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By Tony Alexander
A shortage of listings and fear of missing out were key drivers of last year’s price surge.
ANALYSIS: In recent weeks I have written about the seeds being sown for the upward leg of the housing cycle to return next year, but that before then we would see further market weakness. Such weakness was easily observable in the July data on residential real estate activity released this month by REINZ.
Their data show that the number of dwellings sold around the country in July was 37% down from a year earlier. It took 16 days longer on average for each of those sales to occur than a year ago, and the average sales price was down by 1.4% from June after adjusting for changes in the types of houses sold from month to month.
Average house prices have now fallen 10.4% from their peak so have another 4.6% to go before they will be considered to have hit “sustainable” levels by the Reserve Bank.
But what about the seeds of a turnaround? Here are a few new ones. After adjusting for seasonal influences the number of dwellings sold in the three months to July was down 7% from the three months to April. This is a fall but a smaller one than the 24% decline three months earlier.
There was also an interesting report this week regarding real estate agents noticing a rise in enquiries from the many tens of thousands of migrants who have been granted permanent residency under the government’s special scheme. This is a factor I have cited as one which will help bring some stability back to the market eventually – but not yet.
Another piece of evidence comes from my monthly survey of portfolio investors undertaken with Sharesies. The full results will come out in a couple of weeks but there is one worth commenting on here. The gross proportion of investors saying that they are thinking about selling a residential investment property held steady in August at 13%.
This is down from 14% three months ago, 16% six months back, and 19% nine months back. As time goes by fewer and fewer investors are feeling inclined to sell. At the same time, more are showing an inclination to buy.
In this month’s survey 29% of investors said they were thinking about buying an investment property, up from 25% in July. Three months ago the result was 26%, six months ago 27%, and nine months back 27%. The latest result is the highest for the past year.
Put the two sets of results together and we see things shifting in the residential investment market towards more interest in holding this valuable asset. Why might the investors be showing these behavioural changes?
One reason will be the lacklustre rise in bank term deposit rates. Another will be the way mortgage fixed interest rates are falling – so far down between 0.2% and 0.4% from mid-June peaks.
Maybe another reason is the rise of National in political opinion polls suggesting that a change in government at next year’s general election is increasingly likely. National have said they will restore the ability of property investors to do what every other business can do and deduct interest expenses from revenue when calculating taxable income. They would also take the brightline test back to two years.
That latter change might interestingly bring forth a few extra sales when it happens as leading into it many investors looking to sell will keep their property off the market if they would otherwise be caught by the existing and recent brightline tests.
That allows me to give a reminder about the dangers of believing the current surge in the stock of listings to 104% ahead of a year ago will persist. Further rises are likely in the next few months because the negatives for the housing market continue to easily dominate the positives.
But at 28,000 the current listings stock is still 21% below the average for the past ten years and 38% down from ten years ago. It was a shortage of listings last year which contributed strongly to FOMO and the unusual surge in prices from July to November despite rising interest rates, tightening credit conditions, and new tax rules hitting investors.
Once sales pick up and the stock of listings eventually falls again, watch for FOMO to ramp up again fairly quickly in 2023.
Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
