, even if they have the necessary deposit.
"On the hypothetical $600,000 house from earlier, this mortgage would require $2,800 per month in interest payments with an 80% LVR [loan to value ratio]. This is double the $1,400 per month in interest payments needed in November [2021] to purchase a $700,000 house when mortgage rates were around 3%.
"In a nutshell, the constraint on first-home buyers entering the market has switched from deposit size to servicing cost as house prices have fallen and mortgage rates have risen."
116 Comments
Yawn...... ANZ napalming the green shoots, that said there are a lot of people who have to sell, want to sell/move, divorce and its good to see some sales, The miserable mortgage lending numbers indicates they are mainly those in the market trading, I just do not see many FHBers leaping in here with FOMO
"With the market clearly having rounded the corner, FOMO could make a comeback," they said. But not for long, they reckon"
As sure as night follows day, the downward trajectory will soon resume as we haven't had the real downturn yet. This small dead cat bounce is being drowned out when adjusted for inflation. The prevailing inflation rate is a measure Spruikers once used conveniently as a benchmark measure of house price performance. Its best they also do that now so not to misslead.
My mortgage does not change with inflation so therefore I am more interested in nominal house price growth that real growth. If prices stay static for the next while, affordability can still improve. Inflation is a good thing for asset owners, even if the high interest rates used to fight it are not.
These economists are really all over the place..
For sure. They're all over the shop and their narratives aren't backed by convincing 'evidence-based' arguments. An index going up 0.7% for each of the past 3 months is not an evidence-based argument.
Jeremy Grantham is saying house prices need to fall 'globally' by 30% minimum. And he admittedly thinks this is conservative.
Where can this hypothetical 600k house be found?
Maybe found not by location, but at a future point in time. Problem is that if house prices start falling, the whole economy starts falling. So even prices fall to the hypothetical $600K, they still might be affordable. That's when you get in to depression fears. I expect money printing to begin like there's no tomorrow if that's the case. Even then, it might not work. And all you're left with a massively debased currency. We are not a net creditor nation in many respects, apart from the Super Fund. And that's just a drop in the ocean for the lifestyles we think we deserve.
It’s not going to work well this time without a secure trade partner. We import deflation, we have pumped the money taps on full and relied on that money exiting the economy via a significant account deficit, passing those inflationary pressures to the third world, rather than dealing with them locally.
With china stuttering, this doesn’t really work without significant imported inflationary pressures as we’re creating too much artificial demand. I don’t think this is enough to stop us trying, but we’ll likely go through some tighter spikes of inflationary and disinflationary periods in the medium term before it starts to becomes more viable to pay for local goods than imported. Overall periods of tightening.
Meanwhile our dollar will devalue over time against the US who really couldn’t care less about some milk powder from down under once the udders run dry.
Its not all doom and gloom though, the economy is a balance and there are always ways to improve your position.
https://www.trademe.co.nz/a/property/residential/sale/auckland/manukau-…
Could be yours for around 700k. Three bedrooms on 1200sqm in Otara.
Reminds me of the sort of house most of us boomers started in.
@kwbr - To put that house into context - it’s in Otara which is the slum of Auckland. Cv is 820k. Asking 750k is not that bad considering most places are selling for approx 100k under cv. So around 700k is probably what it’s worth in today’s market. Being in a flood plain doesn’t have that much of an effect on price depending whether it’s actually flooded previously or not. The impression people get straight away from seeing that listing is probably that it should go for a million, which is incorrect.
I personally would consider a flood plain, it’s typically a 1 in 100 year event. Can be more frequent obviously hence required thorough due diligence. It is a risk no doubt, but no risk no reward. Also, that’s a rear section, hence the cv is low too - not the most appealing for developing. So a couple of things potentially going against it.
In Otara was probably $50K though and no one needed it or wanted it, as better housing for good prices were available all over New Zealand. Most house prices back in the day were less then 3 to 1 DTI. Now higher then 7 to 1 with rampant inflation. But hey stop buying avocados, and you could buy a home.
