Expectations were riding high that the Reserve Bank’s hefty OCR cut in August (and the subsequent impact on mortgage rates) would prompt a noticeable property market pickup. Well, to date, that hasn’t happened. It seems the market can still turn in some surprises.

That’s because the latest data doesn’t provide evidence of a wholesale market pickup. Instead it presents, once again, a mixed bag of results. This has left commentators somewhat divided in their interpretations of what it all means for the market.

There is one constant in the analysis: the doomsday crash talk has disappeared.
On the contrary, commentators are pretty optimistic about the outlook for the market going forward. It’s just that they differ in their projections and the details of them.

Positive Price News

Taking a look at the August price data provided cause for optimism. Realestate.co.nz, QV and REINZ all had prices holding firm overall, with the notable exception of the Auckland market. Barfoot & Thompson’s data on Auckland was more positive.

Perhaps the most interesting development was in the QV data. While value growth nationwide has been waning for months, the latest instalment of QV’s House Price Index suggests the rate of decline is easing up. It has the average national value increasing by 2.3% year-on-year and by 0.3% over the last quarter to reach $688,760 in August.

These growth rates are well off the giddy pace seen at the height of the recent boom. But they are an improvement on recent months: In July annual national value growth came in at 2.2% while in June it was at 2.0%.

And in both June and July quarterly national growth clocked in at 0.1%.

At the same time, in Auckland and Hamilton, where residential values have declined over recent months, the rate of decline has eased.

Hamilton City values increased by 5.2% year-on-year and by 0.5% over the quarter, leaving the average value at $588,196. Auckland saw values decline by 0.5% over the last quarter, which left the region’s average value at $1,025,193. But value growth in different parts of the region improved.

Meanwhile, in many New Zealand regional towns and cities where affordability is less of an issue, value growth continues in a steady fashion.

The REINZ price data supports this. It has prices holding firm with the national median up by 5.5% year-on-year to $580,000 in August. Additionally, 12 out of 16 regions saw a year-on-year increase in median prices and eight of those regions saw double-digit growth.

Four markets also hit new record median prices. Those regions were Southland (up 29.2% to $310,000), Manawatu/Wanganui (up 25.6% to $390,000), Hawke’s Bay (up 12.4% to $500,000) and Northland (up 10.8% to $507,500).

What's driving house prices?

Reinz house sales: Down

Sales volumes nationwide were down year-on-year in August. The month also saw the lowest number of sales in seven months. In Auckland, sales were down annually and at their lowest in four months.

Interest Rates: Down

The Reserve Bank’s shock OCR move has poured further fuel onto the mortgage rate fire and banks are cutting rates again. Commentators say a long-term low rate environment is firmly in place.

OCR: Down

The Reserve Bank kept the OCR unchanged at its record low of 1.0% in September. But economists believe that at least one more cut is likely to come in this cycle and it could be later this year.

Immigration: Down

Migration data remains volatile and, although high annual net migration remains high, commentators say it appears to be trending lower.

Building Consents: Up

Consents nationwide were at levels not seen since the 1970s in July – although they were down slightly from May’s record high – and demand is high. Auckland consents remained at all-time highs.

Mortgage Approvals: Down

Reserve Bank data shows mortgage lending overall was down in August. Lending to investors was down on July as well as on August last year and their share of new lending remains much reduced.

Rents: Up

The average national rent remained static on a record high in August. Auckland’s average rent dropped slightly in August but from a record high and Wellington rents remain at historic highs.

REINZ has median house prices in Auckland down by 3.5% to $820,000, as compared to $850,000 in August last year. In contrast, Barfoot & Thompson’s latest data had both the average price (of $930,090) and the median price (of $830,000) up on July, as well as on the averages achieved over the last three months.

Sales slump again

The news may have been positive on the price front, but it certainly was not on the sales front. According to REINZ; sales have slumped again.

Nationwide, the number of sales fell by 6.1% year-on-year to 5,959 in August. This was the lowest level in seven months and the lowest for an August month since 2014. Southland, Hawke’s Bay and Taranaki saw the greatest annual decrease of the regions. In Auckland, sales were down by 4.1% year-on-year to 1,761, which was the lowest level in four months.

