In my column last month, I noted that the Reserve Bank would probably respond to evidence of a rise in low deposit lending to investors by seeking to reinstate Loan to Value Ratio regulations (LVRs) earlier than the scheduled date of May 1. So, it has come to pass, not with the Reserve Bank unilaterally acting, but with banks putting the speed limits back in place themselves.

It looks like the banks had been approaching the RB, lobbying individually for an early return of the rules, but afraid of making an individual decision to do so themselves for fear of not being followed by the other banks.

Now that the LVRs are back in place voluntarily, are we likely to see the recent extreme heat coming out of the housing market? Yes, in that although November will still likely show a sharp price increase, for December onward monthly price gains below the 3.5% of October and 2.6% of September are likely.

How fast might prices rise on average in the coming year? In the six months leading into March this year prices nationwide rose on average by 1.1% a month. In the seven months since April prices have risen on average by 1% a month, though with falls in April and May and rises in other months.

In all probability, on average in the coming year prices will again rise by about 1% a month, though with a risk that gains are higher than that.

Prices will keep rising despite the immediate return of minimum 30% deposits for investors and 20% for owner occupiers for a great variety of reasons. One is that interest rates will remain at extremely low levels. This not only makes the purchase of a house highly affordable for owner occupiers, but it also nudges more and more investors every day toward doing something more with their low risk bank term deposits.

There is currently about $200bn sitting in household bank accounts. Most of that money will stay there and not leave the banking system. But the low returns are going to affect people’s behaviour. A year ago, the average two-year term deposit rate was 2.6%. Now it is 0.8%. Over the same time period the average two-year fixed mortgage rate has fallen from near 3.6% to 2.5%.

Term deposit rates have fallen much more than mortgage rates, and that is why the drive by investors to diversify away from bank deposits will continue. But there are more than just low current returns which will be encouraging investors into other assets. We have yet to see discussion of an underlying change in mindset towards funding one’s retirement, but as awareness of this factor grows, it will drive even more property purchasing.

We Kiwis have traditionally viewed the use of invested funds in retirement as involving living off the income of the assets we might have, be they corporate bonds, bank term deposits, or some rental property. But that approach is not going to be possible in the future outside of property because cash returns on assets will average much lower in a permanently lower interest rates environment.

People are going to have to consciously plan to reduce their wealth far earlier in retirement than they would have been thinking. That is, starting in their 60s rather than their 80s. This is a big change not yet being discussed in New Zealand, but the implications are strong.

Money kept in a bank delivers zero capital gain. In fact, after inflation the wealth will decline, with further reductions caused by taxation of earnings. Property however delivers a capital gain which over the past 28 years has averaged 6.8% per annum across the whole country.

Going forward that average is likely to be closer to 5.5% given that we have ended a period of structural declines in interest rates and growth in house supply is better now than over the past three decades and likely to remain relatively high.

This capital gain is likely to continue in retirement, and that becomes important to people who still seem to place value on passing something on to the next generation and maybe the one after that as well.

Anticipated mild capital gain in retirement will assuage concerns about wealth declining as people age. Facilitating drawdown of this capital and retaining the ongoing gains will require much deeper development of the reverse mortgage sector, to the point where the interest rates charged do not prove such a persuasive argument against pursuing that course as is the case now.

The upshot of relevance for the next few years is that investors will continue to favour property, and they will continue to favour it even when the brightline test is inevitably extended from the current five years to at least seven years and probably ten years. Personally, I had expected such an extension to already have occurred by now and the move does look overdue.

Will the government go further than that to try and contain the pace of house price increases? Probably, but they will not make any change large enough to cause prices to go down. Falling prices might please a few first home buyers. But banks will lift deposit requirements if prices are falling, taking home purchase even further out of reach to those young buyers.

​Plus, falling prices will hardly be greeted positively by recent young buyers. And all other property owners will feel some disquiet about their wealth declining. Therefore, all the government will ever try to do is slow the pace of price increase, not reverse it. In fact, the Prime Minister has already noted that she will be taking into consideration this term the desires of the over 400,000 people who switched in the most recent general election from National to Labour.

These people are probably property owners and the PM will want to retain as many as possible come the 2023 election.

Could the government tinker with the ability to deduct interest payments from rent before calculating taxable profit from property investment? That would be an extremely big move and if they did it would probably be spread out over a number of years. There is a risk that such a move would cause selling by investors which has never happened in the past in response to other moves which reduce landlord returns, such as ring-fencing.

