Housing market strength ‘not sustainable’

It might be running red-hot right now but the housing market’s current ‘‘eye-watering’’ strength is unlikely to last, ANZ economists say.

The bank has just released its latest Property Focus report and it makes it clear that the days of hefty price rises and buyer frenzy are not sustainable.

In the report, the economists said that a ‘‘perfect storm’’ for rising prices was at work. There had been a post-lockdown catch-up flurry of sales, supported by low mortgage rates, while new listings had lagged the market.

That meant the market had been exceptionally tight, with buyers chasing a very low inventory of available properties – and that led to a 10 per cent growth in prices since May.

ANZ senior economist Liz Kendall said a speculative dynamic had emerged, with investors leveraging up and some first-home buyers taking on risky debt-to-income ratios. ‘‘Fear of missing out (FOMO) is really helping to propel prices upwards and push the market forwards.’’

But the ANZ economists were wary about the sustainability of this upturn, despite the support from low interest rates and abundant liquidity. They said the market appeared out of step with fundamentals.

Kendall said population growth was very weak as migration was low and new builds were becoming available.

‘‘Income strains are likely to increase as the impact of the closed border on the economy becomes clear and direct fiscal support wears off.

‘‘And for those whose incomes are unaffected, affordability constraints are expected to be a constraint at some point, even at low interest rates.’’

The reality was that prices could not just keep rising indefinitely as it was unsustainable – and that meant the market would have to cool, she said.

‘‘Just when that might happen is difficult to pick because the market is so dynamic right now, but the Reserve Bank’s move to reinstate the LVRs in March next year could be the catalyst.’’

Many retail banks have already announced they will only be lending to investors at LVRs of more than 70 per cent and to owner-occupiers at LVRs of more than 80 per cent from now on. Investors in the 70-80 per cent LVR bracket currently account for 8 per cent of new lending, so ANZ expects this tightening of credit to have a meaningful impact on the market.

As the economic recovery stagnates in 2021, ANZ’s expectation was that the housing market would lose some steam, with a possible wobble expected, Kendall said.

‘‘The outlook is uncertain and the market has momentum for now, but overall, we don’t expect the current heat to be sustained.’’

In recent weeks, politicians have been trading blows over the heat of the housing market and what should be done about it.

This culminated in Finance Minister Grant Robertson sending a letter to Reserve Bank governor

Adrian Orr suggesting the bank think about ways to work with Government to achieve ‘‘sustained moderation in house prices’’.

Economist Tony Alexander said this could lead to the Reserve Bank increasing the LVRs to 40 per cent and requesting the ability to use debt to income ratio rules, while the Government could extend the bright line test from five years to up to 10 years.

But this would not change certain fundamentals, like low interest rates and ongoing supply issues, so Alexander expected house prices to keep rising, but at a slower pace than over the past five months.

‘‘Income strains are likely to increase as the impact of the closed border on the economy becomes clear.’’

Liz Kendall

ANZ senior economist