Feature
Storm warnings
by Nick Smith
What’s really happening to house prices? Is the property market facing a crisis or will those black clouds lift?
In journalism, as in politics, a week is a long time. One Wednesday last month, the media-anticipated housing crisis finally found its headline – “Housing Prices Take Big Slide” – only for the $500-a-day decline to be recanted a mere five days later with a face-saving “House Prices Buck Downward Trend”. As Baudelaire observed, you can learn a lot from a newspaper, if you read it with the proper contempt.
Yet, the jungle drums of public concern – interest rates, fewer sales, declining immigration, among others – will not be stilled. Accepted wisdom insists that New Zealand’s, and particularly Auckland’s, soaring property prices are unsustainable. And the higher the flight, the bigger the bump when this housing Icarus falls to Earth, right?
You will find no dissent to the doctrine of market correction from BNZ chief economist Tony Alexander, that rarity in his field, a number-cruncher with a sense of humour.
He refuses to discount the possibility of a major housing slump; after all, anything that will tank the economy – a Korean peninsula nuclear war or invasion of Iran, perhaps – will have severe implications for New Zealand households, he drolly notes. But a real, imminent crisis? Hardly. “I don’t believe it’s the 20% [slump] scenario …”
Alexander, however, is still predicting a fall in prices, perhaps in the order of 5-10%, next year. (Isn’t it always bad news next year? For economists, it’s never the promise of jam tomorrow, but more likely, Bovril.) The higher figure is probable for the top end of the market, where prices are more volatile, he says, and a 5% adjustment for more modestly priced homes.
“But you had a 20% capital gain last year and you’ve got to feel happy about that. So what if it falls 5-10%?”
The reasons underpinning Alexander’s prediction are well-known, repetitively spelt out by a property press poised to deliver its next to-the-barricades headline at the merest hint of bad news: productivity growth is stymied by a tight labour market, migration figures will approach zero by mid-2005, interest rates are going up, investors are cautious after a Rolls- Royce ride on capital gain, first-time home-buyers are gun-shy, the biggest construction boom since the mid-70s is set to flood the market …
But Alexander says there is an equally compelling litany to support the opposite contention, the “don’t panic” attitude of Massey University’s property studies professor Bob Hargreaves and Real Estate Institute president Howard Morley.
They argue that it’s hard to have a crisis, or slump, when the economy is going gang-busters; the tight labour market might inhibit productivity, but it is also ensuring near-full employment and job security (lessening the impact of interest rates), particularly among middle and low-income earners; and prices have still increased, albeit by lesser amounts, with a new record national median house price of $250,000 set in September.
Although there are fewer houses being sold, the experts note that this is only in comparison to last year. More houses were sold in the same period compared to 2001, and in some districts more were sold than in 2002. Also, there are a lot of people with money in their pocket from these boom times, who are hoping to cash in on any fall.
Real Estate Institute figures bear out their optimism. Despite fluctuation in some regions, particularly Nelson, prices have held up.
In Auckland, the median price was up slightly, as it was in Waikato-Bay of Plenty, Manawatu-Wanganui and Canterbury-Westland.
As for sales volumes – often considered more indicative of any market trend – about 500 fewer Auckland homes were sold in August this year, compared to September last year. But the 2540 sales in the region were more than were sold in 2002 and nearly 1000 more than in 2001.
The same comparison holds true for Hamilton, Mt Maunganui, Rotorua, Gisborne, Wellington east and west and Christchurch.
In short, the market is softening, but is in no way in a crisis, slump or any other such tabloid noun you care to use.
Even taking Alexander’s worst-case 10% scenario involves only a shaving off of the capital gain from the past years’ boomtime. Recent home-buyers will just have to wait a little longer for the cyclical nature of the housing market to upswing again, the experts reassure, and are advised to sit tight.
Interest rates have probably reached their peak – Reserve Bank Governor Alan Bollard has conceded as much in announcing the latest official cash rate (OCR) rise – and will have limited impact because only about 29% of the mortgage market is on a floating rate.
As Alexander notes, last year 40% was floating and asks, “If it can’t influence fixed rates, how does it slow down the domestic economy?”
But there will be people feeling the pain, particularly as rates touch 9%. Alexander, Hargreaves and Morley say some property investors are going to get burnt by the combination of rates, static prices and the drop in confidence, particularly those who have entered into the market recently.
Alexander: “Interest rates are around 8.5% [and rising], costs have gone up. That’s big exposure for those people who purchased investment properties and have overpaid, relying on capital gains [to see them through], and they’ll be suffering negative cashflows. They are the ones most vulnerable. You can only carry negative outflow for so long … they will be the ones burnt first.”
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