But the big, big problem for the government is that the average occupancy of a rented property is higher than an owned one, and if the home ownership rate were to rise as some investors sell, more people would find themselves unable to secure accommodation.

Rents would rise and there would be even more pressure on the state housing list which has already tripled in size over the past three years. Over the coming months we are likely to see both Treasury and the Reserve Bank offer insight into measures which might go some way toward slowing the pace of average house price increase in coming years.

But in our new environment of extremely low interest rates, an expected migration boom once the borders reopen, and a coming shift in how people perceive their technique for funding retirement spending, any changes made are unlikely to do more than mildly ease the average pace of house price gain rather than reverse it.

Email me at tony@tonyalexander.nz to subscribe to my free weekly “Tony’s View” for easy to understand discussion of wider developments in the NZ economy, plus more on housing markets.

​By Tony Alexander

Back in March, as we all tried to make sense of what a global pandemic meant and how much economic damage would ensue from something unheard of called a lockdown, the outlook most of us had for the residential real estate market was bad. There was a near universal expectation that prices would fall as turnover shrank, that mortgagee sales would jump, and that house construction would fall away quite rapidly. Things have turned out to be quite different – thankfully.

​In the three months to August, the number of dwellings sold around the country was ahead 22% from a year earlier. The number of properties listed for sale was down by 13%. Prices initially fell 3% during April and May, but they have since risen to sit 1.5% ahead of average levels in March. Why have things turned out this way?

There are numerous factors which help explain why our economy has not collapsed as much as expected, why the unemployment rate has not soared, and why the housing market looks to have an entirely new lease on life. Principal among these factors is the cutting of interest rates to record low levels.

In March, the Reserve Bank cut its official cash rate by 0.75% to just 0.25%. This caused the likes of the one-year fixed mortgage rate to fall from 3.4% to 2.5%. But it pays to remember that the March cut was preceded last year by another 0.75% worth of cash rate cuts which had seen the one-year fixed mortgage rate decline from 4.1%.

The rate cuts of 2019 meant that our housing market entered this crisis with accelerating momentum, assisted by last year’s confirmation that no capital gains tax would be imposed.

But it is not just the cuts to current interest rates bringing new buyers into the housing market. The Reserve Bank, like other central banks overseas, has indicated that it will keep interest rates low for a great number of years. They have also indicated that they might cut the cash rate below 0% next year.

This matters, because what drives asset markets is not just conditions on the ground, but where people believe things are going. Expectations matter in markets and those interest rate expectations help explain why so many investors are looking to move their funds out of low interest rate term deposits and into other assets including shares and property. The low rates also explain why many people who were planning to sell their investment property and live off earnings from other assets have decided not to. They simply won’t generate the returns which they have been earning on their housing investment and which they are likely to continue to earn. This helps explain the shortage of listings.

Another factor explaining listings shortages is unwillingness of people to sell before they have bought. They are scared of being caught having to rent a property for some time while they search for a suitable new house, and ending up potentially paying more for an eventual purchase than they would currently. So, people have switched to buying first then selling.

This fear of missing out on a purchase has in fact become a strong element once more in the property market. FOMO is short for “fear of missing out”, and it mainly refers to people feeling fearful of not making a purchase and not enjoying capital gains.

Back in May, in the monthly REINZ & Tony Alexander Real Estate Survey, I asked real estate agents all around New Zealand whether they felt that buyers were feeling FOMO. A net 2% back then said no. Now, in the September survey, a net 77% say yes. Similarly, back in May a net 17% of agents said that they felt house prices were falling. Now a net 81% feel that they are rising.

But it is not just low interest rates generating FOMO and the self-perpetuating momentum it generates in the housing market. In the year to March there was a net immigration boost to our population of 90,000 people. This has since eased to 76,000 in the year to July, but that 76,000 includes an unheard of net 20,000 gain in Kiwis.

All of these extra people in the country mean we have already accumulated the population gain most of us analysts expected would accrue by August of 2021. These extra people will not largely be staying in motels, hotels, campervans and tents. They will be using rental accommodation – including Airbnb. They won’t be buying houses if they are foreigners, but their presence has removed downward pressure on house prices which can come from downward pressure on rents.

Since April, net migration inflows have averaged only just over zero a month, and going forward the numbers will remain low until the borders open. However, every few weeks the government has announced an easing of rules allowing more people into the country and more migrant visa workers to stay. There are also discussions underway regarding private accommodation providers contracting to quarantine skilled workers. One could imagine that extending to foreign students ahead of the 2021 academic year if things go well.