REINZ chief executive Bindi Norwell says the fall in sales volumes was surprising given the strength of July’s figures.

She put the decline down to an extremely wet August across most parts of the country and a shortage of listings, with 3,624 fewer new listings in August than at the same time last year. “The past three months have seen the lowest number of new listings of any consecutive three months since records began in 2007.”

Barfoot & Thompson’s sales figures for Auckland told a similar story. The agency recorded just 746 sales in August – which was a decrease of 15.1% on July and of 6.2% on August last year. The figure was also down by 10% on the average of the last three months.

The Auckland market is in a stable position but it needs more listings to revive lost momentum, Barfoot & Thompson managing director Peter Thompson says.

“We saw 1,052 new listings in August. That’s the lowest in an August for more than a decade and it is also down by 8.1% on July and by 21% on August 2018. So, at month’s end, we had 3818 properties on the books, which was the lowest number in 20 months.”

However, some see hopeful signs for the market, especially as it comes out of the traditionally slower winter months and the lower cost of lending hits in.

QV senior consultant Paul McCorry says real estate agents have reported increasing competition to list the limited number of properties that come to market each week. “We are expecting renewed enthusiasm from buyers, particularly at the lower end of the market.”

On the rise - Maybe

He is not alone in anticipating a market resurgence. ASB senior economist Mike Jones says that, despite the fall in sales, August’s data is supportive of their view that the market is stirring.

“The broader upturn in activity remains in place. Days to sell a house continue to edge lower and prices across the country rose in August, even in Auckland. We expect the upturn to gather pace in spring.”

They are picking house price inflation to build to a 5-6% annual pace by mid- 2020. “That’s as sharp falls in mortgage interest rates help thaw out the Auckland housing market and add a little more heat to simmering regional markets.”

Should market activity continue to recover as they expect, the updraft for house prices will strengthen in coming months, Jones adds. “The Reserve Bank’s recent sanctioning of a ‘borrow and spend’ dynamic may well further bolster confidence in the housing markets.”

But other commentators are not as convinced. BNZ chief economist Tony Alexander doesn’t believe interest rate reductions will spark a lift in the Auckland housing market earlier than he has predicted.

The uplift story - no capital gains tax, low interest rates, more demand than supply, likely further easing of LVRs – sounds good, he says. But it’s balanced out by a host of factors. These include the new ring-fencing rules, slowing migration, banks’ servicing calculations, and domestic and global growth risks.

“There is no slam dunk case for prices easily continuing to fall at the recent annual pace of 3.5% in Auckland. But equally it is difficult to see that investors are about to flood back in given the increasing switch in power away from landlords toward tenants.”

In Alexander’s view, the recent developments strongly support flattening in prices. “But it still feels a tad too soon to reasonably be expecting price gains to return again to a range of 5% to 10% per annum - especially in light of the worrying risks offshore.”

Squirrel

House prices - where to from here?

For the past thirty years there has been a strong correlation between property prices and interest rates. As interest rates fall, property prices go up. So, as interest rates continue to fall, property prices could potentially increase further. My view is that won’t happen. Credit criteria is still tight and will restrict how much can be borrowed. We also still have LVR (loanto- value ratio) restrictions impacting on property investors and foreign buyer rules reducing foreign investment into property. All of this is a headwind against further price increases.

If anything, lower interest rates simply reduce the risk of prices falling. House sales volumes are still near the same levels as they were during the GFC, and in Auckland are down 30% over the past two and a half years. Lower sales activity in any other market would result in significant price falls, however sellers are not desperate and rather than lower the price, will simply take their property back off the market.

We are at full employment and there is a general shortage of property that has resulted in high demand for rentals. With lower interest rates and higher rents, investment properties are becoming more cashflow positive and therefore easier to hold long-term.

My observation is that investors realise property prices are still high, and that there are still plenty of risks that could trigger a market correction. The China/ US relationship and New Zealand being forced to pick a side between the US and our biggest trading partner is an obvious example.

Lower interest rates just make the world feel a little less risky. Here’s my final point: we already have $270 billion of home loan debt. That’s a lot of debt that needs to be repaid, no matter what the interest rate is.

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