Independent economist Tony Alexander says extending the bright-line test to 10 years and wiping away investors’ ability to use mortgage interest for tax deductibility could lead to a situation where buyers start to question the ability of the residential real estate market to keep rising.
“Many will worry they are buying at the peak and could be in a falling paper wealth situation in the near future.”
Alexander points out this is not the same as saying people are fearing negative equity. This is when a house price falls to below the size of the mortgage.
“Such a situation is extremely unlikely except for those buyers buying at the peak with a 5% deposit.”
For investors who might have made such a purchase recently, Alexander says their bank is unlikely to feel any great concern should prices ease off by 5% or more in the next few months, which is a 50% probability.
“The fall in prices will be a simple technical correction to the ridiculous speed of price gains since May last year rather than the start of a sustained downward trend. That situation lies maybe five years out.”
Is there any evidence beyond some anecdotes of FOOP? In his monthly REINZ & Tony Alexander Real Estate Survey agents around New Zealand are asked which things buyers are most concerned about.
In the latest survey a gross 25% of agents said worries about prices falling is the biggest concern for buyers.
Alexander says he wouldn’t call it a high degree of FOOP yet.
“But consider the inverse relationship between this measure and that for fear of missing out (FOMO). The net proportion of agents seeing FOMO dropped in the latest survey to 66% from 86% in March.”
As a result of the Government’s changes targeting property investors, Alexander says he can safely say price expectations are shifting, although the shift in the degree of strength in the housing market was underway beforehand.
“The net per cent of agents noticing more investors in the market has been falling since December, as has the pace of monthly change in house prices before the buying binge to beat the 40% deposit requirement occurred.”