But more than these sources of upside to monthly migration numbers is the increasing expectation that over 2021 much of the world will be vaccinated, and by the start of 2022 our borders might be open again. This will not only bring a flow of tourists back which will provide an economic boost, but restoration eventually of previous firm net migration inflows. And that loops us back to the point made above regarding expectations driving asset markets. The expectation in the housing market is that the next change in border control will be an easing which will boost housing demand. And there is more.

For now, banks are running very tight eligibility criteria for home loans. Staff shortages are making processing times very long, and many applicants who in the past would have qualified for a loan, are now having difficulties. For some it is because of the sector they work in, for others the volatile nature of their income.

The expectation is growing that the next change in bank lending criteria will be a loosening up. This might not come to any noticeable degree until the first half of 2021. But when it comes, it will make purchasing a home accessible to more people. That will place upward pressure on prices.

Another source of upward pressure is bond buying by the Reserve Bank (money printing), which swaps a bond asset for a bank cash balance asset on the part of the investors selling those bonds. For some of those investors, the low returns on bank deposits may not be a problem as those returns will be better than they were getting on bonds. But for others the low interest rates on offer will encourage the purchase of other assets such as shares, commercial property, finance company debentures, and again, residential property.

None of these and other factors suggest house prices will boom – not with slowly rising unemployment and high global uncertainty. But they do suggest that the chances of house prices turning back down again as they did on average nationwide during April and May, are exceedingly slim. Rises are more likely than declines from here on out.

Email me at tony@tonyalexander.nz to subscribe to my free weekly “Tony’s View” for easy to understand discussion of wider developments in the NZ economy, plus more on housing markets.

By Tony Alexander

As at the time of writing on May 28, things seem to be moving in the right direction to have the country move out of Level 2 well before the end of June. And going by Australia having essentially the same infection and fatality rates as New Zealand, but without so tight a lockdown, it might not have been necessary for ourselves to go into Level 4 late in March.

But hindsight is a wonderful thing, and in terms of showing compassion and trying to do right by as many people as possible, the government has done a good job. But now we are entering the more challenging period in some regards. Many businesses have closed or laid off staff, and many more will follow.

Our economy is estimated by Treasury to be on the way to shrinking by near 1.0% in the year to mid2021 having shrunk near 4.5% in the year to June 2020 ending in 4-5 weeks time. After that a strong rebound of 8.5% is expected to mid-2022 then 4.5% after that. While many other forecasters have got worse numbers (and different annual time periods), so far, we seem to be doing better than the best scenario put forward by Treasury in their Budget documents of May 14.

​An early exit from Level 2 will be of immense benefit to the hospitality sector, cinemas, events organisers and so on. Of benefit also would be the opening of a trans-Tasman bubble before the July school holidays. And on top of that work is underway not just to let in more movie-makers as has already happened, but to perhaps bring in some foreign students ahead of international borders opening up. 

This highlights perhaps one of the most unique aspects of this deep recession we are currently going through. In the past, whenever we have had a recession in New Zealand, most of us have spoken in terms of the future being bad and that we would like to leave the country. We would talk about a brain drain and the loss of our valuable young people to other economies.

This time around not a single person has said that we are fundamentally doomed and that our population will soon be shrinking. Instead we are speaking about the rush of enquiries from Kiwi’s offshore in the real estate market, and expectations that once the borders open up a lot of people will be wanting to migrate here.

Our attitude toward this recession is different from the past, and while some of the numbers are very bad, there is more a glass half-full sentiment in play than the traditional glass half-empty. Many people – businesses and consumers – will be looking beyond this period of weakness as they get through it, and concentrating on the better times ahead.

That this is happening should not really come as a surprise to anyone who follows the sharemarket. After falling 37% and bottoming out late in March, we now have the likes of the Dow Jones Index down only some 14% from its February peak. Our own market some weeks back recovered to levels comfortably higher than the same period a year earlier.

Attitudes matter because they drive decisions. Once we get through the most intense period of business closures, rationalisation, and redundancies, there may be more positioning for the future undertaken than we have seen in any previous recession. This matters a lot when we focus our attention on the likes of not just sharemarkets, but commercial and residential property markets.

We know that for the next few months there will be weakness in both broadly-defined sectors. House price declines are likely everywhere, with some big falls likely in Queenstown and Auckland’s inner-city apartment market. Commercial property prices are also likely to decline, mainly for hospitality, retail, tourism, and CBD offices. But there is good underlying growth that is likely to sustain the industrial, farming, and warehouse sectors.

