Market slowdown different this time

ANZ chief economist Cameron Bagrie

ANZ’s latest Property Focus report is out and it takes a close look at the potential longevity of the current slowdown in the property market.

It is now a matter of public record that markets around New Zealand, notably Auckland, have been experiencing far less activity, slower price growth and rising inventory, over recent months.

The main reason for this is usually picked as the Reserve Bank’s latest investor-focused LVRs, along with a tightening up of bank lending and stretched affordability ratios.

But for ANZ chief economist Cameron Bagrie the gradual rise in interest rates is also playing a part in the dampening of market exuberance.

He said that interest rates are no longer falling; they are rising – and that is due to two factors in New Zealand.

“First, it is now broadly expected that the Reserve Bank will no longer be cutting the OCR and the next move is up, though not for a while.

“Second, there is also aggressive competition for deposits across the banking industry. That’s forced deposit rates up, and where deposit rates go, borrowing rates follow.”

Additionally, the era of incredibly cheap money around the globe is coming to an end.

Bagrie said that when it comes to the outlook for the property market, the interest rates factor is significant – especially as they are going to keep nudging higher.

“We’ve see LVRs brought in before… After an initial lull, the market turned up again with a vengeance as interest rates continued to fall.

“House prices can look semi-affordable at a house price to income ratio of 9.5 when interest rates are extremely low, but the key point is that it is not sustainable; the equation can change dramatically when interest rates nudge higher.”

However, the fundamental mismatch between supply and demand will keep the market supported and ready to build more momentum down the track should conditions permit, he said.

“Which is going to win out? Rising interest rates and diminished credit or a shortage of housing supply in the face of still-strong migration?

“While Economics 101 tells us prices will need to lift if an even larger shortage opens up, we’re backing interest rates and credit to dominate supply-demand imbalances, or at least buy some time for the latter to catch up.”

That seems to go against the aforementioned Economics 101 conclusion, Bagrie said.

“But if the supply thesis was really all that’s driving property prices we wouldn’t have seen such a wedge open up between house prices and rents. The latter would have risen more sharply too.

“This doesn’t mean we discount supply tension. Such tension will still be apparent for a long time yet. We simply need to put it in context and think more broadly.”

The Auckland market will also start to see the impact of “leakage” factors, like a pick-up in interregional migration flows, as tends to be case when pricing pressures become acute and financing becomes difficult, he added.