House prices broke out of an 18-month downtrend in June, rising 0.7 per cent month-on-month.

This was on the slightly stronger side of ANZ Bank’s expectations. The bank has been calling a turn in the house price cycle, and the June data confirmed it.

“Now the question is whether this is just a noisy start to the turn, or if the upswing has a bit more oomph than we’ve been expecting,” says Sharon Zollner, ANZ’s chief economist, in the bank’s latest Property Focus.

House sales were also higher in June (after seasonal adjustment) and have been trending that way for a while, having lifted around 30 per cent since December last year, suggesting the market is indeed warming.

Sales tend to lead prices by about three months, indicating that the lift in June prices wasn’t a one-off. That said, with the level of sales still below the historical average, it would certainly be a stretch to call the housing market “hot” right now. But the trajectory is certainly pointing towards warming.

Another useful key indicator at picking the turning point in the house price cycle is the Barfoot & Thompson auction clearance rate for Auckland, Zollner says.

There are multiple drivers of the house price cycle, but one in particular stands out for June: easing loan-to-value ratio (LVR) restrictions, which took effect on June 1.

• For owner-occupiers, 15 per cent rather than 10 per cent of new lending is now allowed to be at an LVR ratio of more than 80 per cent.
• For investors, 5 per cent of new lending (unchanged) is now allowed at an LVR ratio more than 65 per cent, up from 60 per cent.

In addition, further tweaks have been made to the Credit Contracts and Consumer Finance Act (CCCFA) recently after it was materially tightened in December 2021.

Change in mood

A change in mood last month stemmed from LVR tweaks that may not have occurred during previous LVR tweaks. In other words, if buyers and sellers were just waiting for confirmation the wind is changing direction, recent LVR tweaks may well have provided it.

A recent small uplift in demand for mortgage borrowing has coincided with slightly looser financial conditions stemming from the changes.

Zollner says for LVR settings, the bank’s modelling suggests tweaks to investor LVR restrictions have meaningfully affected house price inflation over the past few years, but changes to owner-occupier settings have tended to have less impact. But even if the direct impact of recent policy tweaks is small, that’s not to say a loosening in LVR settings for owner-occupiers and CCCFA changes will have no effect on the market.

“The impacts of various housing drivers are likely to be time-varying to some extent, and subject to prevailing market conditions at the time. For example, the housing market can be influenced quite heavily by ‘animal spirits’ (fear of missing out, or FOMO, being one manifestation).

June was also the first full month of data since the RBNZ called a halt to rate hikes. “This likely had an impact on perceived interest rate risk, which can also influence the broader housing vibe, with some households now potentially viewing current mortgage rates as a worst-case scenario,” she says.

The bank’s OCR call disagrees, but views on the outlook differ, with some expecting the next move to be a cut, and others like ANZ expecting it to be a hike.

Significant housing headwinds remain, with housing still very unaffordable relative to history, the unemployment rate set to rise and, more recently, some renewed upward pressure on mortgage rates.

So, while it’s possible that June prices received a larger bump than anticipated from the tweak to LVR settings, recent CCCFA changes, and the RBNZ declaration of a cessation of hostilities, at this stage probably don’t point to stronger housing momentum persisting into the medium term.

Recent changes to mortgage rates corroborate this view. Three, four, and five-year standard mortgage rates had been trending lower this year until May, as the two-year moved broadly sideways. On the other hand, the one-year rate (typically a relatively popular term) has continued to trend higher this year. “Whether or not this recent mix of mortgage rate changes has been a tailwind, headwind, or neutral is somewhat uncertain,” Zollner says. “But what is clear is that over the past month or so, most mortgage rates have shifted higher.”

One-off factors

She suspects the running start to the upturn had some one-off factors nudging it along, but not all the data ANZ monitors concurs.

For example, recent auction clearance rates in particular suggest ANZ’s forecast for about three per cent growth in house prices over the second half of this year is a touch soft.

“That may well be true, but we can’t lose sight of the broader economic backdrop: the RBNZ is seeking to engineer higher unemployment in order to tame CPI inflation, and if it doesn’t achieve this with the OCR at 5.5 per cent it will hike by more.”

