One of the hottest topics of conversation in the residential property market at the moment is second guessing when the Reserve Bank will start to cut interest rates and by how much.
Some have it that a cut to the Official Cash Rate (OCR), and a consequent cut in mortgage interest rates, will quickly turn the market around.
Buyers will return in force, prices will start rising, there will capital gains galore and all will be well.
Or so they hope.
Unfortunately things are not quite that simple.
The housing market is facing many more challenges than just high interest rates.
Probably the biggest is the current overhang of unsold properties.
The overhang is the difference between the total number of properties on the market and the number that are sold each month.
And that has been growing hugely over the last three years.
The chart below illustrates the phenomenon.
The blue field at the bottom of the chart is the number of residential sales recorded by the Real Estate Institute of New Zealand each month. The orange field above it is the total number of residential properties available for sale on Realestate.co.nz at the end of the previous month (stock).
Three years ago, at the end of May 2021, there were 14,883 residential properties on the market. In June 2021 there were 7629 residential sales, leaving an overhang of 7254.
At the end of May this year the total stock on the market had increased by 119% to 32,598.
But sales have headed in the opposite direction to just 4356 in June this year, down 43% compared to three years ago.
Consequently the overhang of unsold properties has ballooned by 289% over the same period, to 28,242 in June this year.
This means the market will slog through winter and head into spring with a mountain of unsold properties weighing down on it.
Unfortunately the problem is even worse than the above figures suggest, because they are just the sellers we know about.
On top of that, there is also a potential tsunami of latent supply waiting to come onto the market.
These are people who may have already tried unsuccessfully to sell their property and then taken it off the market for the time being.
Then there are those who want to sell but are sitting on the sidelines for the time being, perhaps waiting for the market to pick up.
Those people will still be wanting to sell.
We don’t know how big this latent supply of properties for sale is, but anecdotal evidence suggests it could be very large indeed.
And if mortgage rate cuts, when they eventually arrive, are touted as a turning point in the market, it could well prompt latent supply to turn into actual supply.
And that could push the market even further into buyers’ favour.
All of that would be bad enough, but there are a couple of other factors also likely to weigh on the residential property market.
According to Statistics NZ, there was a net loss of population from migration in May, with around 2000 more people leaving the country long-term than arrived.
Those figures need to be treated with some caution because they can be subject to substantial revisions, especially following a sharp change in migration patterns.
However if they signify an ongoing turn in migration, and we have a net loss of population from migration for a significant period of time, then that could have serious implications for the housing market.
It would most likely affect demand for rental housing first, but that would eventually flow through to general demand for real estate as well, as investors reassessed their positions.
Finally of course there’s the general economy.
People often talk about the housing market as if it operates independently from the rest of the economy, but of course the two are intimately entwined.
And right now the economy has a bit of a cold.
It’s not at death’s door, but it’s hardly in rude good health either.
So all in all, the outlook for the housing market looks difficult, even with potential cuts to mortgage interest rates on the horizon.
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