Homes to be purchased are found from -
New builds
Airbnb and other empty homes
Current owners who must sell.
Ma and Pa selling the 5 bedder for a 2 bedder.
2 bedder into rest home
More vacating and sharing a home/rental/garage/car.
There is a heap of supply that can be squeezed out once the pressure is really on.
More supply for same buyer number will lead to one thing only.
Be patient FHB's.
All those investments barring potentially shares are typically not great investments, and you pay tax on any profits/interest received. TDs essentially can be illiquid if you need to break and forgo interest. It’s the tax on that interest which makes it a poor option in my opinion.
What should a potential owner occupier buyer do today? Buy or rent?
The key question is should the potential owner occupier buyer on a median household income be buying at today's median price in their neighbourhood or should that household continue to rent and / or buy later, reinvest deposit in another investment? Different owner occupiers have different circumstances and different holding periods. What would you suggest for those with the following time frames?
1) 5 - 10 years - e.g single couple who may upgrade when they have children. Retiree who may downgrade and move to retirement village. Couple with adult working children who may look to downsize.
2) 15 - 20 years - e.g family with teenage children
3) more than 25 years - e.g family with new born children
A young couple with no children who may have bought an entry level home in 2020 - 2021 with a desire to upgrade when they have children in 5 years (say 2025 - 2026) may be unable to upgrade in 2-3 years as they are now in negative equity.
If they are unable to hold on until house prices recover (e.g due to loss of job, inability to continue debt service payments due to rising mortgage interest rates), then they will still owe the bank due to the house sales proceeds (after commission costs) being below their mortgage amount.
They would have lost over 100% of their initial deposit used to buy their house (and took many years to save)
In this case, it would have definitely been better to rent than to buy.
Neither are after tax wages or rents, so income is going backwards against a debt that just doubled or tripled in cashflow value.
I think you just negated your own point without realising it.
Next argument is speculation that rates will come down next year, but we all know the environment that kicks that off does not bode well for asset prices.
I won’t bore you with the details, but basically we have to replace the fuel pump. You can drive it around as is for another few joy rides, but it’s a write off and it’s better to do that sooner rather than later before those insurance premiums go up again, which they will just fyi.
If a couple earning average incomes in New Zealand they would earn140k between them so at 4 x DTI 560k would be about the most should be able to borrow if they did manage to save 90k.650k would be highest price they could pay for a property. So most properties will be way out of reach for average wage earners the banks must see this. House prices look like they are way out of reach for the most in New Zealand when starting from scratch so prices will continue to fall.
I'm not sure why there is such a rigid belief that a DTI of four is the threshold for affordability. It there any science behind this ratio or is this just n historical ratio we reminisce over? Surely the DTI for affordability would have changed when we went from 20 to 30 year mortgages?
At 8% interest rates, you boost your price by ~10% moving from 20 to 30 year terms. But your interest paid to the bank over that term is almost doubled - they get a higher rate of return over a longer time period.
Longer terms are for the banks benefit, not yours. And have negligible effect on DTI.
If buyers choose to accept the narrative by those with vested financial self interests, then buyers may have expectations of rising house prices. As a result of that house price expectation, they are willing to bid against themselves / vendor bids in order to purchase a property - these buyers paid $550,000 than their initial bid when they were the only bidder.
“We had two pre-auction offers, but they were not enough to stop the process,” she said, adding that on the day there was just one bidder. They upped their initial bid of $3.4m to $3.6m and then, after negotiation, the hammer came down at $3.95m."
https://www.oneroof.co.nz/news/44295
If buyers have expectation of price falls would they have chosen to bid against themselves?
Boosting confidence in the house prices matters. And those with their financial self interests are going to heavily promote that narrative.
