In Alexander’s layers the bottom is the normal quantity of buyers motivated by achieving an income goal, needing a house for a bigger family, shifting for work, retiring and so on.
But it is the extra layers which have been driving prices higher.
“The first layer is yet to be touched, the second layer is partly eaten and the third layer has been consumed,” he says.
Here is a rundown of the layers.
Although housing construction is rising there is no belief as yet that shortages people believe exist around the country are disappearing.
That point will come when people understand the difference between a shortage of listings and a physical shortage of property, but probably not this year or next.
Low mortgage rates
This layer has thickened.
That may sound perverse given the growing debate about interest rates rising and the financial markets now pricing in a 50% chance the Reserve Bank will raise its official cash rate in November.
But the stimulus comes from two sources. First, expectations of rising rates are driving people to buy now so they can lock in a fixed rate before it rises.
Second, banks are discounting their one-year and some floating mortgage rates in order to win business.
The degree of monetary policy stimulus to the housing market has strengthened.
Low term deposit rates
These remain at record lows and even when monetary policy enters its tightening phase the speed of increase in term deposit rates will be less than for mortgage rates because banks are awash with funds.
This is the second factor in this first group of layers which has strengthened.
“Based on comments submitted by respondents in my five-monthly surveys, parents are so despairing of their offspring ever being able to purchase a property that they are moving beyond funding deposits.
“They have now started buying houses years in advance of their children needing a place of their own to live in.
“They intend using the eventual capital gain to help their kids. They have in essence become unwilling investors.”
Partly eaten layers:
FOMO (fear of missing out)
This layer has been partly eaten.
The gross proportion of real estate agents responding in the REINZ and Tony Alexander Real Estate Survey are saying FOMO fell from levels above 80% between the end of August and the end of February to 49% at the end of April.
But the proportion rose to 51% in May and now 60% just a week ago.
This factor has become stronger. FOMO is back.
People have been buying houses in expectation of expats flooding back to New Zealand because the country is successfully pursuing an eradication strategy.
But now other countries’ vaccination rollouts are proceeding rapidly, and New Zealand is one of the worst countries in the world for speed of vaccination, the attractiveness of New Zealand is decreasing by the week.
Not only that, but overseas economies are also picking up and that is going to encourage Kiwis to stay offshore to earn good income.
Finally, Australia has just halved the numbers permitted through MIQ facilities.
Employers there are extremely short of staff and New Zealand is the only foreign pool they can fish in.
A large wave of Kiwis is likely to head across the Tasman soon. This layer still exists, but soon it will join the third group of layers which have gone.
Kiwis have been buying houses through inability to travel.
The passage of time has brought thoughts of being able to go offshore again. So, this layer has been partly nibbled.
However, because of the lockdowns in Australia and media images of Kiwis stuck over there, the switch back to travel spending has partially reversed.
In Alexander’s Spending Plans Survey there has been a drop in the proportion of people saying they plan to travel offshore.
At the same time more people have indicated a return of interest in purchasing investment property.
Space to work from home
This factor has never been especially strong.
Given the recent lockdown in the Wellington region this layer has probably not been eaten any further this past month.
Completely eaten layers:
Still gone and not set to be eased for a long time – so no change here.
Rejoining the fray
This refers to young buyers leaping back into the market during lockdown last year hoping for listings and looking to take advantage of record low borrowing costs and the removal of LVRs.
This layer got gobbled up by the wave of investors which followed the young buyers quickly.
This was only ever a temporary boost in savings over the seven-week period when people kept getting paid but could not spend the money they normally would.
Of the 11 factors chosen to be included in the housing layer cake, three have become stronger and one has weakened over the past three months.
The housing market now is in a stronger position than a month ago.
There are many other factors in play to consider however before merely knocking back a bit the huge strength from August to February.
Loss of interest deductibility
These other factors most notably include the loss of interest expense tax deductibility for all new buyers of existing houses from March 27.
Plus, there is the gradual loss of existing deductibility for owners of existing houses on that date.
Rising inflation expectations
Expectations of inflation are rising.
People are seeking to put their funds into something which gives protection against higher prices. Property is an asset traditionally sought in such times.
The challenge is making sure people do not face rapidly rising debt-servicing costs.
That can be covered by those buying houses as an inflation hedge by fixing one’s mortgage rate for a long time period.
Immigration policy being tightened
A third factor newly in play for some will be the Government’s decision to keep borders closed to many low-skilled migrants when Covid-related restrictions eventually end.
This has been signalled for some time, but a few more people may be paying attention now and it rates as a new small negative factor to take on board for house price growth prospects.
The bigger impact of this factor is likely to be over three to five years as businesses leave New Zealand for Australia to source workers in a country where the government is looking at strengthening migrant inflows when the borders open, not pulling up the drawbridge as the Ardern Government is planning.
Rising house supply
House supply is rising.
While there are a few economists warning people of supply causing a flattening of prices and collapse of some builders in three to five years’ time, for the moment fears of a flood of property are rare.
Instead, the most recent change in this factor is actually a worsening in that construction costs are going up and labour availability problems for the construction sector are set to get a lot worse given the demand and pay on offer to Kiwis in Australia.
Looking at the many factors affecting the housing market, Alexander says he is willing to say not just that house prices will rise closer to 5% in the coming year than Treasury’s forecast of 0.9%, but that they will rise 5-10%.
“If I were a borrower, what would I do?
“Given that it increasingly looks like monetary policy will be tightened in November and not next year, but fixed mortgage rates have yet to rise to reflect this, I’d be more inclined to lock much of my debt at a three-year fixed rate now than was the case last week.
“I’d be cutting back the proportion I’d plan fixing at one-year.”