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Last year’s house prices reflected last year’s interest rates says Westpac's Dominick Stephens. This year higher rates will change affordability, renting and property investment decisions he says

Last year’s house prices reflected last year’s interest rates says Westpac's Dominick Stephens. This year higher rates will change affordability, renting and property investment decisions he says

By Dominick Stephens*

There is now no doubt about it.

New Zealand’s housing market is slowing.

The number of house sales per month fell 11% over the three months to December, in seasonally adjusted terms – the sharpest decline in house sales since 2009.

Lower turnover is one classic indicator of a market slowdown.

The other is that it takes longer to sell houses.

This month’s Real Estate Institute data showed that the number of days taken to sell a house did indeed lengthen a little. The drop in turnover is not purely to do with buyer reluctance.

The realestate.co.nz Property Report showed a sharp drop in new listings, especially in Auckland, and a diminishing stock of unsold homes. It seems sellers are reluctant to put their houses on the market in the current uncertain environment.

The slowdown has hit low-price houses especially hard, indicating that the Reserve Bank’s mortgage lending restrictions are having an impact, as are rising mortgage rates. Barfoot and Thompson (B&T, Auckland’s largest agency) provide data on sales by price bracket, which we are able to seasonally adjust.

B&T’s sales of properties under $500,000 have fallen 26% in the space of three months, while sales over $750,000 have actually risen (both figures seasonally adjusted).

Similarly, the Real Estate Institute reported that nationwide sales of houses under $400,000 are down 14% compared to a year ago, whereas total sales are down just 1%.

Ironically, the dearth of sales in cheap categories means that the median price of those houses that did sell is higher – up 7% in three months.

We have seen some rather specious reporting casting this jump in median price as good news for property owners!

The REINZ’s House Price Index is a better measure of the change in the value of houses on a like-for-like basis. It has risen 1.8% over the past three months.

That said, it remains true that house prices are rising.

House prices tend to follow sales with a lag of a few months, so we expect house price inflation to begin cooling a month or two from now.

We are forecasting 6.5% house price inflation for 2014, down from almost 10% in 2013.

So if the housing market is slowing, will the Reserve Bank persist with its plans to increase interest rates this year?

In a word, yes.

The current housing market slowdown is no more or less severe than the Reserve Bank anticipated when it laid out its plan to normalise interest rates.

One must always bear in mind that the goal of monetary policy is to keep inflation close to 2%. With the Canterbury rebuild hitting its straps, dairy farmer payouts booming, and consumers in an ebullient mood, there is a fair degree of certainty that inflation is set to rise.

So the Reserve Bank has ample reason to lift interest rates even without double-digit house price inflation.

Of course, the housing market and the Reserve Bank dance a two-sided tango. Each affects the other.

Our big concern is that last year’s house prices reflected last year’s interest rates.

The market may have been operating under the mistaken impression that low interest rates would last forever. As interest rates rise over the next couple of years mortgages will become less affordable, rent-or-buy decisions will swing in favour of renting, and property investment will appear less lucrative.

House prices could come under downward pressure around the middle of this decade.

REINZ housing data, December 2013

  Dec-13 Nov-13 Dec-12
House sales, number, s.a. 6,319 6,390 6,568
   Mth % chg -1.1 -5.9 -1.2
   Ann % chg -1.1 -6.6 8.2
Days to sell, sa 35.1 34.5 35.1
House Price Index (s.a.) 3,842.4 3,841.0 3,515.9
   Mth % chg 0.0 0.5 0.4
   Ann % chg 9.2 9.6 6.7

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Dominick Stephens is the chief economist of Westpac NZ. This is a reprint of Westpac's January 21, 2013 "Home Truths". It is used here with permission.

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43 Comments

House prices could come under downward pressure around the middle of this decade.
 
So Dominick is predicting house price declines in 12 months? - Right at the peak of the NZ economy's "rockstar" year.. Interesting call. 

The economy doing well doesn't translate to more money in people's pockets, especially with higher interest rates. Strong corporate results don't increase house affordability.

Yes but rising incomes should balance out the increased costs due to increased mortgage rates. The housing shortage won't be balanced for quite a few years. I can certainly see house price inflation moderating but I have difficulty seeing how house prices will drop next year.. in the middle of boom time for NZ.

.....rising incomes...boom time for NZ....good luck!

You might say my view is skewed because of the sectors I am largely exposed to - namely sectors related to development and construction. Nevertheless I assure you incomes are rising significantly and there is a bucket load of work out there. With respect if you think differently you must be well removed from anything to do with the development sectors.
 
You might argue many other sectors are not doing so well. I would counter that is the nature of ecopnomic cycles. Construction leads and other sectors follow.
 
