Latest BNZ-REINZ residential market survey indicates shortage of houses will worsen and prices will keep going up

The current shortage of available houses will get worse and that is going to keep pushing prices up, the latest BNZ-REINZ residential market survey indicates.

BNZ chief economist Tony Alexander said that the survey had now been running for just over two years and was providing "valuable insights".

"The survey shows how awareness of the shortage [of houses] rose strongly during the summer of 2011-12 and it is suggesting to us this month that although buyers remain determined and want a property, they may increasingly despair of finding one," he said.

Alexander said this conclusion was reached after noting how the proportion of estate agents seeing more people at open homes was low, but fewer potential vendors were seeking appraisals, while buyers remained very motivated to transact.

His views come on a day when latest REINZ figures showed that house prices eased slightly in April, though sales volumes were very strong.

"This survey gives no indication of the housing market easing up and suggests strongly that prices will continue to rise and that the shortage will worsen," he said.

To counteract the shortage was not easy as it required much stronger growth in new house supply.

"Yet the number of consents issued for the construction of new dwellings was not only well below the ten year average of 22,000 in March at 17,397, that result was down from February’s 17,481."

Alexander said that last week the Reserve Bank made it immediately harder for first home buyers to get into a home with their increase in the amount of capital banks must now hold for lending above 80% of a property’s value.

"This appears to have added 0.15% or so to such lending interest rates.

"But the positive news regarding proposals to sharply accelerate the discovery and opening up of tracts of land for building in Auckland will have no immediate impact and may only boost supply over an extended number of years – especially as the now ever larger size of the Christchurch rebuild will strain even more the availability of builders.

"Short of an outbreak of foot and mouth devastating the economy there appears little reason for believing other than that house prices will continue to rise strongly. And as they do so in an environment where more and more investors are chasing yield the risk of a bubble will grow. But slow debt growth and simple economics of a supply shortage and many buyers catching up on delayed purchases says we are nowhere near that point yet."

Foreign buyers

The latest survey has repeated questions first posed in the survey two months ago regarding foreign buyers.

The subject of foreign ownership has become contentious, with many anecdotal evidence of particularly Chinese buyers having a large influence in the market.

The May survey has produced very similar results to that in March, again suggesting that the numbers of offshore-based buyers are being overstated in anecdotes.

"A gross 23% of sales for our 549 agents nationwide are to first home buyers, 19% are to investors, and 8% to people located offshore. There is no upward trend evident in the proportion of sales offshore," Alexander said.

The survey shows that the largest source of offshore buyers is the United Kingdom at 16%, followed by China at 15% then Australia at 14%.

By then asking the question of whether those offshore buyers intend to live in NZ after buying the house, Alexander is able to extrapolate that just 3.6% of the house sales were to offshore buyers not intending to live here. Again this is similar to the March result.

General results

The number of respondents to the survey noticing an increase in people attending open homes, fell to a net 9.5%, which is below average and the lowest figure since December.

However, just a net 5.1% of agents say that they have received fewer requests for appraisals over the past month.

"The way to read this variable is that if suddenly people wanted to take advantage of high prices and cash up the reading would be very strong. The opposite has happened. This tells us that the listings shortage we have long written about is getting worse," Alexander said.

A net 25.9% of the 549 responding agents noted that they are seeing more investors in the market. This is the lowest reading in four months but it is not far off the April result of a net 29.4% and "importantly remains above the two year average of a net 15.6%", Alexander said.

A net 33.5% of agents said they were noticing more first home buyers in the market.

"This reading is about equal to the two year average of 34.8% and broadly consistent with the past year apart from the spike in February which could easily be seasonal," Alexander said.

"One could not therefore look at this outcome and say that the reason there are fewer people obviously appearing at Open Homes is that first home buyers are backing away. They remain in the market though next month’s result will be interesting following the Reserve Bank’s move to make it harder for first home buyers to purchase a property by raising bank capital required for high loan to value lending."

A net 48.5% of agents reported that they feel prices are rising, which is almost twice the two-year average of 28.7%.

"Prices are rising. Note the upward trend, but also note that this measure has now eased slightly for three months in a row," Alexander said.

No bubble

"In the context of arguing that the rise in the housing market is not a bubble this is a positive thing. But it will do nothing to assuage the concerns of first home buyers regarding house prices moving out of their reach. Each month more and more houses will be unattainable without a massive boost in supply."

Agents overwhelmingly see buyers as more motivated to get a deal done than sellers – a net 21.3% positive.

"This is the highest result in our two year survey and well above the average of 4.7%," Alexander said.

"What this perhaps indicates then when taken in conjunction with the easing off in open home numbers and still high interest coming from investors and first home buyers, is that buyers may simply be sick of looking at homes they feel they have no hope of buying.

"One would not call this buyer fatigue but perhaps buyer despair."

Westpac's 'Home Truths'

Meanwhile in Westpac's monthly 'Home Truths' analysis of the housing market, chief economist Dominick Stephens said it was good to see growing broad recognition in the marketplace of the importance of low interest rates as a driving force for the housing market.

"We are glad to see that the consensus is beginning to break down in favour of a more multifaceted understanding of the housing market. There now seems to be more recognition of the role low interest rates are playing among politicians, the Reserve Bank, and in the media," Stephens said.

He said it is more widely recognised that housing markets are warming outside of Christchurch and Auckland, even though they are not yet hot.

"And there are fewer people arguing that the housing market is going to cool on its own with a bit of extra building."

Stephens said that Westpac's view on the new Auckland housing accord was that releasing land would have a dampening effect on Auckland house prices - eventually.

Long time frame

"But the time frame required to produce that result is long (possibly decades), and the effect will be slight. In the meantime, nothing has changed on the interest rate front so house prices can be expected to go on rising aggressively for a year or two yet."

On the RBNZ announcement last week: "We think this will have only a slight effect on mortgage rates, and therefore only a slight (perhaps negligible) effect on the housing market.

"By the way, we are not suggesting that the Reserve Bank's new regulation is redundant or toothless. Quite the opposite. Raising capital requirements for banks will be effective at improving the safety and stability of New Zealand's financial system, which is precisely the aim."

But he said the housing market wasn't going to turn just because some land had been released and the RBNZ is requiring banks to hold more capital.

When will prices slow?

"What will it take to slow the rise of house prices? And when will it happen? In our view, the answer is higher interest rates. Interest rates may be low today, but we don't believe they will stay low forever. When interest rates eventually rise, we expect the housing market will take a hard knock - probably involving outright declines in nominal house prices."

Stephens said this factor was worrying the RBNZ, judging by the Financial Stability Report published last week.

"The trouble (from the perspective of an aspiring first home buyer) is that interest rates are not going to rise this year. The Reserve Bank manipulates interest rates with the overriding goal of keeping inflation close to 2%. Inflation is currently below 1%, so the central bank is duty-bound to keep rates low for now.

"And we expect inflation will stay low for the rest of this year, due to the high and rising exchange rate. Sure, eventually inflation will rise and the Reserve Bank will have to hike rates. But that is next year's story. For the mean time, this housing market is going to keep on keeping on."