The tide is turning on house prices

ANZ chief economist Sharon Zollner says forecasting house prices can be a bit of a mug’s game.

“Accounting for the structural and cyclical impacts of policy changes isn’t straightforward, particularly when there are multiple ‘policy shocks’ occurring over different time horizons.”

The bank is adding another house price headwind to an already-lengthy list - the Government’s housing density legislation, which brings additional downside risks to the price outlook, particularly over the medium term.

“As summer and the New Year approach, it’ll pay to keep a close eye on the listings data and migration settings and outturns. Both could shift the dial for this house price cycle in a meaningful way.”

The bank’s house price forecast has a few negative months of house price inflation built in (as rates rise and listing increase over the summer), but this isn’t enough to shift annual inflation into the red – although that’s a real possibility, says Zollner.

“Based on the growing list of headwinds to house prices, risks are skewed to the downside. For the broader economy, the implications of a sharper-than-expected moderation in house price inflation would depend on how it affects household confidence and spending, as well as construction activity.”

Past the peak:
Whether or not a soft landing will be achieved in the housing market, says Zollner, remains an open question. But with many previous tailwinds becoming headwinds, it pays to be attentive to downside risks. Key wind-changes include:

• Rising interest rates, and expectations that there’s more to come. Swap rates are lifting and that’s putting upwards pressure on retail rates, including for mortgages.
• LVR settings have been tightened further.
• Adding to an already-lengthy list of housing policy changes, the Government’s higher density housing legislation is a step in the right direction towards addressing housing undersupply. Hopefully, the removal of red tape and a pivot towards more multi-unit dwelling construction brings some productivity gains too. However, the benefits may take a while to accrue, as construction is extremely capacity constrained right now. Near-term impacts on the housing cycle are a little ambiguous, as expectations of future housing supply are pitted against the higher development value of land this policy brings. But the longer-run impacts are clear: more houses than otherwise means lower prices than otherwise.
• Banks’ funding gap (the gap between deposit and lending growth) suggests upward pressure on wholesale rates is unlikely to be absorbed for long. If credit demand exceeds deposit growth, rates may need to rise by more, or faster than otherwise, to restore the balance.
• Closed borders have slowed population growth markedly, meaning housing supply is catching up to demand, despite labour and materials shortages.

Migration has big impact
Migration has been on hold this past year or so as a driver of economic activity and housing demand. Closed borders have slowed net migration to a snail’s pace.

“But as the rest of the world (and New Zealand) opens its borders to the vaccinated, this could be something worth keeping a close eye on – particularly if New Zealand is slower than the rest of the world in letting migrants back in, and/or introduces significantly tighter inward migration policies on the other side of this,” says Zollner.

She says net migrant outflows are possible, particularly if more Kiwis start making the jump across the Tasman or further afield at a time when inflows from elsewhere are weak. If that were to happen, the fundamental housing supply-demand imbalance could be rectified much sooner.

Trying to gauge the underlying housing impulse is difficult when the data is plagued by lockdown volatility. Auckland house sales fell 46.4% month-on-month in September (ANZ seasonal adjustment).

Outside of Auckland, sales were up 4.2% month-on-month, suggesting the market is still getting on with it as best it can. Overall, we’d expect sales to bounce back as restrictions are eased, but the timing here remains uncertain.

The number of days it takes to sell a house is generally a decent barometer of tightness in the market, but lockdown is adding noise to that indicator too.

Looking through the noise, we continue to assess the market to be “tight”.

Anecdote suggests housing demand and confidence are holding up at a time when the number of properties available for sale remains very low, despite the small seasonal uptick in September.

Listings should lift in line with seasonal patterns, but if enough sellers attempt to sell “at the peak’ all at the same time, house prices could adjust a little more dramatically than our expectation.