It doesn't feel right

The housing market seems to be back with a vengeance if you read the headlines.

ASB's survey of housing confidence showed 53 per cent of those surveyed in the three months to October believe house prices will rise. The net percentage of those expecting house price rises has staged its fastest turnaround ever in the last 6 months and is now back at the boom-time levels last seen in 2007. The Real Estate Institute has reported the national median house price hit a record $355,000 in October, surpassing the previous boom-time peak of $352,000 seen in November 2007.

Real estate agents cite bustling auctions and heated bidding for scarce properties. The average numbers of days to sell has halved to 31 since February and is back at the levels seen during mid 2007.

But is it really boom time all over again? It does sound like deja-vu all over again, but something doesn't feel right.

The detail behind those headlines is not so reassuring. Here's 5 reasons why this is no boom.

1. First home buyers and investors are not buying madly

Real Estate Institute is now producing an adjusted measure of house prices that takes into effect the slight skewing of the median when a larger number of expensive houses are sold. This measure is now being done after the Reserve Bank suggested a new stratified measure to iron out these skews. The proportion of houses sold in the price brackets above $400,000 has risen to 40 per cent from 30 per cent since prices bottomed out in January this year.

This 'stratified' median was at $368,975 in October and remains 3.1 per cent below the peak of $380,900 set in November 2007. The difference from the regular median is explained by more of the expensive houses selling relative to the cheaper ones. That's because the only people who can afford to buy houses now are those with plenty of equity built up during the 2002-2007 boom when the stratified median rose 114 per cent between January 2002 and November 2007.

First home buyers are locked out and rental property investors are making cash losses with prices at these levels. Much of the activity therefore is in the area of established home owners trading up or out. Some will be looking to reduce debt levels after their high interest rate scare of the last couple of years.

2. Banks aren't approving as much lending

The fundamental demand is not driving through the market in the same way as it did through 2003,04,05 and 07. This can be seen in the latest mortgage approval statistics from the Reserve Bank, from the bank lending figures and from the volumes sold in the market.

The REINZ's series on mortgage approvals show there were an average of $856 million of mortgage approvals in the last four weeks to November 6, which is up from the $690 million average in the same four weeks a year ago, but is down from the $922 million average in 2007 and the $1.3 billion average in 2006.

3. Lending growth is a third of 2006 levels

However, a good chunk of these approvals are never followed through into new lending and some of them are 'rollovers' from one bank to another. The most recent actual new home lending figures for the four months through to the end of September show home lending rose $1.842 billion on average from the previous four months. This compares with growth in the same period in 2008 of $2.086 billion, growth in 2007 of $6.053 billion and growth in 2006 of $5.460 billion.

What the actual bank lending figures show is that the money pump from the banks going into the market has been squeezed down to a third of what it was during the boom years. That's reflected in volumes in the market, where sales in October this year were 6,091, which was down from September. Volumes were above the 4,469 a year ago, but remain well below the 'boom-time' markets of 2006 and 2007 when 8,557 and 6,854 were sold.

4. Affordability is still awful

This market feels a little breathless and for good reason. Housing affordability is fundamentally out of whack with incomes. Our measure at interest.co.nz shows that it now costs nearly 60 per cent of the takehome pay from a median salary to afford the mortgage payments on an 80 per cent home loan on a median house. House prices are priced at more than 7 times earnings.

Essentially this means anyone wanting to buy a house has to do it with two incomes (so forget about kids) or live in a very cheap neighbourhood or town. Housing is still affordable in Invercargill and Wanganui, but it is unaffordable for first home buyers in Auckland, Wellington and Christchurch.

This crushing weight of affordability will eventually cap this price growth, particularly now the banks are more wary of lending willy nilly and interest rates are rising.

5. Interest rates are rising

One of the most revealing parts of the ASB survey was that the proportion who though now was a good time to buy actually fell in the last quarter to 59 per cent from 64 per cent. The percentage expecting higher interest rates rose to a net 35 per cent.

- Bernard Hickey