By David Hargreaves
The housing market looks intriguingly poised as we get up to speed in 2017, but it is far too early in my view to be reaching any hard conclusions about what will happen.
We do know that the Auckland market has made a much softer than usual start to the year. Listings are up as are the number of days taken to sell and prices have dropped.
A combination of the new 40% deposit rules for investors, tighter lending criteria from the banks, slightly higher interest rates and fewer foreign buyers in the market has provided plenty of reasons for people to stand back and have a look for the past month or two.
Whether this 'pause' continues for the year is questionable. The Reserve Bank is still uncertain whether the quieter times will continue.
We won't get really definitive answers till about April.
More life in it yet
I think the Auckland market might have a bit more life left in it. I would still pick a mini-rally for Auckland activity in autumn, followed by a further quieter period into the election.
Even though the election result in 2014 looked a foregone conclusion ahead of the day, the housing market did hit pause in the run-in...then went fast forward straight after the election.
So, once this election's over something similar may happen - depending on the election outcome.
There are a number of imponderables in the current market.
We still don't know properly the full extent of offshore buying of houses. We really should sort out a proper system for collecting this information. It's important.
Then there is the question of how long housing investors will back off.
The monthly figures collated by the Reserve Bank on new mortgages have been painting a clear picture of retreating investors in the past few months.
There are counter points though.
There's still interest there
Those same figures have shown that activity from would-be owner-occupiers has stayed the same or even increased a bit, while first home buyers have been on the rise.
Indeed the separate RBNZ figures on household borrowing showed a rise in December - which was not what economists expected.
Those two sets of figures don't suggest to me a housing market going into hibernation.
The influence or non-influence of foreign buyers is, as mentioned above, really difficult to try to get a handle. Anecdotally such investment is down. But I think with some of the potential for global instability that we are now seeing, there is a possibility of renewed buyer interest from offshore as we get further into the year - and this won't necessarily be led by Asia as in the recent past.
On more local influences of the market, the key question will be how long the investors back off, coupled with how long the banks play cautious with their lending policies.
The one thing this housing boom has not shared with the last one is the parallel rise of the finance companies, which of course sourced most of their funding from public deposits.
The crashing and burning of that sector has not really been replaced - to this point - by many other large alternative finance providers. That might change depending on how long that 40% deposit rule for investors stays in place. There's probably zero chance of rule being dropped this year.
It may be that we will see greater sources of non-bank lending rise in coming months as investors look to find a way around that 40% rule.
It really depends on the appetite of the investors. A fair few seem happy to sit back at the moment, but equally, given a few months time and the sky hasn't fallen in, then they might get itchy feet again.
Until there's some fundamental Government-led change such as in taxes or duties, housing is going to continue to have favoured status as an investment asset class.
Anyway, that's investment. The other thing is what about demand for houses simply to live in?
The fact that the Government's now seeking to discredit figures showing the extent of housing shortages tells you the extent to which its efforts to fix the problem are proving impotent in the face of market forces. In Auckland last year there were under 10,000 new dwellings consented - against Government hopes earlier of 12,0000 to 13,000.
Regardless of what you believe concerning the existing shortfall of housing in Auckland, there aren't enough houses being built right now even to keep up on a day-to-day basis with the booming population.
Based on current immigrant numbers and the natural birth rate, you can say Auckland needed to have consented 18,000 to 20,000 homes last year - just to keep up with new people - never mind catching up on the existing shortfall.
Housing all the people
If you take Stats NZ's seasonally adjusted net nationwide migration figures for the past four months, this has shown a steady net gain of over 6000 people a month - which averages out at about 74,000 people a year.
The recent pattern has been for about 60% of migrants to settle in Auckland.
So, in other words we are looking at a current annualised rate of about 44,500 net migrants (needing close to 15,000 houses) moving into Auckland.
Couple all this with the agonising (read slow) progress being made toward achieving densification in Auckland and it's actually difficult to see where there would be a lessening of demand to buy houses, or a significant slackening of prices over time.
Where I think there are risks in the current housing situation is outside of Auckland in some of the regional areas that have been and are building houses in good numbers, but are nevertheless enjoying strong buying support at the moment both from offshore and Auckland buyers turning their attentions elsewhere.
Auckland's house prices will remain underpinned by its economic strength, the strong population growth its had and will continue to have, coupled with the continuing planning agonies and constraints. Other places won't be underpinned by that and for those places there is a risk - particularly if Auckland, as I suspect it will, enjoys another strong lease of life particularly from next year.
Another thing that concerns me is the relative surge in first home buyer interest. I just hope everybody is doing the sums. If you can JUST afford a mortgage now you probably shouldn't be doing it - or you should at least look for some other way of funding yourself.
Interest rates certainly won't go down again this year. How much they rise will be principally down to how much the banks believe their cost of funds demands increases.
In truth, I can't see interest rates rising markedly in this way, but the other thing that should still be considered is the possibility of official interest rate rises late this year. The Reserve Bank hosed down market speculation on this last week with its forward interest rate predictions that show no rises till late 2019.
Inflation a dark horse
I have a feeling, however, that inflation might continue to surprise on the upside this year. Since the housing market heat spread more generally from Auckland to the rest of the country last year there have been more signs of a return to the types of spending patterns seen in the mid-2000s boom. This had been absent when most of the activity was in Auckland, but it does seem to be resurgent now.
Of course if the Kiwi dollar stays strong this will help to keep the lid on inflation. If interest rates rise more quickly in the US now - as I think they will, and then couple that with some resurgent interest in the Australian currency on the back of rising iron ore prices, and it's possible the Kiwi will finally fall back a bit this year. And that would open the door to more inflation.
So, I would still see an Official Cash Rate rise last this year after the election as a possibility. The point is, anybody out there struggling with the mortgage payments now should have a look and see how they will be if the rate were to up by say one whole percentage point - and it's easy enough to do those calculations.
Nobody wants to see people getting into strife because they over-reached - but it is a risk. Be careful out there people. An interesting year lies ahead.