What’s driving the property frenzy?

Rising house prices are once again in the news and it’s easy to see why. In the six months leading into July last year, average house prices in Auckland fell 0.4 per cent while they rose 1.7 per cent in the rest of the country on average.

Since then Auckland average prices have gained 4.6 per cent and the rest of New Zealand is up 6.8 per cent.

Why have prices lifted firmly virtually everywhere these past few months, and can we reasonably expect rises to continue in light of growing economic risks from the coronavirus outbreak?

The big reason for price rises is the Reserve Bank’s 0.75 per cent cut in interest rates near the middle of last year as it worried about collapsing business sentiment.

Low interest rates reinforced again to conservative investors that returns on simple bank term deposits are likely to stay low for years, and probably decades.

That has partly encouraged some investors to buy property anew.

But it might have had a greater effect in discouraging existing investors from selling, even as they fret about actual and proposed changes such as ring-fencing of cash losses and removal of 90-day no-cause tenancy terminations.

Last year we also saw confirmation of no capital gains tax on housing or even extension of the brightline test beyond five years – which was a surprise.

But before we all start thinking that investors are driving the market, the evidence on the ground suggests otherwise.

A quarterly survey of Barfoot & Thompson real estate agents, which I’ve started in Auckland, shows that while a net 63 per cent of agents are seeing more first-home buyers, a net 0 per cent are seeing more investors. That’s interesting.

Why this increased demand from first-home buyers beyond just lower interest rates? Perhaps because some have been holding off and now they feel it’s best to move before prices go higher.

That might explain why a net 35 per cent of real estate agents feel ‘fomo’ (fear of missing out) is present again.

Beyond interest rates and the lack of capital gains tax – the commonly cited reasons for the mid-year turning of our housing markets – some other factors might also be in play.

■ Net migration into New Zealand failed to fall away sharply as some were predicting.

■ Confidence amongst businesses and consumers rose strongly from unusual mid-year lows.

■ Virtually the final nails were put in the coffin of KiwiBuild.

■ Listings shortages have become worse around the country.

■ Transport infrastructure problems seem to have got worse and encouraged people to once again seek properties nearer city centres.

So, what happens now? Do prices soar the likes of 23 per cent as happened during 2003 when Sars struck? No.

This time around is different from, say, 2012 onward.

Back then net migration flows soared from negative 17,000 to positive 64,000. The current net 45,000 inflow is not going to soar to 126,000.

Back then, shortages were intense because house construction had just fallen to the lowest levels since the 1960s. Now, dwelling consent numbers are running 55 per cent above their 20-year average.

Back then, foreigners were large net buyers. Now the data suggest they are small net sellers.

Back then, bank six-month term deposit rates fell an average 1.7 per cent. This time the decline is just 0.7 per cent.

Back in 2012, there was a huge surge in catch-up buying by people who had been putting things off since 2007. The catchup this time will be far less and not present at all outside Auckland.

And finally, from 2012, New Zealand’s growth rate surged and the unemployment rate fell from 6 per cent to 4 per cent.

The outbreak is getting worse. Until we see signs that the global spread is being contained as China’s spread seems to be, the global and local economic outlook will deteriorate.

As you and I get more concerned we’re going to pull back from buying big things like cars, couches and houses.

But will we sell our houses in droves? No. Interest rates are low and the chances are growing that the Reserve Bank will cut again. But timing and magnitude are anyone’s guess.

Plus, our labour market is tight and sensible businesses affected by the economic shock will try to cut staff hours rather than lay people off.

Given the many long-term factors pushing house prices higher, the economic weakness we will feel this year from the virus is likely to be just a temporary interruption to the new pressures on house prices which will worsen social conditions even more, especially for low socio-economic renters.

Before we all start thinking that investors are driving the market, the evidence on the ground suggests otherwise.