When the good news is actually bad news for the housing market
The five things you need to know about the housing market this week.
1. The falls in property values roll on
The Corelogic House Price Index recorded another drop in average property values in July (measured across all stock, not just what happens to have sold recently), with the Wellington market notable for weakness. Indeed, values across the wider Wellington area are now lower than a year ago, the first drop on an annual basis since 2012. First home buyers have pulled back from this market, which has made a significant contribution to softer demand, while a marked increase in development activity in the past few years, especially in Lower Hutt and Upper Hutt, is likely to have been a factor in subduing property values too.
2. But can we also see light at the end of the tunnel?
Despite the continued falls in values, however, there may also be some glimmers of positivity – e.g. further easing in the CCCFA rules (albeit not until March next year) and of course the recent cuts in mortgage rates by the major lenders. In addition, low unemployment (despite Q2’s small uptick) remains a key support for borrowers’ ability to keep servicing their debt. These factors can’t be ignored and at some stage the “smart money” buyers will begin pondering the trough and potentially the next upswing. But at the same time, I think it’s still too early to sound the all-clear – history tells us that values may well keep falling into 2023.
3. Good news is actually ‘bad’
Speaking of the labour market, to me the small rise in the unemployment rate in Q2, from 3.2% to 3.3%, is probably just random variation. The key point is that it remains low, and at the same time, wage growth is still solid – in normal times, that’s great news. However, from the interest rate perspective, things are so topsy-turvy in this Covid/inflation world that the labour market strength can actually be considered ‘bad’ in many ways – as it highlights the continued case for the Reserve Bank to keep pushing up the official cash rate. With other central banks around the world also still tightening, this all just adds to the caution around whether or not mortgage rates have truly peaked.
4. Landlords may be watching migration and rent data closely this week
Over the course of Thursday and Friday this week, Stats NZ will release June’s net migration figures and July’s rental price data. No doubt some landlords will be keeping a close eye on these releases, as there’s now a growing feeling that the rise in young people heading overseas is undermining the demand for rental property, in turn putting a dampener on rental increases – potentially exacerbated by any of the large number of new-build properties currently coming forward that are being pushed into rental supply.
5. Debt to income ratios back in focus
Finally for this week (Friday), the Reserve Bank will publish April-june mortgage lending data broken down by debt to income ratios (DTIS). As we all know, there is work going on behind the scenes to
establish a framework for officially mandated DTI caps, and although they won’t be imposed until mid-2023 (if required), it seems likely that the banks themselves already operate some kind of internal restrictions. It’ll be interesting to see if the latest data shows a further easing in the share of lending being done at high DTIS – generally considered to be >7 (or maybe >6 for investors).
- Kelvin Davidson is chief economist at property insights firm Corelogic