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If you asked most Kiwis how they felt about the housing market right now, they'd probably grimace.
Sure, prices are coming down - but that's no help to buyers who are also watching interest rates rise and having awkward conversations with their bank managers about how much they spend on flat whites.
In a live Q&A with Herald Premium subscribers this morning, property editor Anne Gibson and business-editor-at-large Liam Dann didn't sugarcoat the situation.
While both were quick to point out they don't have clairvoyant powers, they noted that all signals point to further house price drops, higher rates and worsening supply chain problems. Adding to the sector's woes: ongoing leaky building issues and controversial sales tactics.
Still, as Gibson told a subscriber, life goes on: "Fear shouldn't hold you back from [building]. I never regretted buying houses - or building in 2017."
Here's a wrap of this morning's discussion:
Bevan T: Our experience in trying to purchase a property has shown real estate agents have an unusual degree of control over prices. They work for the seller but no one works for the buyer yet agents place themselves as the trusted go-between. Combined with confidentiality levels, this allows for a potential high degree of agent manipulation between buyer and seller. The deadline sale is especially vulnerable to this. Is there any concern in the industry about how deadline sales have been used to hike prices? We still have not purchased, with no debt, 200k dep, no dependents, both working, but so much fear and liability-shifting in the finance sector we can't get across the line. Furious.
Anne G: I sympathise deeply. You're asking an excellent question about the potential conflict of interest re agencies as well. The agent must not mislead you the buyer about the seller's price expectations although 'conditioning' is a known tactic. You've saved a lot. Take heart, things appear to be improving for buyers. Volumes, values and prices are heading down and ANZ is forecasting a 10% price drop this year. www.settled.govt.nz has information about deadline purchasing.
Anne sought comment from real estate barrister John Waymouth in response to this question. Here's what he said:
Real estate agents in New Zealand are governed by the Real Estate Agents Act 2008 and the Real Estate Agents Act (Professional Conduct and Client Care) Rules 2012. This imposes a statutory duty of care on real estate agents in the way in which they treat members of the public, more especially vendors and purchasers. Because real estate agents in probably 95-98% of the time are acting for the vendor under a vendor agency agreement, their principal and prime duty of care is under Rule 6.1 of the Code, which makes it quite clear that because of the Agency Agreement they are in a fiduciary relationship with their principal who is the vendor and they have to act at all times in the vendor's best interests, and moreover, they have to also do what the vendor tells them to do unless it is contrary to law (Rule 9.1).
Real estate agents also have a statutory duty to be fair and honest with the buyer or potential buyers and this is under Rule 6.2. So they have to act in good faith and deal fairly with "all parties engaged in a transaction". It is a very fine line that real estate agents have to tread between serving the best interests of the vendor whilst still being fair, etc, to their buyers and the Real Estate Authority recognise this fine line that they have to do and in fact one of the compulsory topics for this year's REA Continued Professional Development (which is compulsory to all real estate agents in New Zealand wishing to relicense themselves) is a topic called "Balancing fiduciary duties with a fairness to the buyer" ...
With respect to the method of sale, again, that is one of the optional topics that is available in 2022 as well, but it is the vendor who selects (after advice from a real estate agent) what method of sale is to be used, and deadline sales/tenders/auctions have been used in the past, not to "hike prices", but to reflect the fact that in a very competitive seller's market (as existed previously before the slowdown in prices), that was a way of harnessing the competing interests of all the buyers to get the best possible price for the vendor.
If there is any evidence of real estate agents controlling prices or utilising the sale method to push up prices above where they were (that is to say being deceptive with buyers as to price expectations, etc), then the REA do clamp down firmly on that practice.
Moderator N: Hi Anne and Liam - thanks for your time today. This is a bit of a random one from a person who pays the mortgage and doesn't think too much about it (except when those horrible 'your rate's going up ' letters arrive from the bank). Is there such a thing as an average interest rate - kind of in the Goldilocks zone? What's high and what's low?
Liam D: Interest rates are always relative to the economic conditions of the day. But there is a concept called the "neutral rate" which is the level which the official cash rate should ideally be if all things were in balance. So that is kind of the "goldilocks zone".
The neutral rate is probably about three per cent right now. It used to be higher but after many years of exceptionally low inflation it drifted down. With the OCR currently at 1.5 per cent we're still well below the historical average for interest rates - even though it might suddenly feel quite high.
Bank rates for a fixed two year mortgage bank rate are already above 5 per cent - they could go to 7 per cent and that would probably be about average across the past 30 years.
David C: With the removal of interest deductibilty for landlords on no level does the maths work now on a rental property, despite the huge spike in rents, so with the huge increase in social housing tenants having nowhere to live as landlords exit is it a good time to invest in motels and other sub optimal housing for the most vulnerable or will it just ruin city centres and render the investment worthless.
