If life was predictable it would be far less interesting.
In that vein, I have to say that the enthusiasm of wannabe first home buyers to mix it in the very uncertain (very risky?) post-lockdown housing market is something I certainly didn’t anticipate.
On the one hand, I admire. On the other, I fear.
Are they smart? Are they stupid?
They could be either.
Consider the two sides of the equation:
- On the one hand, economists are predicting further house price falls. House prices still look very expensive relative to wages. And the absolute key to the house market at the moment is how bad unemployment gets.
- However, on the other hand, interest rates are lower than low. There are now no Reserve Bank limits on the numbers of high loan to value ratio loans banks may advance. And, those FHBs who are feeling totally confident they are in jobs that won’t get cut, would therefore see this as an ideal time to get in.
Okay, investors would immediately say that, well, if house prices might go down significantly, better to wait. Sit on the sidelines.
It’s a different thought process though for the first home buyer. They just want a place to call their own. That’s the driver, not the investment consideration. They want a house now - they pay the price it takes to get them the keys. For an investor it's very different.
Right now then, one person's 'stupid' might be another person's 'smart' when it comes to buying a house in this market.
Of course, there’s many ways you can interpret the mortgage figures for June, which showed the FHB grouping taking its highest share (over 20%) of monthly mortgage lending since the Reserve Bank began gathering the lending by borrower type information in 2013 (and releasing it publicly in 2014).
More of less, or just more?
One obvious thing to consider is whether the rising market share of the FHBs is means this grouping is borrowing more now - or whether they are simply getting a bigger slice of a much smaller pie.
Well, it's both. And to demonstrate that, it's worth going back four years to June 2016 at the height of the last housing boom to put the latest figures in some perspective.
In June 2016 some $6.8 billion was advanced for mortgages. That compares with a little under $5.4 billion in June 2020. So, a much smaller pie now.
Drilling down into the detail, in June 2016 investors borrowed $2.368 billion, which represented 34.8% of the total. In June 2020 investors borrowed just $1.04 billion, representing only 19.4% of the total.
As for first home buyers, in June 2016 they borrowed $738 million, representing 10.8% of the total. In June 2020 they borrowed $1.09 billion representing 20.3% of the total.
So, yes the FHBs were getting a share of a much smaller pie in 2020, but they were putting much more into the pie too - borrowing $352 million more than the FHB grouping did in June 2016.
Investors retreat, FHBs move forward
By contrast in June 2020 the investors borrowed much less than half what they borrowed in June 2016. They borrowed a whole $1.328 billion less.
So, investors have retreated A LOT and FHBs ARE borrowing more.
Now, I mentioned earlier that the RBNZ began gathering information on borrowing by buyer type only in 2013.
It is worth remembering the significance of 2013. That was the year the RBNZ introduced the limits on high loan to value ratio lending, or “the LVRs” as they simply became known.
The LVRs as in any form of intervention did inevitably cause some distortions in the market. Now, of course, the LVRs are gone - at least for 12 months.
Because of the impact the LVRs had, I’m not sure if its entirely possible to say what a ‘normal’ market breakdown of buyers – between the FHBs, owner occupiers and investors – might actually be. We can look at the 20%+ share of the market the FHBs have now and say it is ‘high’ compared with recent years - but first home buyer participation in the market was clearly knocked by the imposition of the LVRs.
The LVRs knocked the FHBs
In a detailed review of the LVR regime released last year, the RBNZ said that based on Corelogic sales data, the first home buyer share of house sales fell from around 25% before the LVR policy took effect in October 2013, to below 20% by early 2014. (Remember though, Corelogic data covers all sales, not just those involving a mortgage, while the RBNZ only started breaking down the mortgage; figures into buyer groups after the LVR limits were introduced).
And the RBNZ made just that point, saying: "While data on lending breakdown by buyer types were unavailable for most of this period, banks and mortgage brokers point to a disproportionate reduction in lending to first home buyers." The RBNZ went on to say that in some contrast to the decline in first home buyer activity, house sales to property investors were "not significantly affected by initial LVR restrictions", leading to their share of sales increasing.
That's those distortions I was just talking about. We had a market in which the FHBs were in a way actively discouraged (albeit inadvertently) from getting 'in', while the investors were probably in a way encouraged to plunge in - because THEY could.
So, while we were for a time seeing the FHBs grabbing less than 10% share of the mortgage money and the investors getting up to 35% this might not have been ‘normal’ at all. In fact, increasingly I would tend to wonder whether a more ‘normal’ breakdown might be something more akin to what we see today, with FHBs grabbing 20% of mortgages and investors around about the same.
Changing the balance
What would such a rebalancing of the market dynamics mean over time?
Well, with more FHBs able to get into their own homes, that's less demand for rental accommodation, for a start. Potentially that's got ramifications for investors.
The next few months are in any case going to be interesting to watch from the perspective of the investors.
I'm particularly interested in what happens for example in the Auckland apartment market. Call this a vested interest if you will because I currently rent an apartment in central Auckland.
You can't remove thousands of overseas students from the apartment market without it having an impact - and clearly it is.
How investors deal with that impact will be most interesting to see. And will the situation with apartments flow on into the wider housing market?
It all begins to look to me like a housing market with two very differing perspectives at the moment - potentially positive for the FHBs, but potentially quite negative for the investors.
As ever, personal circumstances will be the key here.
What of those FHBs?
To go back to the original thought about the FHBs and whether those getting in now are 'smart' or 'stupid', the ultimate determinant of that will be the employment market.
If it gets a lot worse than expected then there could be trouble.
Anybody buying into this market has to have a very high level of confidence that they are going to have a job in six, 12 months' time. Otherwise they are taking a big risk.
And, of course, it is very possible in this crazy Covid world that jobs we would think are 'safe' at the moment might prove not to be. Much depends on the virus itself and what the future direct impact might be on this country.