Here is another bidding competition by participants at an auction.
https://www.oneroof.co.nz/news/christchurch-retirees-going-apartment-cr…
At a certain point, prices stop falling and volumes start falling instead. I think we are into that phase now. Asset owners won't list if they know they can't get the price they need. We are moving into a soft feudalism where those who have land continue to enjoy the merits of it and those who don't can't hope to.
I think we've been in that phase for a good year at least now.
NZ has almost 2 million dwellings. OO on average move every 7 years. Rentals aside, you would expect somewhere between 250-300k houses to be changing hands each year. But at the moment we're sitting at roughly 60k per year.
This market is not healthy, reflected in prices that are still too high because there is a collective will amongst those who own to hold on. What will break first - their will or their finances?
"In a nutshell, the constraint on first-home buyers entering the market has switched from deposit size to servicing cost as house prices have fallen and mortgage rates have risen."
Let's not kid ourselves - deposit requirements are still a massive hurdle for all but the highest earners/richest parent crew. Especially considering the banks' reticence on low-deposit mortgages, and higher living costs eating into potential deposit savings.
FHB are now predominantly "new residents" and they are all buying with 5% deposits, very little credit checking, and the Govt guaranteeing their mortgages to the bank. That's why the RBNZ increased the limit on low LVR loans.
https://www.oneroof.co.nz/news/first-home-loan-scheme-is-open-to-abuse-…
And yet these 'economists' continue to avoid mentioning significant supply-side changes like the new Unitary plans that allow higher densities and directives with cross-party support like the National Policy Statement - Urban Development?
ANZ, with their "interest rates are going up" and their "so will house prices" contradiction without ever mentioning the significant supply side changes, are losing credability real fast.
The increase in supply will not go up in pace with immigration. The housing deficit is still growing.
I was in Queenstown a month ago. I was horrified at the amount of homelessness. Passed six cars on one street with people sleeping in them. I could't help but wonder if Queentown is our canary in the coalmine.
Homeless in paradise: Queenstown residents living in cars, tents
https://www.rnz.co.nz/news/national/486908/homeless-in-paradise-queenst…
The big issue down there is that the big employers in town have been too lazy and greedy to build workers accommodation. The prevailing view is that as long as people will come and work there, even if they have to slum it, then that’s all good.
of course the conversion of long term rentals in to air b and b is a problem too.
That is directly a result of Labour policy ending the ability to terminate fixed term tenancies. Most of the houses down there are holiday homes, and used to be rented out to seasonal workers during the periods the owner wasnt using them. ie. They were rented out over summer by owners who used their home during the ski season, or over the winter period by owners who used their home during summer. As most staff down there are backpackers on one year working holiday visas, this suited them to live and work there for 6 months, before departing for another part of NZ. Now home owners have no choice but to put their holiday home into AirBnB as otherwise they are unable to get their house back when they want it back.
House owners want to be able to use their house with a couple of weeks notice, and want to rent it out also.
Surely they could plan their holidays six months in advance? Winter/Summer usually comes at the same time each year doesn't it?
Does Airbnb bring in more money overall maybe?
Once you have rented the house for longer than 90 days you cannot terminate the lease. Doesnt matter how much "planning" you do, you are not entitled to end the lease on an agreed date . Put a tenant in there and they are a tenant for life. You cannot even use the "I want to move back into my home" exception because its a holiday house and not your main residence.
I will never forget predictions over covid when some banks predicted big falls to property prices. IMO one of the biggest factors in property prices is the interest rates. Artificial supply shortages using migration drives demand. But I also wonder if we may see some 35 or 40 year mortgage terms coming in as the super age goes up, or even multi-generational mortgages, which all allows for people to borrow more, and increase house prices. .
Interest rates for sure. Look what's happening in the U.S. Michael MCDonough, Chief Economist over at Bloomie:
The monthly mortgage payment for purchasers of existing homes, using the 30-year average mortgage rate, stands at $2,309. This is a substantial increase from $977 in March 2020.
