Property

‘Bonkers’ housing market off the chart

While house inflation is running at about 30% a year, it will take decades for affordability to improve, ANZ economists say.

Friday, August 20th 2021

The big-four bank’s economists say the ratio of house prices to incomes is simply off the chart. 

House prices are running at more than 10.5 times disposable incomes, that’s up from an already elevated 8.3 times in June 2019 – pre-Covid.

The ANZ economists say assuming house price inflation from here to the end of time is zero and income growth is running at a solid 5% per year, it would still take six years for this ratio to return to pre-Covid levels.

Other scenarios are sobering. For example, if house price inflation was 2% while income growth was 4%, it could take 15 years for the ratio to return to pre-Covid levels.

And if house price inflation was 3% while income growth was 4% it could take 37 years for the ratio to return to pre-Covid levels.

“Without outright house price falls, it’s a slog,” says Sharon Zollner, ANZ’s chief economist. “The only solution to this madness is to build more homes.

“In an economy where the annual median household disposable income (ie net tax and transfer payments, but before housing costs) was $72,939 as at June 2020, these numbers are simply bonkers,” says Zollner.

“And looking at median house prices relative to disposable incomes, the recent experience is even more bonkers.”

Although there are a suite of new Government policies supposedly to dampen the housing market, they have not yet made a dent.

Buyer gap widening

The gap between people who can afford to buy and those who are still saving has widened.

To put this in context the ANZ says if a buyer bought a $1 million-dollar house a year ago with a 20% deposit, and fixed the $800,000 loan at, say, 3% pa, the unrealised gain on their house, less interest costs, would be more than $275,000.

Conversely, if a buyer didn’t quite have the 20% deposit a year ago, it’s extremely unlikely they are closer to their savings goal over the past year. They would have needed to save another $60,000 just to maintain purchasing power to buy that same house.

That’s an extra $165 in savings per day required just to stand still, versus an unrealised daily gain of more than $750 per day for those lucky enough to be on the other side.

The bank says it’s not feasible for growth in house prices to significantly outpace income growth for much longer, as someone has to pay the rent or service the mortgage sitting behind such exorbitant house prices.

Zollner says the multi-decade tailwind of low interest rates is probably finding a bottom.

OCR lift will have an effect

The Reserve Bank is expected to start lifting the OCR from next month to a terminal rate of 1.75% by the end of 2022.

And with that already getting passed through to mortgage rates, the ANZ expects the housing market to slow.

“Because the stock of mortgage debt is now so high relative to the size of the economy, interest rate increases will be a little more powerful than before.

“The implied 150 basis points of OCR hikes from here on a stock of around $315 billion – and growing – of lending secured by residential mortgages represents almost $5 billion more a year that borrowers will need to find to service their debt.”

Zollner says what the bank’s house price to income projections highlight is just how difficult it is for policy makers to make housing more affordable in a timely manner without a house price crash.

“The New Zealand housing market and economic cycle are intertwined so tightly that the confidence and wealth effects associated with a sharp house price fall would result in weaker-than-otherwise income growth, undermining affordability progress to some extent, at least for a while,” says Zollner.

She says the Government could help to build more homes with more aggressive supply-side policies, such as freeing up land, cutting red tape, funding greenfield infrastructure, and importing the right skills.

“There’s scope to cool the housing market without spooking the horses too much.”

Comments

No comments yet

SBS FirstHome Combo 6.14
Unity First Home Buyer special 6.55
Co-operative Bank - First Home Special 6.79
Heartland Bank - Online 6.89
Wairarapa Building Society 6.95
Co-operative Bank - Owner Occ 6.99
Kiwibank Special 6.99
Unity 6.99
TSB Special 6.99
ICBC 7.05
China Construction Bank 7.09
Unity First Home Buyer special 6.45
Heartland Bank - Online 6.55
SBS Bank Special 6.69
ICBC 6.69
TSB Special 6.75
Westpac Special 6.75
ASB Bank 6.75
AIA - Go Home Loans 6.75
China Construction Bank 6.75
Kiwibank Special 6.79
Co-operative Bank - Owner Occ 6.79
SBS Bank Special 6.19
ASB Bank 6.39
Westpac Special 6.39
ICBC 6.39
AIA - Go Home Loans 6.39
China Construction Bank 6.40
Kiwibank Special 6.55
BNZ - Classic 6.55
Co-operative Bank - Owner Occ 6.55
TSB Special 6.59
SBS Bank 6.79
SBS FirstHome Combo 6.19
AIA - Back My Build 6.19
ANZ Blueprint to Build 7.39
Credit Union Auckland 7.70
ICBC 7.85
Heartland Bank - Online 7.99
Pepper Money Essential 8.29
Co-operative Bank - Owner Occ 8.40
Co-operative Bank - Standard 8.40
First Credit Union Standard 8.50
Kiwibank 8.50

More Stories

Sticky market for investors – first home buyers in control

Wednesday, May 15th 2024

Sticky market for investors – first home buyers in control

Large numbers of property investors have not come back into the market despite  the reintroduction of 80% interest deductibility for landlords and the lowering in July of the Brightline test from 10 years to two years, QV says in its latest update.

Low house prices and deposits help first home buyers

Thursday, May 09th 2024

Low house prices and deposits help first home buyers

The increasing number of low deposit mortgages being lent to first home buyers has been borne out by the latest CoreLogic research.

Rate cuts needed to lift mood

Wednesday, April 17th 2024

Rate cuts needed to lift mood

The enthusiasm that followed the change in government, mainly from property investors, has waned as homeowners and buyers hang out for interest rate cuts, says Kiwibank.

Support for regulation

Monday, March 18th 2024

Support for regulation

REINZ has emphasised the need for property management regulation to Parliament’s Social Services and Community Committee.