By David Hargreaves
With softer housing market conditions, particularly in Auckland, set to be with us into next year, the coming months will be present some new challenges for a variety of people and parties.
The proximity of the election would now seem to preclude any immediate upswing in market activity. For now, anecdotally, the tap is turned off on the flow of foreign money into the Auckland market. So, in combination, what this means is that after years of a market that only seemingly goes up, for now that’s not happening.
One interesting consequence may be a period of some sorting out of investors versus speculators.
I would say it’s entirely possible a fair few speculators don’t know they are speculators. They think they are investors. But of course, if a property purchase doesn’t make sense in terms of the rental yield you get on it, and only makes sense if you get a quick capital gain, then you are in my book a speculator.
And we can debate how many of the people who have flooded into the Auckland market in recent years fit this bill rather than the description of the yield-driven ‘investor’.
Undoubtedly for some people it is going to be a shock to see prices moving sideways or down.
How many people are unprepared for such a scenario? That will be interesting to see.
If we do get substantial numbers of ‘investors’, (really speculators), deciding to offload properties with poor rental yields and suddenly no immediate promise of capital gains, then this could obviously put downward pressure on the market. Time will tell how many people might actually be in this category.
For the Reserve Bank this becomes an intriguing time.
A desperate measure
The RBNZ’s move to clamp a 40% deposit rule on investors last year almost looked like a desperate measure in the face of a defiant market.
Now, however, the market has indeed backed off and the RBNZ’s looking at a much flatter market. So, curiously, the question now becomes when and whether the RBNZ should take its foot off the brake. It certainly won’t be thinking of anything like that right now, but as we head into next year, then the question will become more pertinent.
A key issue for the RBNZ to consider internally is to what extent the slower conditions in the market this year have been directly caused by its actions.
The huge fall in amount of money being borrowed by investors since last year tells you there’s been some impact. But other factors are clearly involved.
The major banks it seems have happily hidden behind the RBNZ measures and have undertaken their own tightening up in lending criteria. Interest rates have edged up. And then there’s the unquantified impact of the turning off of the foreign investment tap.
It all becomes very relevant, because at some stage if the housing market stays flat, the RBNZ has to decide whether it is the key reason for that and therefore whether it should be packing some of its LVR weaponry away.
It in fact all potentially provides a reverse headache for the RBNZ.
Right now the central bank will clearly be very happy with the state of affairs. The lending books of banks have been rebalanced away from the growing percentage of high loan to value mortgages seen prior to the RBNZ’s introduction of LVR ‘speed limits’ in 2013.
They are not doing it for you
Remember, the goal for the RBNZ in all this is to ensure financial stability. It’s not to ensure either that you can afford a house, or that the one you’ve got will keep rising in value. The central bank wants to avoid a situation where a sudden downturn in the housing market causes banking stress.
The ironic thing is though, there must at least be some possibility that any sudden rush by our speculators dressed as investors to sell properties would then start to produce the sharp falls in house prices, and potential stress for banks, that the RBNZ’s measures set out to avoid in the first place!
So, it’s an interesting juggling act potentially ahead and I don’t envy the central bank folk in their job.
The other concern I have from the quieter market and the potential reaction to it, is what this does for the appetite of housing developers (and that includes both private and state and local government developers) and also the appetite of banks to lend on housing developments.
The fruitless game of catch-up
If you go back to Auckland in the early 2000s it saw some of the most active development in its history, with about 35,000 consents for new dwellings issued in the 2002-04 period. But then there was a lull in building activity. Then there was the real house price boom. And then, just at a point when it might have been felt house building activity would crank up again, the Global Financial Crisis hit. The result was Auckland built way too few houses for several years and has since been playing a so-far fruitless game of catch-up.
The worry now would be that any rush to market by speculators will see a temporary supply glut. And that might convince developers and their backers to, well back-off. This would not be good.
Regardless of the short term performance of the housing market, Auckland is going to need substantially more houses in future.
Any backing off in building of new houses now will surely see the problems of shortages and unaffordable housing simply magnify later. There’s plenty for all involved parties to think about.