"I will never forget predictions over covid when some banks predicted big falls to property prices. "
After the early house price forecasts, policy makers changed the conditions that stopped the house price falls for a period of time. Those policy changes expired and changed housing market conditions once again.
"the house price bubble of 2021"
Can someone tell me - is this the first time a high profile market commentator in NZ has used the word "bubble" in respect of house prices in New Zealand?
I've only seen the word used once in a temporary headline in Stuff (in a low profile manner).
Reminder that this is what the Dec 2021 Property Focus by ANZ stated at the time:
"Formally, our forecast is for annual house price inflation to fall to a low of –3% y/y (3m/3m) in 2022 Q4, down from our previous expectation that prices would slow to a crawl of 1.0% y/y (3m/3m) in the same period. On a quarterly basis we expect that prices will resume growing from the second half of 2022"
Note also the following forecasts in that report (page 8):
1) peak inflation of 5.8%
2) peak OCR of 2.0%
3) peak 1 year mortgage interest rate of 4.0%
https://www.anz.co.nz/about-us/economic-markets-research/property-focus/
Highly leveraged house buyers of 2020-2021 may have assumed a worst case 1 year mortgage interest rate of 4.0% (or 5.5% mortgage stress test rates used by lenders in their loan applications).
As we now know, economic conditions changed dramatically and the peak 1 year mortgage interest rate rose well above 4.0%. Currently for the big 5 banks in NZ, standard 1 year mortgage interest rates are above 7.0%.
Not wanting to pick on any one economist, here is a summary of house price forecasts on 1 Dec 2021 by the major banks and their line of reasoning at the time.
https://www.interest.co.nz/property/113539/economists-three-four-larges…
Yet if someone showed financial literacy, read up on the ANZ forecasts prior to Mid 2021 and bought a property on the basis that interest rates are forecast to peak at 4% and their stress point is 5%....that's quite literate if you ask me.....then (assuming $500k loan) they'd be finding an extra $500 per month on top of their stress point if they refixed today.
I understand your point on other comments, personal responsibility comes into play because there are no protections in place for mortgage lending like we do everywhere else that mitigate losses to the consumer from factors outside their control.
My interpretation of financial literacy would be:
1) mortgage interest rates can be fixed for a maximum of 5 years. After that I will need to refix and I am subject to movements in mortgage interest rates.
2) in 2021, mortgage interest rates were at record low levels.
3) mortgage interest rates in the past 20 years have reached as high at 9-10% in 2008. As a precautionary measure, I should ensure that I can continue mortgage payments at those mortgage interest rate levels. Was it unreasonable to expect that mortgage interest rates could go back to 9-10% levels? People can debate that all day long, but those who failed to prepare and had insufficient buffers are now facing cashflow stress.
Data from RBNZ
https://www.rbnz.govt.nz/statistics/series/exchange-and-interest-rates/…
I guess it comes down to the herd all adopting this "financial literacy" as you call it. Otherwise, it's the difference between letting the bank test you at 6% (3% above prevailing rate) or the individual self testing at 13% (3% above 20 year peak).
So a borrower ends up with a $270k mortgage instead of a $500k mortgage and carries on renting until they can save a $500k - $600k deposit.
Good talking though, I do see where you're coming from even if I disagree with the stance.
It's about choosing to control the things that people can control. Things that are outside of a person's control should be taken into consideration in their decision making and adequate allowances made.
Borrower's can choose how much debt to take on relative to their incomes. The higher the debt to income level, then the higher the chance of getting caught out of an unexpected rise in mortgage interest rates.
Debt to incomes of up to 3 are manageable. People who chose to take on debt to incomes of 6 and above unknowingly took the increased chance of facing cashflow stress.
If you want to know, this could have been prevented back in 2016.
How did the nation get itself into its current situation?
One single decision back in 2016 led to continue GDP growth and now we're facing the consequences of that policy decision.