Good times.
 
 

Supply-strangled housing markets result in prices rising faster than incomes. We can't win until the supply issue is fixed.
Just because incomes are 40% higher in San Fran than in Houston doesn't mean people can afford houses more easily. The prices are 3 times as high in SF making a median multiple of around 7 compared to Houston's 3.
The system of housing supply is responsible. Houstonites have far more disposable income as a result.

It's good to see a breakdown of house sales per price bracket. The press have been a bit misleading by continuously reporting on median house price increases and not attributing at least part of that to decreased sales of the cheaper homes.

It's not so much that there is "decreased sales of cheaper homes", there AREN'T ANY cheaper homes......!!
The inflation is all in the price of the land and that has been around tenfold.
This means that $1,000,000 houses on $200,000 sections end up $3,000,000 instead of $1,200,000.
It also means that $40,000 old dunger houses on $100,000 sections end up $1,040,000 instead of $140,000.
This also means that there is no longer any such thing as an old dunger home significantly cheaper than everything else on the market.
In a well adjusted housing market, each quintile of income earners buys a home in roughly the same quintile of the price distribution. When the prices are distorted upwards like they are, the bottom quintile or two of buyers drop out of the market altogether. The houses in the bottom quintile are what middle income couples can just stretch to afford. 

This is what the experts said in 2004, 2005 and 2006, as rates increased and house prices kept rocketing.
SK.

After so many years the price surge finally comes to an end and evaporated in the Auckland heat~

Sort of right.  Auckland flattened during 2004-2007 and the provinces with their higher yeild attracted more investors.  2004-2005 palmerston north prices grew (QV index) over 20% p.a as auckland investors chased higher yeilds (or simple wanted to gear up the 200k tax free equity they made on each auckland property by buying 3 or 4 rentals in Palmy with it that more or less paid for themselves.
 
 

Some people in California sold their family home at the peak of the last bubble and bought 5 or 6 houses in a fast-growing Texas city with the money. That is even better than the only option being a rural backwater.
NZ needs just one significant city to "do a Houston". The people, business and investment money will flow accordingly.

That one city should have been Christchurch. Wellington has too many geographical constraints, Auckland, maybe, but the infrastructure requirements of every extra resident will be much more than ChCh due to its size.
 
A proper reform of local government, planning laws and infrastructure provision, instead of this confused central government control rebuild would have allowed Christchurch to take off.
 
How many opportunities do the Natz need?

The price brackets in the graphs in the article need to be adjusted by the house price inflation (inflation of reinz index) or else ofcourse you will get less sales under 500k when 3 years ago most houses in auckland were worth under 500k and today, most are 600k....
Better solution for the price bracket graphs: report ratio of 'number of sales' to 'listings' in each price bracket.  I suspect the graph would look a lot different if this was done and the sales numbers were normalised to number of listings in each bracket.

I agree in general, and expect in 5 years you will find next to no sales below 500K.
 
However you will notice that the 500K to 750K bracket has also plumetted.
 
750K+ and 1M+ sales volumes are slowly increasing as more house values inflate into those brackets, but the plumetting of <500K and 500-750K brackets cannot be attributed solely to houses graduely inflating out of those brackets.

Simon is right, though. Because the inflation is all in the land, the $750,000 houses ARE "bottom end of the market", fixer-upper houses. The depreciated structures might be worth $40,000. The section probably should be less than $100,000 but instead it is in the high hundred thousands. 
Of course demand for these will be drying up. The value for money is just ridiculous. Market activity is always distorted towards newer houses further out, under these conditions. 
Each segment of the market has its own supply and demand curve. Equilibrium sales at higher prices, are at lower volumes.

Interest rates like immigration affects the demand for houses so has an affect on house prices. But the major cause of our high house prices is supply factors as discussed yesterday.
 
Banks make their money in NZ from mortgage lending, they have an incentive to move the discussion away from supply factors, because if NZ returned to its long term house to income mean, mortgage lending would over time halve. Bank economists are biased 'experts' on housing matters.
 
Really they are as biased and self centred as Olly Newland. Trust their advise if you are naive.

And if you don't think this article wasn't written in response to the Demographia survey results here he is specifically attacking the survey.
 
Westpac chief economist Dominick Stephens said he had "some sympathy" with the federation's criticisms of the survey.
 
"What the Demographia survey tells us is that we are paying a great deal to own our houses. What it doesn't say is why," he said.
 
The high prices of New Zealand houses had a lot to do with the tax regime being favourable to home ownership and property investment compared with other forms of saving or investment, he said

"However, you can't really call houses unaffordable when clearly they sell every day," Stephens said.
 