Anne G: It's not entirely clear whether landlords are selling or buying more right now. Reports conflict on this. We found in January that instead of landlords stampeding to sell as they threatened in response to Government rule changes for rental properties last February, they were actually buying more places - the number of residential properties rented is at an all-time high, with bonds taken on more than 380,000 places lodged with the Ministry of Business, Innovation and Employment's Tenancy Services. Numbers were up by 15 per cent on the 336,000 bonds lodged at the start of 2015.
David L: Hello. In the US a standard mortgage is for 30 years and the rate is fixed. Why do people in NZ have floating rates that expose them to such huge risk (3-4 times higher risk than US buyers, based on the difference in house prices)? Thank you, David
Liam D: I guess Kiwis like the flexibility and are prepared to pay for it. I think the biggest mortgage category in NZ now is two-year fixed but we've certainly never gone in for the long terms they do in the US. We're more in line with the UK and Australia and the long term fixed rate is a bit of a US cultural quirk.
Richard L: Hi Anne and Liam. Thank you for your time today. My wife and I recently purchased a section with the hope of building. However with the current rising costs to build we are fearful to even start the process. Is there any sign of the pipeline of new builds slowing, potentially bringing downward pressure on the demand side of the building supply chain?
Anne G: Hi Richard - I see the opposite, actually. New builds are ramping up right now. For example, there were a record 48,522 consents in the year to November. Each month, new records are being set. But fear shouldn't hold you back from this. I never regretted buying houses - or building in 2017. Very successful experience.
Liam D: Yes, for people in your position a building sector downturn can actually be quite a good thing....There were some very very tentative signs of steam coming out of the construction sector in yesterday's ANZ Business Outlook.
As rates rise and the economy gets squeezed my hunch is we will see the sector cool more. It may even face a bit of crunch if developers are over-extended. Timing on that is hard to pick but historically these things are cyclical so it wouldn't be surprising if it all looked very different this time next year.
Marcus B: Anne, our leaky building fiasco went from what $5b to $30b and it continues. Now we have shoddy building practices by guys who shouldn't own a hammer, earthquake strengthening issues plus the impact of global warming and rising sea levels starting to manifest. One day hopefully far in the future a fair bit of Aotearoa might be a bit underwater (Wellington, Dunedin and Devonport for example) and the cliffs around Auckland may well crumble to the sea. If you were say Lloyds back in London would you continue to reinsure this banana republic of ours?
Anne G: Thanks Marcus, v topical from you. I wrote two stories about major ongoing leaky building court cases just in the last week or so: $120m+ in Queenstown and $140m in Gore St, Auckland. I've been writing about the topic for 22 years. I really am so concerned about it. Also writing about crumbling cliff stabilisation attempts/consent applications. Again, worrying. Couldn't agree more.
Moderator N: I'm interested to know what you both think about the Auckland housing and infrastructure package the Govt announced yesterday.
Liam D: It was good to see but clearly a long term investment, so won't do much for the market short term. That's actually quite good as we don't need more inflationary Govt stimulus right now. But this should hopefully help keep new builds rolling over for the next several years even if there is a downturn in the commercial sector. New Zealand needs to smooth out the cycles and avoid the 'boom to bust' we've seen in the past.
Anne G: Yesterday's $1.4b package is part of an ongoing commitment to housing by this Government. Urban renewal started some years ago in Mt Roskill, Mangere, Tāmaki, Oranga and Northcote. It's amazing to see the change - what makes me sad is to think of the neglect of our approx 60k state housing estate for so many decades. Now, we're playing catchup. It was unacceptable to put state house tenants in 'killer boxes', uninsulated, freezing, causing massive social/health consequences. We're now seeing fit-for-purpose warm dry Kāinga Ora homes rising, albeit more intense on their sites to make better use of the land, often apartments and townhouses.
Danny C: Hi Liam and Anne. What is your view on the impact of emerging global macroeconomic conditions and house prices? Deutsche Bank has just joined the chorus of commentators that the base case is there will be a global recession starting in 2023. Given this scenario, and that NZ inflation is likely to continue to rise, and that houses are 'expensive' relative to incomes in NZ, is now a good time to sell?
Anne G: Got no powers to forecast the future Danny or say whether it's a good time to sell right now - depends so much on your own personal/financial circumstances. Am sticking only with the facts. ANZ has forecast a 10% house price fall this year, CoreLogic has noted valuation drops already and that business and Barfoot & Thompson have noted sales volume drops recently. The phrase emerging is that buyers have more power than sellers - a bit of a power pivot going on, apparently.
