Tony Alexander: Clock’s ticking on home loan rules
Expect the hot market to cool quite soon as calming factors come into play.
Two weeks ago, I listed some key reasons why house prices have risen so strongly recently, then last week looked at past periods when prices rose in a frenzied manner over just a four-month period and what happened after the surges. This week I’m going to look at reasons why the pace of house price growth on average is highly likely to slow down this year – but remain positive.
Let’s start with something which has morphed over the past nine months. At the end of April last year, the Reserve Bank removed LVR (loan to value ratio) rules, so first home buyers plus a few investors with low deposits jumped into the market looking to make a purchase. The passage of time has been bringing us closer and closer to the May 1, 2021 date when the Reserve Bank indicated the rules would return.
But late last year, banks lobbied the Reserve Bank to bring the rules back early and the Reserve Bank signalled a review with a view to reinstating them from March 1. Then ANZ said it would lift the old 30% minimum investor deposit to 40% immediately.
We can put some of the extraordinary surge in prices down to buyers scrambling to beat the return of LVRs, possibly at a minimum 40% investor deposit requirement for all banks from March 1. Once we get to the end of February this force driving the frenzy will end.
A second factor contributing to slowing house price gains will be the actual 30%, or more probably 40%, minimum deposit requirement for investors. The 2016 experience tells us that the 40% requirement has a far greater impact than 30% on investor property demand and bringing it back will take a lot of buyers out of the market.
A third factor contributing to slowing prices growth will be the ending of the “timeshift” for buying a house. Many people who would have been planning to do lots of travelling and have a great time before purchasing a house maybe five years down the track have reversed the order of things because borders are closed.
As we get a feel for when foreign travel will become viable again (I’m assuming next year) these spending plans will switch again and that will reduce housing demand. Maybe this factor kicks in over the second half of this year. Fourth, there is a lot of pressure on the government to “do something” about rapidly rising house prices, with pressure coming from not just some sections of the community but also the quadrupleOpposition now in Parliament: National, the Greens, the Maori
Party and ACT.
The Government doesn’t have the gumption needed to make any serious moves, partly because there are far more people favouring steady to rising prices than falling prices, and partly because the lift in house prices has strengthened house building, which is a key factor in New Zealand’s better than expected economic and jobs performance last year, and its continued strength in 2021 and 2022.
Regardless, the Government will probably make being a landlord more difficult and less profitable, and take moves that will encourage people like me to predict annual house construction rising from the current 38,000 to not 41,000 in two years, but maybe 45,000. The upshot will be a small wave of caution hitting buyers, and some will step back.
Fifth, every strong growth cycle brings forward a number of sellers who decide to hold out for a better price. Once price growth slows, they start to worry about missing the peak and will rush to list. It is impossible to know when these optimistic vendors will capitulate and meet the market, but we could guess maybe midyear.
Finally, let’s add the simplest, most basic economic factor explaining why prices growth will eventually slow. We will be closer to the new average house price equilibrium for the country, for Auckland, and for all locations. Higher prices bring forth more sellers, burn off some buyers, and things settle down. My best guess on that factor generally is the second half of the year.
All up, numerous factors suggest the 11.7% average house price gain for New Zealand experienced in the four months to December won’t continue, and some easing in house price gains is highly likely this year and next – probably after March.
“We can put some of the extraordinary surge in prices down to buyers scrambling to beat the return of LVRs.”