Zollner says the bank’s expectation is that CPI inflation will prove harder to tame than the RBNZ anticipates, pushing it back into OCR hiking mode come November. That’s likely to lead to renewed upwards pressure on mortgage rates later in the year and could even see housing headwinds dominate tailwinds heading into 2024.

“All up, the recent downturn in the market, which now appears to be over, has done little else than bring the real price of housing relative to incomes back to the broader relative levels that prevailed before the pandemic.”

She says there has been no fundamental shift between supply and demand dynamics (the country now has a widening housing deficit) and housing is still unaffordable relative to history.

“Its updated forecast essentially banks the starting point in June and maintains the previous outlook we had pencilled in previously. That is, we expect house prices to rise around 3 per cent over the second half of the year, boosted by strong (but easing) net migration and the LVR limit tweak.

“But as we get into 2024, we think the reality of higher-for-longer interest rates will set in, and that still-stretched affordability and rising unemployment will culminate in a very subdued pace of expansion in house prices. And we certainly couldn’t rule out a few more monthly declines in house prices along the way.”

Migration figures

Speaking of softer tailwinds, the net migration release for the month of May provided further evidence that the recent surge in net inflows (which ultimately has meant New Zealand is no longer building enough houses to keep up with population growth), has indeed turned a corner. Departures picked up strongly in May, which we suspect reflects the fact that the NZ summer is in the rear-view mirror (why not enjoy the summer months at home before embarking on a new adventure?). Meanwhile, arrivals came in well below the extremely high levels recorded earlier in the year, possibly reflecting pent-up demand being worked through in the context of a softening NZ labour market. All in all, net migration was still at very high levels in May, but the migration impulse to housing demand is no longer growing.

“Putting it all together, we’re comfortable with our view that the upside surprise we saw in the June housing data is unlikely to be the harbinger of a string of upward surprises from here – tailwinds have lost a little bit of steam in recent months.

“Our updated forecast essentially banks the starting point in June and maintains the previous outlook we had pencilled in previously. That is, we expect house prices to rise around 3 per cent over the second half of the year, boosted by strong (but easing) net migration and the LVR limit tweak. But as we get into 2024, we think the reality of higher-for-longer interest rates will set in, and that still-stretched affordability and rising unemployment will culminate in a very subdued pace of expansion in house prices. And we certainly couldn’t rule out a few more monthly declines in house prices along the way.”

A line in the sand

To round out this month’s edition, if June was truly the turn in the house price cycle, then we can say the following about the recent downturn:

House prices fell almost 17 per cent from their peak in November 2021 on a nationwide basis.

At the trough (May), house prices were still around 21 per cent above their pre-pandemic (December 2019) level. That is, they gave up less than half their nominal gains.

House prices relative to incomes in Q2 2023 were roughly where they left off ahead of the pandemic. The recent correction in house prices, combined with persistent (and robust) growth in household incomes has seen this ratio improve from both ends. Importantly, this ratio is still very high relative to history. But the Covid-era bump has been completely unwound.

House prices relative to rents are almost back at pre-pandemic levels.

All up, the recent downturn in the market, which now appears to be over, has done little else than bring the real price of housing relative to incomes back to the broader relative levels that prevailed prior to the pandemic. There has been no fundamental shift between supply and demand dynamics (NZ now has a widening housing deficit), and housing is still unaffordable relative to history.

The RBNZ commented in its July Monetary Policy Review that house prices are now looking “sustainable”. But that’s not the same thing as “affordable”. According to this note, the RBNZ interprets sustainable house prices to be “the level that house prices should move towards based on the medium-term outlook for the underlying drivers of the housing market. These drivers include household incomes, demand from population growth, housing supply responsiveness, tax settings, and interest rates.”

Conversely, it’s the price of housing relative to income that determines “affordability”. As the RBNZ notes, “in a market with low supply responsiveness and restricted land supply, house prices can be unaffordable, but sustainable. When supply is more responsive and land is readily available for development, the sustainable house prices are likely to be lower and more affordable.”

This gets nicely at the crux of NZ’s housing affordability problems, suggesting (as we have noted uncountable times) that the appropriate policy response to housing unaffordability is a supply response.