Liam D: I don't want to give specific advice on when to sell. I think you should be as guided by your own financial circumstances at least as much as the macro-economic circumstances. But my gut feel is that we're going to see a recession or go close to one in the next year. Central banks have the bit between their teeth now and are chasing down inflation. Rates are rising very fast from a historical perspective, even though they are coming off a low base.
The REINZ index that economists like to use has residential property down by 4.1 per cent from its peak last November. Economic forecasts are for it to keep falling until its down around 10 per cent from peak.
Masayo P: There is an argument that despite all the discussion about supply/demand balance a lot of the driver of house prices particularly in the last 2 years has been - interest rates. People felt they could borrow more and pay more, so they did. Now with interest rates heading back up to the 6-7% mark prices are going to go back to 2019 type levels. Not instantly, but the air will just come out of the balloon in the next couple of years - inflation will take care of 1/2 the adjustment. 10-15% drop to nominal prices + 10-15% reduction with inflation over 2 years. Thoughts?
Anne G: Yes, good question about interest rates. This month, REINZ said "The impact of tighter lending criteria, LVRs, and increasing interest rates coupled with inflation continue to reduce the pool of buyers who are willing and able to pay market prices. The increase in interest rates over the past months presents one of the greatest impacts to the market." And a second expert opinion on the same topic: "CoreLogic chief property economist Kelvin Davidson said many households would be forced to adjust their finances fairly quickly, following the doubling of mortgage rates and the country's high household debt to income ratio." We've got the Barfoot & Thompson numbers out early next week and I'd expect some mention on the effects of interest rates on the Auckland/Northland markets from that agency as well.
Liam D: I think that sounds like a plausible scenario. Unless of course something big happens to change the equations...which it often does. Pandemics, wars, earthquakes, Wall Street crash...or who knows maybe the world's due a run of good news and supply chain stuff could improve faster than expected! But as a base case I tend to agree with you...
Ryan L: Hi there I've got three questions. Firstly, what are you seeing with shortages of building materials and labour recently? Are things improving now? Secondly, when do you think the residential building backlog will be resolved given the capacity constraint (35k-40k pa) and surplus of consent over capacity built up over the last two years? Lastly, what do you think the residential building consent level would be in the long term and what's the rationale behind it?
Liam D: This from yesterday's ANZ Business Outlook was interesting...early days but there's signs that building sector was at the front end of a pandemic boom and may be at the front end of a slowdown...
"Compared to March, cost expectations fell for construction, but rose elsewhere, most dramatically for agriculture.
"Pricing intentions eased sharply for construction, and modestly for agriculture and retail, but rose further for manufacturing and services.
"The retail, agriculture and services sectors were all expecting higher wage settlements than in the last 12 months, while manufacturing and construction were expecting smaller increases.
"'The RBNZ will be pleased to see some of the heat coming out of the construction sector, which has been a trailblazer for domestic inflation pressures for some time,' Zollner said.
"Meanwhile the outlook for residential construction was weakening rapidly.
"'The divergence between residential and commercial construction intentions is unprecedented,' Zollner said."
On the building consents there seems to be plenty in the pipeline but opposing forces at work. So we're still on a record breaking roll and now the new zoning laws are opening up lots of land for development but costs, interest rates, falling population and ultimately lower house prices must surely start to bite and slow things down. Hopefully we have a reasonably soft landing and don't see it all come to grinding halt.
Anne G: Thanks Ryan, good Qs. If anything, I hear of material shortages and price rises worsening. We need a lot more houses. Fletcher Building's Winstone Wallboards is spending $400m to develop its new Gib plant in Tauranga. That opens next year. That commitment alone gives you an idea of where the biggest manufacturer/supplier sees house-building going. On future-telling, the national construction pipeline report released by Poto Williams late last year forecast national construction activity to grow to about $48.3b in 2024 and much of that is house-building. We're training more apprentices than ever to cope with all this. Hope that answers your Qs.
Maik H: Hello. With the current situation in interest rates on the rise and inflation up and also looming emigration of Kiwis, is it not more likely to see a further fall in house prices? I read mostly on the likely soon upturn and looking at recent years as comparison. With the new situation of worldwide heightened inflation and rising rates, would it not be more realistic in comparing this to the seventies or even further back? Many thanks for your time!
Liam D: Hi, I think we've touched on price forecasts above....economists like to use the REINZ House Price Index as a measure and that's already off 4.1% since peak. ANZ and others think we'll see falls to about 10%.
I'm not so gloomy as to compare things now to the 1970s. Central banks are acting much faster and doing so all around the world. So I think (hope) we'll see inflation back in its box much sooner. We also have very low unemployment and labour shortages so there is opportunity to really whack inflation without doing too much long-term economic damage. Also NZ Govt finances in much better shape and really strong prices for our exports...neither of which was the case in the 1970s.
The New Zealand sharemarket reached its highest level in a month.