There is some good news out there

Headlining this year’s TMM Better Business conference was popular economist Tony Alexander and Core Logic’s Nick Goodall. Here they give their outlook for the year ahead.

BY SALLY LINDSAY

The biggest boost to the property market most people are unaware of is the number of migrants flowing back into the country.

Economist Tony Alexander and CoreLogic chief researcher Nick Goodall speaking at TMM’s recent Better Business conference say migration has turned around faster than anybody expected.

Combined with 200,000 plus migrants already in the country going on to permanent visas, it will lead to a tighter rental market and more overall property growth, although less of a drop in the future, says Alexander.

NZ Stats figures show in the 12 months ending June/July last year, the country had a net migration loss of 16,000 people.

There were expectations numbers would improve later this year, but 16,000 have already arrived New Zealand and there could be up to 35,000-50,000 set foot here by the end of the year.

That has relevancy for Auckland, says Alexander. “Kiwis from across the country leave, but migrants come in predominantly to Auckland.

Goodall says while migration is a positive for the property market, credit will still be a greater influence.

It is continuing to be a tough environment in which to get credit, says Alexander, although banks are more willing to lend because the worst case scenario of 8% plus interest rates is fading as the Reserve Bank fights to get inflation under control. Banks have already priced in another 50 basis point OCR rise into their interest rates.

Although the Reserve Bank said last year it would engineer a recession and is still forecasting one, Alexander says it would be relatively rare as businesses are saying they cannot get staff.

“It is a 50/50 call. The banks are tending to push out the timing of a recession to late this year, early next year.

“The question is does the Reserve Bank really need a recession to get inflation down? Economists don’t know the track which inflation is going to follow. Frankly, none of us have a model that tells us exactly what is likely to happen.”

He says any recession will be a different dynamic than every previous downturn in New Zealand where unemployed people were sloshing around.

It is not the case this time, and that is important when it comes to mortgagee sales, servicing higher interest rates and the $170 billion plus of mortgages that will repriced in the next 12 months.

CoreLogic’s data show banks are probably through the largest hump of people having to take the biggest leap in mortgage payments as they come off low 2% interest rates to middle 6% rates. “There is more to come but not as much as we have seen,” Goodall says.

Alexander believes this may be the best time in a generation for first home buyers (FBHs) to get into the market without facing intense competition from other buyers.

CoreLogic data show 25% of all sales in January this year went to FBHs. About 28% of those sales went to FBHs in Auckland despite stretched affordability.

“The key is they are willing to adjust their expectations to meet the market and vendors are a bit more open to negotiation. There are also many more buying choices in Auckland than anywhere else in the market,” Alexander says.

Investors disappearing from the market in the last week of March 2021 took out a large percentage of the competition for FHBs. There is no great sign of those buyers coming back as falling prices, higher interest rates and tax changes over mortgage interest deductibility keeps them away.

However, Alexander says the more experienced investors know this is when to buy, just as they knew in early 2021 it was the time to sell their ‘crap’.

Alexander has warned over the past 18 months that a lot of inexperienced, undercapitalised, over-optimistic people have moved into the residential construction sector.

“There was always going to be a period of reversal, of weeding out and through the surveys I do and industry feedback there are signs a solid decline in the industry has already started.”

He says the feedback from architects, which is always the earliest in a downturn, is business is falling away for them substantially. The proportion of new build sales is also dropping.

Alexander says the worry for people is will there be enough resources and materials available in the wake of flooding, the cyclone and normal house building.

“The flurry of building will continue, but resources and materials will be available in the second half of this year, particularly as banks have pulled back aggressively on their willingness to finance multi-unit new builds.”

House prices are up 18-20% from where they were pre-pandemic. That is about 7% a year, which Alexander says is nothing surprising. “It still sounds a lot, but people don’t often give a thought to what incomes are doing underneath.

The quarterly employment survey shows wages are about 18% higher than pre-pandemic. Alexander says the ratio of house prices to wages at the end of 2021 was 30%, now it is almost right back to where it was three years ago.

Many people believe when interest rates come down house prices will take off again, but Goodall says there has to be caution around that because of stretched affordability.

Affordability has improved slightly because prices have fallen away. It now takes about eight times income, compared to 11 times a few years ago, to buy the average house, but this is offset by rising interest rates meaning more than 50% of an average income earner’s pay goes to servicing the mortgage on an average priced property, assuming an 80% deposit, he says.

“The reason this is important is we think this will help dictate how things will go over the next couple of years.”

Alexander and Goodall are in step with this assessment and say the residential housing market is at the margin.

Price fall expectations are 23% from peak to trough from 2021 to 2024 but most of that fall will be throughout the rest of this year, Goodall says.

“Things are changing – nothing major, but FHBs are slowly coming back into market motivated by talk about rental shortages and poor quality rental accommodation, increasing migration and the impact of the recent floods on the rental market,” Alexander says.

“Recognition of some of those rental pressures in the context of wages rising 30% in the past three years and house prices coming down have people broadly working those numbers in their heads and some are coming into the market. Also, with interest rates at 6.5% people are thinking ‘this is going to be as bad as it gets if I sign up at that rate’.”

Goodall and Alexander agree that the housing market is a massive study in consumer behaviour.

“It makes no sense,” says Goodall. “When we look at the fundamentals and all the available information common sense dictates this should happen in demand and supply, but it never plays out this way. This is why it is so interesting.”

Alexander says the housing market has elements of crypto and shares with investors try to buy before the market goes up.

“So, there are psychological investment related factors as well economic fundamentals – growth in population, growth in income and new supply coming forward.

“In my surveys I am trying to get a feel for the psychology of the market because it can turn quickly, even if the fundamentals don’t necessarily change at the same pace.

Alexander says his belief is there is probably going to be some overshooting of the market in the next year and beyond. “It will probably go down too far. Auckland prices are down 22% because of a big supply increase and Wellington is down 25% because prices overshot on the upside.

“It’s the regions where things will be subdued over the next few years. There has been population growth in the regions related to the pandemic, but clearly there is now going to be a bit of a reversal.” ✚

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This case study is not a testimonial and is provided for educational purposes only It is not a substitute for professional advice. Outcomes will vary depending on individual circumstances. You are protected by responsible lending laws. Because of these protections, the recommendations given to you about home loans are not regulated financial advice. This means that duties and requirements imposed on people who give financial advice do not apply to these recommendations. This includes a duty to comply with a code of conduct and a requirement to be licensed. Applications are subject to credit assessment, eligibility criteria and lending limits. Terms, conditions, fees and charges apply. Information provided is factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser. © Pepper New Zealand Limited NZBN 9429031065153 | NZ Company Number 3416551

This case study is not a testimonial and is provided for educational purposes only It is not a substitute for professional advice. Outcomes will vary depending on individual circumstances. You are protected by responsible lending laws. Because of these protections, the recommendations given to you about home loans are not regulated financial advice. This means that duties and requirements imposed on people who give financial advice do not apply to these recommendations. This includes a duty to comply with a code of conduct and a requirement to be licensed. Applications are subject to credit assessment, eligibility criteria and lending limits. Terms, conditions, fees and charges apply Information provided is factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser. © Pepper New Zealand Limited NZBN 9429031065153 | NZ Company Number 3416551