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It’s never one thing on its own that makes a market change; there are many factors, and wouldn’t you know it, they’re all moving simultaneously. We’ve noticed a marked change in activity since our last newsletter, reflecting that several factors have converged. It’s led us to conclude that the bottom of the market is probably here, and buyers no longer have the upper hand. Here are some thoughts:

1. House prices have fallen 20%

This changes things in two ways – one obvious and one not so obvious. The obvious one is that the house you saw in 2021, priced at $1.2m, is now priced at $1.0m. Whether that’s a bargain or not is a different question, but cheaper is cheaper; there’s no denying that. The less obvious change is that the percentage deposit that first home buyers have improves as the target price they need to hit has reduced. This group haven’t necessarily saved more money, but with house price falls, their cash could have become a 10% deposit, whereas, during the 2021 peak, that amount of cash might not have even been a 5% deposit. Overall, borrowing power has improved for some people, and we can tell you they’re out there using it.

2. Wages have risen 10-15%

Many people have had chunky pay rises, and the thinking is that if you have more disposable income, you have more borrowing capability, increasing the likelihood that people will buy a house. That’s true, but two things temper this: first, the cost of everything has gone up – broccoli is $3 a head, and cucumbers are $6. Secondly, you might have a bigger wage, but the bank is now stress testing at a much higher rate than they were in the past because (as we all know) interest rates have risen dramatically too. Still, the fact remains that for a number of people, their borrowing power has increased thanks to the pay rise they’ve received. Stress Testing is where banks test home loan borrowers at different rates. It determines whether the borrower can still pay their mortgage even if interest rates increase. This test has always existed, but with loans at roughly 6% currently, the stress test is now at 9% (Westpac’s stress test is 9.5% at the time of writing).

3. Rents continue to increase

This is the impact of inflation – the cost of everything has gone up, rates, insurance, maintenance on the property, etc. So, rents have gone up to cover everything, which flows through to the tenant. The upshot is that it causes tenants to reconsider the economics of renting vs buying. Importantly, the economics for property investors is relatively poor and first-home buyers know it, so there is an opportunity to take advantage of that before National change the rules if they get elected!

4. Growing awareness that immigration will put further pressure on buying and renting

They are building houses at a huge rate of knots, but I am unsure if it’s enough to keep up with the demand. Last year, about 70,000 long-term arrivals came to New Zealand (Mums, Dads, kids, the lot, and most come as a family), and even if it stays at the same level, more people are looking for a roof over their heads, and this puts pressure on the market.

5. People think interest rates have peaked

That’s certainly our central view too, and is backed up by the fact that longer-term fixed rates are lower than shorter-term ones (i.e. the market is saying rates in future will be lower than now) and good news on the inflation front with inflation at 7.2% in December, 6.7% in March and 6.0% in July which we hope to see continue.Those of you who watch interest rates closely will probably question the above comments, given that the banks have recently increased all fixed rates. That increase reflects two competing forces: underlying bank funding costs going up, and the interest rate offered for term deposits going up too – the bank always wants to maintain its margin! But overall, we still think we are in ‘peak’ territory. That’s not to say things are going to get easier quickly, but it does mean a mindset change is happening, which is along the lines of “this is about as bad as it can get, so let’s get going now, it’ll be easier as time goes on”.The part that no one can predict accurately is how fast inflation and interest rates will fall or when that fall will begin. That’s why we still advocate a splitting strategy – to support the possibility of two outcomes – one where rates improve quickly and another where rates improve slowly. Please read our other article here for more about this.

6. Banks are more willing and able to lend money

Don’t misconstrue that headline to mean borrowing money is a walk in the park – those days are behind us! However, a couple of things have happened. Firstly, the CCCFA (Credit Contracts and Consumer Finance Act) has softened. You no longer need to account for all your coffees and KFC spending to the same degree. The strict interpretation of your discretionary expenditure is no longer required, and because we don’t have to put that into the equation, it means you can borrow more. You’ve still got to make an informed decision about what to trim, and we’ll certainly have that conversation with you. Still, the reality is this – taking the discretionary out and focusing only on your essential spending does translate into higher borrowing power.Secondly, towards the end of June, the Reserve Bank of New Zealand eased the LVR (loan to value ratio) restrictions ever so slightly. The bank used to require a 40% deposit for property investors: now, it’s only 35%. It’s not a huge change, but it is a move in a positive direction.Also, the percentage of low-deposit loans a bank can provide has increased. The way the LVR restrictions work is that the amount of low-deposit loans a bank can do is a proportion of the high-deposit loans they’ve done. Until June, they could do 10% of the loans as low-deposit ones, but now they’ve opened it up more and said that the banks could do 15%. It doesn’t sound like a lot, but when you’re talking about all their loans combined, that’s billions of dollars. And who is that going to affect? First home buyers.

7. There’s real job confidence

The ‘widescale unemployment’ in the news hasn’t eventuated. If people feel they can rely on their income continuing, they’re more comfortable taking on long-term debt (i.e., a mortgage). Again, it means more demand in the property market. If there’s one factor I’m most uncertain about, it’s this one, especially as existing mortgages roll off the two and three percent rates into the six percent range. That’s because higher interest rates reduce what people can spend elsewhere on haircuts, travel, appliances, new cars etc. That’s negative for business activity and, therefore, negative for employment and negative for borrowing. Keep an eye on this one.

Taken together, all these things point to upward price pressure on property. If you look at these points in isolation, you could argue t either way. But altogether, I believe that the buyer’s market (that people have gotten used to) is fast disappearing. I think that what you’re going to have, is a situation that, by the end of the year (if not sooner), there will be an 8th point to consider…

8. Lack of stock

I think there’s a real risk of a genuine shortage of houses on the market in the coming months. What’s available now will be sold, and barring an influx of listing post-election, what’s left could be rubbish. Real estate agents will need more properties to sell, and upward price pressure could be the result.

If you’ve read all of this and are freaking out a little, then it’s time to give us a call. Let’s have a chat. If you’ve been thinking about doing something, it’s time to get on with it. It’s not a sales pitch; this is us determined to help you get the best outcome with your aspirations.