House slowdown may be more than a blip

Auckland sales volumes have dropped but prices are still high in Auckland. Photo / File

Auckland sales volumes are down 13.6 per cent year on year.

The talk around the recent residential property market slowdown has seen it labelled as nothing more than a temporary pause.

Market commentators continue to stress the point that the demand-supply mismatch remains, and that ultimately this will provide the necessary market support.

However, with interest rates potentially on the up, and policymakers more serious in their desire to quell excessive lending growth, there are many who are not so wholly convinced this slowing is a short-term phenomenon.

House sales have fallen in seven of the past 12 months, with turnover down 24 per cent since April 2016. This weakness appears broad-based.

Auckland sales volumes are down 13.6 per cent year on year, with February's seasonally adjusted monthly sales down more than a third against the September 2015 peak.

Meanwhile, outside of Auckland, seasonally adjusted sales volumes are down 12 per cent year on year.

Typically, when we look at measures of housing affordability, a key element is that of debt serviceability, because, among other things, it takes into account interest rates, which are a critical driver of both housing market and economic cycles.

While there will always be some regional inconsistencies when it comes to debt serviceability, the average mortgage payment to income ratio in Auckland sits at about 51 per cent for new home buyers. That's on par with the highs reached pre-GFC, back in 2007, despite mortgage rates currently still being close to their historical lows - highlighting just how sensitive some recent home-buyers in Auckland would be to even a small lift in interest rates.

The latest tightening of the high loan-to-value lending restrictions, together with increased credit rationing by banks, seems to be having a marked impact on both house sales and credit availability. Add in the recent, modest increases in mortgage rates (and widespread expectations of more to come), and we can expect to see mortgage lending growth moderate further in the coming months.

Previous pauses in the market have generally been explained away, or attributed to the investor slowdown (new investor lending is currently down 35 per cent, year on year). Perhaps more telling, however, is that the growth in lending to first-home buyers and other owner-occupiers has also cooled of late, with the former flat, and the latter down 4.5 per cent year on year.

For the Reserve Bank, the pause is undoubtedly a welcome one - but there's potential for a far longer period of reduced activity compared with what we saw back in 2015, when the LVR restrictions were first revised. Vendor expectations are still bullish, but those wanting to actively sell may have to readjust their sights.

The views expressed in this article are those of Hobson Wealth Partners Limited, an NZX Firm. This article does not consider objectives or situation of any particular investor.