An adjustment underway
Average house prices in Auckland soared 44% between May 2020 and November last year, near matching the 47% rise for all of the rest of New Zealand. So, the first thing to say is that the Covid-induced price boom is not something specific to Auckland.
Prices boomed on the back of the removal of LVRs for almost a year, record low borrowing costs and returns on simple assets like bank accounts and bonds, and a strong focus by people on improving their living environment with a better house or, as the boom developed, home renovations.
Once the price recovery got underway FOMO (fear of missing out) kicked in and there was a buying frenzy from August 2020 through to February 2021.
After that a number of investor buyers exited the market because of tax changes announced on March 23 2021. But the space was filled by first home buyers jumping back in anew and the pace of house price growth actually accelerated heading into the very end of 2021.
The talk of property shortages, an expected boom in returning Kiwi numbers, strong desires not to miss out on further price gains, and rising construction and land costs all contributed to a strength of demand well out of line with the state of the economy.
From before the middle of last year I began writing in terms of our country having entered the endgame for the house price boom. Now we have data in hand showing the boom is over, with prices falling over December and January. Key contributors to the retreat in prices include rising interest rates and sharply reduced credit access.
These things definitely matter. But the key factor which solidifies the ending of the boom is the ending of FOMO – the feeling that one has to buy virtually anything available in order to avoid regretting not having bought. The monthly survey of real estate agents which I run with REINZ showed a record low 21% in late-January said they could see buyers displaying FOMO. Back in April 2020 when we all anticipated price declines that reading was a much higher 35%. So, things have definitely changed.
What’s underway now is a retreat in prices from unsustainable levels – and this is where things get tricky. It is impossible to know how big a retreat there will be if we are all just guessing as to the true extent to which prices have gone beyond the pale.
But history tells us that when the labour market is strong house prices as a rule do not fall. That suggests that for virtually all of the decline in prices now underway, the prime cause will be a simple removal of an unrealistic situation. Hence the comment in the earlier article regarding a 10% fall in prices for Auckland simply taking things back to where they were in July when prices were 29% ahead of May 2020 levels. If prices decline 20%, we will be back to January last year when prices were 15% above May 2020 levels.
Looked at over a two year timeframe the falls underway at the moment are not all that significant or serious – especially given the high test interest rates banks used when making loans in recent times.
When might prices bottom out? It is too soon to start putting any firm timeframe on that, but a guess might be late this year. After that prices might be directionless for a long time. That will be good news for both vendors and buyers because of reduced transactional stress levels and calmer considerations of investment and mortgage decisions.