The level of interest rates was another important factor in housing affordability that was not included in the survey, he said.
 
I wonder where this 'economist' got his training from. It is like he has never heard of prices being set by a combination of supply and demand factors. 
 
This is just the vested interests fighting to maintain the status quo.
 

one year on, and you are still pushing the "major cause of our high house prices is supply factors" line
 
Now you are disparaging Dominick Stephens "like he has never heard of prices being set by a combination of supply and demand factors"
 
You are just plain wrong .. and not listening .. how disappointing,

Oh come on, "supply doesn't matter" is "sun rises in the west" economics.
I don't believe that anyone honestly believes it doesn't matter, they all know it does, and they say it doesn't because they WANT unaffordable housing and high economic land rent
And the people with any economic expertise at all who ARE talking this way still are a tiny minority in obviously compromised positions - I mean, working for the finance or "big property" rentier sectors. Come ON.

Raw land costs in Canterbury (and they are not that different elsewhere in NZ and Aust) are about $5K for a standard residential section size piece of dirt -of about 700sqm - that is 10 sections + roads/parks, in a lifestyle block or farm priced at $50K hectare. Yet the cheapest sections this size in the satellite towns of Rolleston, Prebbleton, Kaiapoi and Rangiora -20 km from CHCH is $180-200K and in Christchurch city $250K+ (unless they are TC2-3 and require expensive engineering where the engineering costs deduct from the $250K+ figure).
 
If all lifestyle block holders had the right to make an eco-village of up to 10 sections per hectare, say to a maximum size of 100 sections, if they meet certain strict 'off grid ' criteria, provide their own water, treat their own sewage, prevent storm-water surges and so on, I think this could be done at least half the above figures. PDK what do think?
 
My new town proposal I think the section prices could be half the current section prices. The new town idea was briefly discussed with PhilB here.
 
Hugh and Philbests open competition splatter suburban development could certainly be done at cheaper section prices too.
 
The mortgage loadings could be further lowered by allowing new towns, eco villages and suburban developments to borrow directly from Kiwisaver  through bond sales following NZ Audit office approval and the new residents paying this off by an extra rates rather than through a one-off charge that is added to their mortgage.
 
It is obviously not in the best interests of the banks for kiwis to discuss these supply issues. Hence the diversionary tactic of Dominick Stephens.
 
The reason this doesn't happen is bureaucratic institutional failure resulting from our political histories. A discussion of this was had here.

As new builds are a substitute for existing houses a rise or fall in price in one market will affect the other. So Cantabrians are paying $100k+ more for residential sections than they need to. And this directly translates to the existing house market too.
 
Because there is such lack of competition in the new build market, developers impose convenants that cause the Mc Mansion effect to maximise their returns. So no experimentation with non-traditional designs, No smaller houses or houses that can be made larger later if needed.
 
I also think their is evidence the new build market is suppressed and subject to booms and busts causing a lack of competition in the house construction market leading to unnecessary high build prices. Of course the building supply duopoly contributes to this effect too.
 
And because house prices are so high in Christchurch city with no possibility to develop cheaply in the green belt area, people are forced out to commuter towns 20 km away.
 
These supply effects are a huge waste but apparently according to Iconoclast and Dominick these issues are unimportant.

Really? where did I say they were un-important?
 
I simply challenge your assertion it is the "MAJOR" factor in setting prices
 
Examine the following post - it has been posted here 3 times - there never have been any takers
 
There is a simple desk-test Care to do the exercise ?

$100K + of extra costs seems like the major factor to me.
 
Your simple desk-test comes out as error 404. But I am suspicous of people who insist on unnecessary intellectual hoop jumping. You either agree or disagree with the argument put forward.

Give us your version and then we might continue the debate otherwise stop wasting my time. It is pretty obvious from the information given what I think the supply changes need to be and why.

No wonder no one is interested in doing the test - there are no crayons. Seriously Iconoclast, doing that exercise would be the equivalent of drawing with crayons, ok for little people, but not to be taken seriously by grown ups. Having lived and worked in property development in both high supply and low supply economies, it is very obvious to me, and even to others that have not had that benefit, that land economics is the driving force in housing affordability.
For this debate to move forward, we have to at least agree that 2 plus 2 equals 4, before we move on to debate whether E equals mc2

Chief economist gives an impression of respectability. A more accurate description for Dominick Stephens would be Chief sales officer with a job description of maximising mortgage sales while minimising costs in order to make as much profit for Westpacs Australian owners.
 
Any comments Dominick makes needs to take into account this bias.

