By David Hargreaves
It may seem the height of absurdity to talk about the possibility of the house market taking off again, just at a time when it appears to be going cold, and with winter to come as well.
As we know though, it's always darkest before the dawn. Picking the bottom of a market is well nigh impossible.
I would say most people who 'pick' either the top or bottom of a market (by either buying at the bottom or selling at the top) usually do so by accident. Yes, there will often be signs that a market might be nearing the top or the bottom, but the actual turning point can usually only be visible in hindsight.
How many people were predicting in the midst of the post global financial crisis funk of 2009-10 that the Auckland house market would be roaring along again within about three years? But roar it did.
So, with that in mind, have we just seen a turning point for the house market in New Zealand?
Recent house market figures paint a picture of a declining market in Auckland and a cooling market in the rest of the country.
No CGT, whoopee!
However, we haven't yet been able to quantify the impact on the housing market of the Government's decision to torpedo any capital gains tax. The Government only announced this on April 17. Coming months will tell us what the reaction has been.
Given that various media outlets and commentators had been talking about a capital gains tax as if it was a stone-cold certainty, the whole issue must have been casting a cloud on the market.
So, I think there would have been a 'relief rally' in the market afterwards anyway.
And now, here comes the RBNZ with a cut to the Official Cash Rate. Fuel for the fire...
It looks like the banks are not keen to pass on anything like the full quarter of a percentage point that the RBNZ cut. That's significant. It means that the RBNZ will probably be forced to cut again in order to get the level of impact it seeks. I would reckon there will be another cut in August.
Mortgages are going down
Either way, and whatever the reluctance of the banks, the already historically low mortgage rates are going lower. And that's got to be an encouragement for anybody thinking of buying a house.
The other side of the equation is that bank deposit rates are coming down too, so, sticking money in a term deposit is not a particularly lucrative course of action at the moment. Buy a property instead, may well be the thinking.
According to the detailed background information released with the RBNZ's latest Monetary Policy Statement, the RBNZ in conjunction with CoreLogic, is forecasting house price inflation will rise from 2.1% as of the March quarter to 4% by the September quarter.
I presume that projection doesn't include the impact of the rate cut that's just been made and that it's just based on the impact of mortgage rate reductions prior to the OCR cut. It probably also factors in the perceived impact of the RBNZ's loosening of loan to value (LVR) restrictions that applied from the start of this year.
A 4% house price peak?
At the moment the RBNZ/CoreLogic project that the 4% annual price rise in the September quarter will be the peak and the rate of growth will slow again after that. But really though?
Remember, there will now be the impact of the OCR cut this week to add impetus. And there will very likely be more impetus from the follow-up cut that I think will likely occur in August.
It's therefore not hard to see a situation where the snowball effect begins in the housing market and price gains end up being rather more than 4%.
Nothing in life is simple though.
Several things have changed in the last few years. Affordability is much more stretched now than it was immediately post the GFC (although it is easing now). We have a new ban on foreign buyers. We have the bright-line test. And investors need to find bigger deposits than they did before 2016.
The imposition in 2016 of, originally 40%, deposit limits for investors, has seen investors' participation in the house buying market drop markedly since then.
I think the attitude of investors is likely to be key to what happens next, particularly as this time around there's unlikely to be a flood of offshore buyers into the market. Well, that's unless some way can be found around the recently introduced legislation banning foreign buying. (And you do have to say - where there's a will there's a way.)
More investors back in the market?
But to come back to the investors, they will be the real key. With the attraction of lower interest rates and freed of the worries of a CGT (as long as they don't sell within five years and get picked up by the pesky bright-line test), will they be back in the market in bigger numbers?
Of course, the investors do still have to find bigger deposits - but with lower interest rates on the way they might be more inclined to make the effort. And 30% deposits (as has been the requirement from the start of this year) are a lot less onerous than 40% deposits were.
The RBNZ releases its next Financial Stability report on May 29. The twice-a-year FSR is the forum in which the RBNZ generally makes decisions about LVR limits, which include limits both for owner-occupiers and investors. Indeed the last FSR release in November 2018 was when the RBNZ announced loosening of the investor deposit limits to 30% and loosening of the 'speed limits' placed on banks for their lending to owner-occupiers.
Reduction of LVR limits?
The RBNZ has said that further loosening of the LVR limits will be considered depending on market conditions. Would it look at a further reduction in the limits now?
To my mind it would appear more prudent to wait and see how the house market reacts to the OCR cut first, but who knows? Under Governor Adrian Orr the RBNZ is not shying away from bold decisions. The decision to cut the OCR this week was pretty bold when to all intents and purposes there would have been little lost for the RBNZ by keeping the OCR unchanged but forecasting cuts in future.
Will this bold behaviour lead the RBNZ into trouble with the housing market? What would be the reaction of the central bank if house price inflation did begin to spark up? My guess would be that in the first instance at least there would be no reaction. At the moment the RBNZ appears focused on actually getting people spending and stimulating the economy.
As we've seen in the past though, once the house market gets away on you, well, it gets away...