Tony Alexander: NZ’s surprising hot run
House prices in New Zealand rose 12 percent in the last four months of 2020.
Data released a few days ago by the Real Estate Institute of New Zealand tell us that average nationwide house prices rose almost 12 percent in the last four months of 2020. For Auckland the gain was 10.9 percent, outside of Auckland
12.3 percent. How rare is this sort of prices surge, and what has tended to happen afterwards?
On no other occasion since data started in 1992 have prices surged like this, and the only periods which come close are the following six:
• In the four months to May
2016 average nationwide house prices rose by 7.8 percent. They then rose 4.1 percent in the next four months, 1.1 percent the four months after that, and 1.5 percent a further four months along.
• In the four months to March
2007 prices rose 5.9 percent, then 1.2 percent, 0.7 percent, then they fell 1.6 percent.
• In the four months to April 2005 prices rose 6.5 percent, then 3.3 percent, 4.7 percent, and 1.5 percent.
• In the four months to November 2003 prices rose 10 percent, then
4.8 percent, 3.0 percent, and 3.7 percent.
• In the four months to April 1996 prices rose 7.0 percent, then they fell 1.7 percent, rose 2.8 percent, then rose 4.2 percent.
• In the four months to May 1994 prices rose
6.4 percent, then 4.3 percent, -0.2 percent, then 3.6 percent.
These episodes tell us:
1. The recent prices surge is a record, but late-2003 was almost as frenetic.
2. The pace of gains can slow down quite quickly.
3. Three of the six previous surges were followed by prices briefly falling – but only briefly.
4. A year later prices were still rising at paces ranging from 1.5 percent to 4.2 percent.
Did any particular factors contribute to the sometimes rapid slowing of price gains?
• After May 2016 interest rates fell slightly, consumer confidence rose, but effective from July investors needed a 40 percent minimum deposit.
• Mortgage rates quickly rose 1 percent after March 2007 to sit above
10.5 percent until the GFC, consumer confidence eased but stayed above average.
• From April 2005 mortgage rates rose almost 1 percent to 9.5 percent and consumer confidence again eased but remained above average.
• From late-2003 mortgage rates rose over 1 percent and consumer confidence improved.
• From mid-1996 mortgage rates hit 11.5 percent and consumer confidence eased marginally.
• From May 1994 mortgage rates rose 2 percent and confidence eased.
These episodes tell us three things:
• Interest rate rises usually cause house price inflation to slow, but the slowing can disappear quite quickly.
• Temporary house price falls tended to be associated with mortgage rates hitting 11 percent or if rates quickly jumped 2 percent.
• In an environment where interest rates cannot go up because general inflation/ economic conditions do not warrant it, a 40 percent loan-tovalue ratio (LVR) for investors has an impact.
Because of low inflation, the continuing global pandemic and a desire to keep economic growth rolling, the Reserve Bank will not be acting to raise mortgage rates until late-2022 at the earliest. Restraint from that source will not come, but that has tended to be the main cause of house price inflation pulling back from extremely high rates in the past.
Does this mean we can expect 11 percent-plus rises in the next four months? Not really. This pace of gain is unprecedented and there are clear concerns in many quarters. Both the Government and Reserve Bank are facing pressure to do something to rein in the speed of price gains. Based on the 2016 experience there is a firm chance the Reserve Bank will require a 40 percent deposit from investors from March.
Technically there will be no reason for them to do this if banks are already winding back the volume of their low deposit lending. The Reserve Bank has never been tasked with guiding house price inflation in modern times. But there is no real cost in terms of reduced stimulus to house building and economic activity if they do, given that the main constraint on more rapid house supply growth is labour and land – not debt. Plus, a 40 percent LVR will help smooth fractured relations with the Finance Minister’s office.
Big changes causing substantial price inflation alterations are unlikely. In the end, the pace of inflation is most likely to slow as a result of LVRs returning and tightening, and the natural process of buyers backing away while some sellers bring forward selling plans to take advantage of the situation. At best guess, 12 months from now the fourmonth gain won’t be 11.7 percent but something closer to 3 percent.
”This pace of gain is unprecedented and there are clear concerns in many quarters.”