Sickeningly, one of the reasons the whole banking sector is so shamelessly bold about all this, is they know none of them will be held accountable when the big crash comes; they will all keep their jobs and their bonuses; and the taxpayer will bail them out. Ask the Irish, who will be paying higher taxes for the next 30 years for this.
I reckon the banking sector would act a whole lot differently if it was a foregone conclusion that executives in the case of a bailout being required, will go to jail, or at least be held personably liable to the extent of losing their own assets, and banned from holding positions in any sectors other than harmless menial jobs for the rest of their lives.

No ...No ....No ... !!!
 
This can't be true !! ... you mean all the "paper" capital gains made by YL, SK, Big Daddy et al will start to diminish !!??!!
 
They had me thinking that the Auckland market will just keep rising, with at least a 10% gain per annum.... this would go on ad infinitum !!
 
What shall I do, as I was so enjoying those huge gains ..... please DON'T STOP THE MUSIC !!
 
I want my property to be worth at least $1.5 mil by the end of the year !! ...... hahahahaha FAT CHANCE !
 
 

I look forward to watching investors start to run for the exits! I might even help one of them out by buying a property - with a harsh haircut of course.

Goodonya rjf !!  .... it's the absolute "blind faith" by these PI's,  who believe everything will go as planned, as per their basic Excel spreadsheet that gets me .....

Don't worry Crazy Horse, all's very well in landlord land. Prices are up... rents are up... interest rates are rising. Long term investors are very happy.

Trawl through the track record of these bank economists previous predictions and see if you can find one example where they have been right - good luck!

I am reminded, reading Dominick, of Christine Keeler's famous quote:
"They would say that, wouldn't they"?

I am reminded, reading PhilBest's quote, of people speaking nonsense.
Both the quote and the person it is atributed to are incorrect.
 

Thanks, factboy. I might remember the correct quote and attribution next time. If it ever really matters.

They are not unique though....look at the Pollies, John  "I cant understand why we are not growing at 6%" Key and he's in charge of the country...
Or in Dec 2008 the downturn was worse than Treasury's own worst case.
ergo the model / school of economics they are wedded to is broken.
regards

Yeah, but Treasury have now got a new captain in charge, that UK-pom blow-in Gabriel Makhlouf - he'll get John and the country sorted out quick smart - dont you wurry - she'll be right

House Prices Slowing?
 
Here is an example where an absentee owner's $1 million property in Forest Hill on the North Shore approx 10 minutes from Auckland CBD that has just been reduced in price by 50%
 
nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11189976

Mr Yang probably got permanent residence for his "investment" too! What a wonderful contribution he has made to New Zealand.

Here it is - 15 Marsh Avenue Forrest Hill - check it out on google.maps street view

Goodish thread, chaps and chapesses.
 
A point to consider, not commented on frequently enough, is the economic osmosis caused by the new build/older neighbouring house effect.  If a new house or greenfields subdivision goes up in an established street or by an older neighbourhood, the unit house/land package cost transmits, and fast, to all those neighbouring houses, almost irrespective of age and condition.
 
This, if the owners are in downsize, cash-up or opportunistic mode, translates to nice instant CG to trouser.  Untaxable as they are (on paper) all Fambly Homes.  This works wonderfully in favour of:

  • established owners, so no-one is about to go running off to the media whining about all the extra potential pesos or the ATM they have just discovered has been bolted to Their House!.
  • banks, lenders, land agents, and other ticket-clippers, who of course benefit from a general standard-unit-value inflation
  • TLA's who cause the effect partly by the desk-exercise 'revaluations' for rating purposes, which consist essentially of gridding out recent sales and mass-updating everyone in a radius, partly by their plannerista and zoneration effort which keep land supply on a very short and dollar-encrusted leash, and partly via their direct fees, charges, levies and imposts related to subdivisions and new builds.

The osmotic effect of all this is that established owners benefit (particularly as they move through the life cycle and trade down near it's end - demographics is a factor here), and the entire effect is concentrated on FHB's and relatively recent owners.  Who are too focussed on making it to the next level, to go rocking boats anytime soon.
 
The pity of it all is that, as Brendon notes upthread, and as anyone with a calculator and an eye for rural land prices can confirm, the raw land value of any unimproved urban plot is absolute peanuts.  But the TLA genuises manage to get that up to $50-70K raw land value without capturing Any of that nice CG for the Common Good - this is economic cluelessness at it's worst.  And then there's the whole development cycle to sit over the top of That, cost-wise.
 
It's hard to escape the conclusion that local Gubmint has set off this ratchet effect, has not Clue One about how to arrest itr let alone unwind it, and that a whole buncha PI cheerleaders is - er - Cheering the whole shebang along.  And, this pom-pom waving results in precisely this sort of article.....
 

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