But astute investors will note that there are some extraordinarily large factors which will limit the extent of weakness in residential and commercial property markets, and perhaps the window of opportunity for making some very good purchases will be a lot shorter than many in the media would have us believe.

First, interest rates are low and headed lower, with some significant jawboning by the Reserve Bank Governor. Faced with the lowest rates of return on low risk assets like bonds and term deposits that they have ever seen, every day will niggle away at investors, encouraging them to search for better yields elsewhere.

Second, contributing to this interest rates effect will be the printing of money. This is something new for New Zealand so perhaps people here are not aware of what happened in other economies which did this post-GFC. While some of the money went into consumption and capital expenditure, most went nowhere, and some went into asset markets and pushed up the prices of shares and properties – both residential and commercial.

Third, the government has initiated a huge spending splurge and given themselves an extra $20bn beyond Budget day to spend. With a general election in September and polls likely to soon show some easing of the virus-driven surge in support for the government, we can count on almost all of that money being allocated in the next three months. In truth, the economy probably does not need extra stimulus and it would be better to focus a lot more on the leap in government debt. But with a centre-left government in power comprising a Cabinet with minimal business experience, spending is likely to be embraced with a vengeance.

Finally, there is a good chance that both business and consumer confidence levels will strongly recover before the end of the year, in spite of rising unemployment. This does not mean the outlook is good for retailers. But it does mean businesses will be making extra effort to limit the extent to which they downsize, if they believe 2021 will be a year of good recovery.

What this adds up to is the following. Our economy has passed its weakest period, which was during the lockdown. There are many job losses yet to be announced, and businesses would be advised to play things cautiously, watch debt levels, slash expenses, and not try to pick when the upturn in their sector will come along.

But to use a tramping analogy, even if you are dog tired, wet and miserable, and short of food, if you know you are on the right track and that the road end is just 5 kms away, you’ll push through the misery and tramp on. That is what our economy and its participants will be doing for the rest of the year – pushing through the misery, yet focussed on the better conditions which increasingly look likely early in 2021, and for some sectors even well before the end of the year. 

This is why asset price weakness is likely to be substantially less than many might be thinking, and opportunities for low-priced purchases short-lived in duration. Go to www.tonyalexander.nz to subscribe to my free weekly “Tony’s View” for easy to understand discussion of wider developments in the NZ economy, plus more on housing markets.

​By Tony Alexander

Banks rolled out six-month payment holidays for borrowers affected covid-19 this week. Owner-occupiers, investors, and business owners can take a payment holiday on principal and interest payments, but their loans will accrue interest over the period.

The payment deferrals are part of a huge intervention by the Reserve Bank to prevent a financial catastrophe, as covid-19 takes a stranglehold on the New Zealand economy.

However, One concern i have expressed is that taking a payment holidays might work against clients obtaining financing in the future.

Banks have moved to allay those concerns.

Westpac says customers who are not in arrears will be marked with a 'payment not required' flag, which will be reported to credit agencies, but will not impact borrowers' ability to get new credit in the future.

Only borrowers who are in arrears before their payment holiday will be marked with a 'hardship' flag, a Westpac spokesman said.

BNZ also confirmed its payment holidays won't affect credit scores: "Other banks will build their credit models differently so I cant speak on their behalf, but if a customer does take a deferral, it doesn’t impact their internal credit rating for us."

ANZ echoed the same line: "A home loan repayment deferral alone won’t impact a customer’s credit rating. However, if they’ve already missed repayments for any reason, even if we later give them a repayment deferral, this may have impacted their credit rating."

A Kiwibank spokeswoman said payment holidays would not affect credit scores "if they apply due to covid-19".

Even though Mortgage holidays are a lost resort at least we can have some comfort that the banks are working hard to ensure that clients will not be negatively affected in the future.

If you are unsure or want to talk to me, please do get in touch.
​
Ryan
021 242 3136

The Reserve Bank is now expected to cut the Official Cash Rate two more times this year to 1.0 percent by mid-November as the global economy slows and business confidence slides to 10-year lows.

But the jury is out on how much of it will translate through to lower mortgage rates, given banks are under pressure to lift their profits to get ready for higher capital requirements. There’s also a concern that banks won’t be able to pass on the rate cuts to term depositors. That’s because the banks now need to keep savers happy due to Reserve Bank funding rules designed to stop the banks going for cheap ‘hot’ 90-day funding overseas.

There are headwinds and tailwinds for the housing market and mortgage rates coming from all directions.