New Zealand’s central bank is predicting house prices will continue climbing for another year, before falling for the first time since the Global Financial Crisis – putting heavily-mortgaged new homebuyers at risk.
ANALYSIS: Economic policymakers are pulling every possible policy lever to rein in house prices – but nothing can restrain Kiwis’ irrational passion for property. It’s the spirit of people, says Reserve Bank Governor Adrian Orr.
Despite rising interest rates and tax changes, New Zealanders are continuing to bid property prices higher and higher, with one brutally predictable outcome: the fall, when it comes, will be that much harder.
When will that come? A year from now, the Reserve Bank says.
“These are asset prices that are highly volatile and they are captured by the spirit of people buying these assets.”
– Adrian Orr, Reserve Bank
According to the latest Trade Me Property Price Index, published this week, the national average asking price jumped a record 19 percent to reach an all-time high of $834,000 in July.
In this week’s statement, Orr and his Monetary Policy Committee seemingly throw up their hands in frustration. House price growth has persisted even when prices look disconnected from the fundamental factors that should determine them, their report says.
“This reflects that sentiment, expectations, and prevailing narratives surrounding the housing market can have a significant bearing on housing demand and house prices. The further house prices rise above their sustainable level, the larger the required realignment will need to be.”
Speaking afterwards, Adrian Orr had another way of describing that. “We can talk about corrections. What I can’t do is tell you when, or by how much – because these are asset prices that are highly volatile and they are captured by the spirit of people buying these assets.”
“I’m talking around the blank, unemotional economic events. What we see through time is house prices can fall, do fall, usually in real terms once adjusted for inflation, but when we’re at low inflation they can fall in nominal terms.”
Orr said house prices were well above sustainable levels, yet they would keep climbing for another year – before dropping for two years through to late 2024.
“Previously we had house prices finishing at zero. We’ve now got them going slightly negative to around -5.0 percent.”
New Zealand was seeing its largest increase in housing supply since the early 1960s, he said, at the same time that New Zealand’s inward migration bottomed out. That would lower demand and ultimately lower prices.
“Mortgage debt, relative to household income, is at very stretched levels. And that means any small increase in interest rates has a magnified impact on debt servicing. And debt servicing across households is also at a stretched level. So it means the new buyer, the marginal investor in a house, is taking on significant debt at interest rates that may be going up.”
Orr noted the Reserve Bank was consulting on debt-to-income limits that would protect homebuyers from the temptation of taking on too much debt. But those will come too late for many households.
Bank data indicates debt servicing levels are still low, at 45 percent of income for new buyers. As mortgage rates continue their rise to “neutral” levels, though, those homebuyers will find themselves spending 53 percent of their income on servicing their debt. That’s because, even though interest rates are lower than what their parents paid in the 1980s, the sums borrowed by this generation are many times higher.
A 0.25 percent increase to interest rates would equate to an extra $15 to $17 a week in repayments, for somebody with a smaller $500,000 mortgage. But for a homebuyer with a bigger $1m mortgage, that doubles to $30 to $35 extra a week.
With each additional 25 basis points, the increase in repayments is higher. That’s why rates rises will make such a difference to today’s borrowers, says one Auckland mortgage adviser. Combined with this week’s Level 4 lockdown slowing the economy, it puts them at greater risk than anyone.
The bank had been ready to raise interest rates this week; that was delayed by the lockdown. Orr said the intent to raise rates, and the willingness to hold off two more months, were reflections of the committee’s confidence, courage, and patience.
But he signalled that OCR hike would come later in the year – which means New Zealand is still likely to be the first country to raise rates.
“We run monetary policy for Aotearoa New Zealand, not for these other countries. New Zealand has been less impacted to date by Covid-19. That means our economy has been stronger, we’ve come up against capacity pressures sooner, and hence monetary conditions may need to move sooner. And so it’s a very strong and positive position to be in.”
– Adrian Orr, Reserve Bank
That will be a talking point at the high-profile annual Jackson Hole conference of central bankers, next week. There are signals that Federal Reserve Chair Jerome Powell could announce the US is also ready to start easing monetary support, in his speech to the symposium.
Orr was not concerned that New Zealand would be going it alone, while the rest of the world kept rates low.
“We run monetary policy for Aotearoa New Zealand, not for these other countries. New Zealand has been less impacted to date by Covid-19. That means our economy has been stronger, we’ve come up against capacity pressures sooner, and hence monetary conditions may need to move sooner. And so it’s a very strong and positive position to be in.”
The main reason other countries weren’t yet raising rates was that indicators like growth lagged six months behind New Zealand. “Likewise that goes for asset prices and house prices. We’ve seen asset prices rise globally, again in part due to low interest rates. But the magnitude and timing has really been as much related to supply constraints differences across countries.”
“There is a queue of countries talking about what we are talking about today. So we aren’t actually on our own. And most of those are small open economies like New Zealand.”
