Is the housing market near the bottom for this cycle?
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By Tony Alexander
Survey results suggest first home buyers will be out in numbers this spring.
ANALYSIS: Markets don’t move in straight lines. There are periods of exuberance when people buy the relevant asset because they feel other people will buy it and they don’t want to miss out. FOMO can rule. At other times people will sell the asset driven by worries that if they hold off prices will become even worse. FOOP – fear of over-paying – rules. Markets are driven by human emotions and most people can easily stand back from sharemarkets and things like crypto assets and angora bunnies and put things into perspective.
But confusion reigns when it comes to housing because houses are not just an investment asset. They are the most fundamental thing we require beyond a partner for forming and raising our family in a safe, secure, and hopefully warm environment.
This crossover of housing as an investment for those seeking gain and preparing for retirement, and a home means the understanding which most people have of where the housing market is at and why is often wrong.
Too many people have incorrectly predicted falling house prices over an extended period because house prices have risen as a multiple of income beyond the norms set when investors were few and far between. Equally, too many people have predicted sustained house price falls because investment yields were less at times than those available on assets such as shares.
This confusion between housing as an investment asset and a home means people can easily make bad decisions with regard to their buying and selling. We are at one of those particular points of confusion currently.
People move with the herd and the herd’s view currently is that house prices will keep falling for a great number of months if not all of 2023 simply because they have to – damn it! Affordability is bad in New Zealand and young people are leaving to seek their fortunes and futures in Australia. But affordability measured by the ratio of house prices to income becomes meaningless when we acknowledge that most people buy a house with a mortgage and affordability is primarily a function of interest rate, not the purchase price.
Thus, even with fixed mortgage rates having risen 3% – 3.5% in the past year, at 5% – 5.5% rates are the lowest for all periods in the past three and a half decades apart from 2015-2022 when unusual worries about deflation were followed by the pandemic. Ability to make weekly repayments is what matters when most people contemplate the purchase of a thing, not the price itself.
Therefore, while it might surprise some people, for me there is no surprise in the readings I am getting from my most recent surveys of mortgage advisers and real estate agents. These readings show that first home buyers are moving back into the market, looking to take advantage of the stock of listings being double what it was a year ago and vendors finally accepting they will not sell for what they could have got late last year.
A month ago, in August my regular survey of mortgage advisers showed a net 8% saying they were receiving more enquiries from first home buyers. The July result was a net 7% seeing fewer and the result in February was -64%. In this month’s survey, the details of which I will release next week, a net 47% have reported seeing more first home buyers. The proportion seeing more investor buyers is almost positive, but not quite.
At the end of August, a net 5% of real estate agents responding in the survey I run with REINZ said they were seeing more first home buyers. At the end of July this result was a net 36% seeing fewer young people in the market.
First home buyers have stepped back from viewing a house as an investment asset for which one tries to pick the bottom of the price cycle in favour of one in which a family can be raised and it matters little if the cycle’s bottom is missed.
The residential real estate market in New Zealand is in the process of turning. Spring for 2022 looks like being one in which housing as an asset to grow one’s family in becomes dominant. What will follow is the flow of people who treat housing as a portfolio asset, and that is when price movement can surprise. Blink and you miss it.
Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
