Taken from Tea with Tony December 2021
The Housing Market
According to Independent economist Tony Alexander there have been fairly radical changes to the housing market in the last month, as indicated by his latest REINZ survey results. In the November survey, 56% of real estate agent respondents claimed they saw fewer first home buyers, up from just 2% of respondents in October.
Additionally, the latest survey showed a further stepping back of investors, although Tony says the most significant impact on investor activity was after the tax announcement earlier in the year.
And, while FOMO (Fear of Missing Out) among buyers has been sitting at around 70% in recent months, Tony says the latest survey shows a drop to approximately 39%. Effectively putting FOMO back to almost where it was after the first nationwide Covid 19 lockdown in 2020, leading Tony to conclude the housing market ‘has taken a big breather over the past three weeks.
Key Drivers of Shift
Tony believes that while we can focus on rising interest rates as a key driver for the housing market, with rates going up between 1.2 – 1.6% in the last 6-7 months, this isn’t the only factor.
“There are a few things in play; this is the way things go in markets. You’re chugging along one thing happens, maybe another thing happens, and then all of the sudden lots of things happen at the same time, and that’s what’s happened in the housing market, says Tony.
“Since fixed rates appeared in New Zealand from about 1991, this is the fastest pace of increase we have ever seen even with the Reserve Bank increasing its cash rates only half a per cent.
The markets are anticipating the Reserve Bank next year will go bang bang bang – regularly increasing interest rates which get factored into the medium-term interest rates that banks have to pay to borrow.”
So, while home loan borrowers are seeing a quick rise in fixed interest rates and Tony predicts this will be the strongest restraining factor to the housing market over the next two years, his view is that it’s not the most significant factor right now.
Alongside interest rates and ‘frustrated, tired buyers’ stepping back, Tony states the most considerable impact to the housing market right now is the banks credit crunch.
As Tony sees it, there are three key causes:
- CCCFA (Credit Contract and Consumer Finance Act) – From December 1, lenders must meet new CCCFA requirements, which means banks must apply the most stringent assessment of people’s income and expenses that we have ever had in New Zealand. Furthermore, Tony believes banks are navigating the changes cautiously and have tightened up even more than required. As an adviser network, CCCFA is something NZHL is navigating with clients to ensure lenders are getting the information they need. Pleasingly we already have robust systems in place to help make this easier – our high-touch personalised service approach helps here as well!
- Low equity deposits – From November 1, the Reserve bank now requires bank lenders only to have a maximum of 10% of their new lending (new loans) where the deposit is less than 20%.
And, with banks at risk of exceeding these requirements, Tony claims they have pulled back on low deposit lending.
“Early in November, the lending growth was still fairly strong, but at some point, it looks like towards the middle of November the banks went – oh my goodness if we continue as we have been going, we’re going to breach the 10%.
And the last thing a bank ever wants to do is breach one of the Reserve Banks requirements, so they’ve just shut the door essentially and cancelled pre-approvals and said no more low deposit lending.”
However, Tony believes this halt is only temporary.
- DTI’s (Debt to Income ratios) – According to Tony, the third element contributing to the credit crunch is the experimentation of DTIs as banks test their systems before the Reserve Bank introduces a DTI requirement, likely in the next year or so.
Essentially, Tony claims the housing market is going on hold for the moment. However, he still sees support for the market particularly with low unemployment rates, which will likely result in a slowdown or flattening of house price inflation rather than a crash.
Although Tony acknowledges, there may be a correction in some parts of the country over the next two – three years where there is currently ‘over construction’.
While more property listings and less competition from investors is great for first home buyers, Tony doesn’t believe this will cause the Reserve Bank to pause on further OCR (official cash rate) increases in 2022. He expects a pullback in consumer spending would be likely to have more impact than flattening house prices.
But what does this mean for mortgage rates?
Tony believes we could see a rise of up to 1% from where they are currently sitting for longer-term 3 – 5-year fixed rates. However, as shorter terms are closely tied to the current OCR, we could see up to a further 2% rise in the one-year fixed rate.
“There are still further increases; however, the bulk of the increases for the longer terms has already happened,” claims Tony.
Economic Outlook: Red, Orange, or Green
Tony still holds a good outlook for New Zealand’s economy, a view which he believes the Reserve Bank will share.
”In some regards, the outlook is too good, considering our shortage of machinery, shortage of people and shortage of materials,” says Tony.
And, when comparing the economy to the Covid-19 traffic light system, Tony chooses a ‘greeny orange’.
However, he cautions that the Reserve Bank needs to slow the economy down to ‘orange’ as currently, New Zealand’s economy is growing too fast, driving up inflation beyond a sustainable level, which could contribute to further interest rate increases.
The Biggest Risk
While emerging Covid-19 variants such as Omicron, resulting in delays in the opening of the borders and New Zealand’s debt levels, may concern many, Tony biggest concern sits firmly with inflation and its potential impacts.
“Let’s give it a small chance that the Government has to do what they did in 2008 – they threw the economy into recession in order to get inflation under control,” says Tony.
However, Tony is careful to stress there is only a slight chance the Reserve Bank will have to use interest rates to drive a recession, and if this were to occur, it would not be in the immediate future.
What can we do?
Tony’s advice to everyday Kiwis is to look at a variety of home loan terms to spread out your risk.
Essentially, Tony advises, “Don’t put all your eggs in one basket “.
Additionally, Tony shares a word of warning for those looking at getting a new property built.
“There are many people who are new into the property investment sector. But unfortunately, they are a bit undercapitalised, a bit under-experienced, and they are over-optimistic about the ability of their bank to keep financing them through when they are racking up bills for wages, for the materials, council fees etc.
When you have a boom, there will always be some operators who are weeded out, and this will be the case in the residential construction sector,” cautions Tony.
Tony’s advice is to carefully consider the longevity of the person you’re contracting, be careful about the sums you’re paying as you progress and most importantly, have a lawyer go through legal contracts with particular attention to completion and sunset clauses.
But ultimately, Tony cautions all Kiwis against overspending. While this is particularly important if you’re looking to extend or apply for a new loan, it’s also vital to prevent further rises in inflation.
You can also come and see NZHL who can help you make a plan to deal with all of the above!