If the then Finance Minister had allowed the RBNZ to implement debt to income ratios on bank lending back in 2016, then house prices would not have reached such extreme levels in 2021. As a result of that single decision, the nation is now in the current situation where a sufficient number of households took on debt levels that are now causing financial and mental stress. Unfortunately some will resort to self harm. The pain that is being felt among highly indebted borrowers is the unintended consequence of that single decision back in 2016.
Wonder if it might destigmatise bankruptcies for whole generations. Rather than it mainly being a tactical tool of the wealthy seeking to protect their assets from their risk taking, it being seen instead as a perfectly reasonable response of younger people to a crash. Where possible, obviously.
There was a really good piece here last week on the comparison between renting and buying. I have a couple of rental properties in a nice suburb in the same street in Porirua. Properties in this street always sell very quickly, when they come on the market.
Both properties are currently valued on Homes.co.nz for around $670k ea - so not miles away from the scenario above. Rates are around $4800, insurance is around $1900. Allowing for a 20% deposit, a FHB would need to borrow $536k. Their annual outgoings for interest, rates and insurance would be over $44k, possibly close to $50k if they're paying any principal off their mortgage. The rents on each of these two properties are around $700, say $36400 per annum. If either tenant wanted to buy and assuming they had a deposit, they might be receiving around $5400 in interest, after RWT, so their net housing costs come down to around $31k.
Taking these as examples and comparing renting v buying, these families are better off renting by at least $250 per week and much more when principal and R&M are factored in. They have no R&M to worry about. If they were able to bank / invest that difference, they'd be doing quite well in the long term; even a modest interest return on that figure improves their situation by another $10 a week, which builds with compounding interest. Those figures show there's a very big financial barrier to FHBers. Rents will increase but if they increase at around 5%, that only covers annual movements in insurance and rates, so a FHB O-O would have to face that too.
What about in 7 years time when those 5% rent increases exceed the mortgage payments? $700 per week becomes $735 pw year 1, an $1820 increase. Did your rates/insurance increase by 27%? I laugh because in Welly yes they did, but they won't increase by 27% p.a. for infinity.
What about in 15 - 20 years when the FHB has been prudent, and put their payrises towards increased mortgage repayments? You know they can increase these by 5% p.a. much like rents increase. Well your tenants will be paying $1500 per week and the OO will be mortgage free.
It's a snap shot in time that shows how difficult it is but it's rather difficult to predict seven years out, let alone 15 - 20. Yes, rates and insurance have jumped up quite steeply in recent years, but remember that increase that you think is so steep for renters is also hitting OOs who are, arguably, carrying even heavier housing costs. One variable is whether they save the difference between the cost of renting and the cost of owning. That requires a heck of a lot of self discipline, but it provides a very good buffer if they lose an income at some point.
For those who wish to read, here is the link to that article
https://www.interest.co.nz/personal-finance/124362/bnz-chief-economist-…
I don't think the level of New Zealand house prices is being driven primarily by local factors. I think they are dependent on worldwide liquidity which in turn is being affected by US liquidity levels.
Based on these assumptions I would expect the NZ housing average price level to have bottomed out and will look a lot like the ANZ index level in the article's graph going forward. The house price level will rise and retrace two-thirds of the previous peak. The price level will peak around January 2025 and decline slightly for 8 months after that.
8 months is where the 2 year lag on US liquidity ends so that's where my prediction ends.
Why are banks saying house prices will rise ? Because they want people to take out mortgages , Hello.
If they say house prices are going to drop how many new mortgages will they sell ? Even if they are wrong and house prices do end up going down, its easy to say something else caused it. I've always been of the belief that what ever economists say, do the opposite !!
The world isn't gonna bounce back quickly from this downturn and its actually not even really there yet I don't believe. I've seen enough property cycles to know this is going stay where it is or drop further and then level off for a while until the worlds economy starts picking up again.
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