Downward pressure - has the market turned?
Will the credit environment – lending rules, banks’ attitudes, rising interest rates, LVRs and possible debt-to-income ratios – push down prices? Sally Lindsay investigates.
1 March 2022
Simple economics have changed quite suddenly in the housing market and players across the spectrum are picking price rises of just 2-4% this year after a massive 29% surge last year.
This spectacular growth is unlikely to be seen again for another generation, says David Nagel, QV general manager.
“With interest rates rising, tightening credit conditions and supply pressures easing, the property market is returning to a more sustainable level of growth,” he says.
The sharp slowdown in growth is biting. There are fewer buyers in the market, listings are rising and new builds are coming unstuck as buyers will no longer pay what developers want because access to money is fraught and LVRs are biting.
An adjustment to house prices is underway, says Tony Alexander, former BNZ chief economist and now an independent. “Vendors still holding out for the big prices are having to capitulate to lower offers from buyers.” Barfoot & Thompson, one of the biggest auctioneers in the country, has sold less than half the properties for auction under the hammer this year, and the numbers are waning.
Open home attendance is also falling as a flood of listings hit the market. Vendors are not getting as many multi-offers as last year and properties sitting on the market are being relisted with a price.
The growth rate in property values slowed to 6.1% over the three months to January, down from 7.8% in the three months to December, QV’s data show.
“Never in recent times have we had so much external intervention in a housing market and yet, in the midst of a global pandemic, house price growth hit record levels,” says Nagel.
Although QV says if the gates were to open to new migrants and returning Kiwis, some strength could return to the market as housing demand increases.
It’s a view CoreLogic’s chief property economist disagrees with. “There has been no migration for the past couple of years and house prices still went up,” says Kelvin Davidson.
“There were also other elements pushing house prices up and one was the low level of listings. That has ended.”
Loan-to-value ratios (LVRs) have also tightened with deposit requirements lifting to 20% for home owners and 40% for investors and banks have been forced to limit high LVR lending to just 10% of all mortgages.
Debt-to-income levels are also being used internally by banks for mortgage lending decisions, even though the Reserve Bank has not formally introduced them, and that is cutting back on the level of lending banks are prepared to offer.
From CoreLogic’s point of view LVRs would need to be loosened by the Reserve Bank before house price values start rising again.
Davidson believes the hoops borrowers are being forced to jump through means the lending environment is probably set in stone for the rest of the year.
While most investors are sitting on the fence about buying more property and there has not been the predicted great sell-off after the government decided to phase out the tax deductibility of mortgage interest, their gross rental returns are dropping.
Investors are holding up in a housing market that has passed its peak, but returns are now sitting at a paltry 2.5%. Davidson says when everything else is factored in cash flow is probably negative for many investors. “For a long period rental housing has been cash-flow positive, but this has changed and quite suddenly. This has left opportunities for cash buyers.”
Property Investors’ Federation chief executive Sharon Cullwick says many investors are still not quite aware of what the tax changes will mean and the penny won’t drop until they fill out their tax returns later this month and see the effects of the rolling back of mortgage interest tax deductibility. She is predicting many will get a surprise and it is only going to get more difficult each year until 2025 when the government expects to pocket $800 million from landlords.
The biggest block to house prices rising exponentially will be access to money and the big trading banks’ attitude to the Credit Contracts and Consumer Finance Act (CCCFA) changes.
A mortgage is not just getting more expensive as interest rates rise. A mortgage is now hard to get full stop, says Jarrod Kerr, Kiwibank’s chief economist.
The new CCCFA rules, designed to stop predatory lending to vulnerable people, have been applied by banks. They are having to work to prescriptive rules on mortgage applicants’ expenses and discretionary spending – asking the same questions and requesting verification whether it’s for a $1,000 credit card or a $1 million mortgage.
All customers are subject to this whether they have been with the bank for 30 years or are new.
ASB chief executive Vittoria Shortt says since the new rules came into effect on December 1 the bank has already turned away about 7% of home loan customers because of the new requirements.
But Alexander says what the ASB hasn’t said is it is lending more, but less per mortgage than a customer is usually Mortgage broking company adviceHQ founder David Green has seen this first hand.
He recently had a client who had bank mortgage pre-approval to sell and buy a property, but when he applied for an extension the level of funding was reduced. Green reviewed his application under the same CCCFA rules as the bank and secured the client a third more funding at a different bank. “It is the difference between people approaching the bank directly or using a mortgage broker.”
Green says he has seen a significant increase in clients. Most are not satisfied with what they are being offered by banks, or the level of their pre-approved funding has been dropped and it is putting them in financial difficulty.
“While there have been anecdotal stories of the impact the CCCFA rules are having on house values, the real effects won’t be seen until this month and April as many settlements at the beginning of the year were for houses sold before the changes.
Review Set To Drag
For the short-term, the credit crunch will be at its worst, says Alexander. “The government struggles to get what the changes mean. It ignored advice from the banks on the consequences of the changes before they were enacted.”
He suspects a review of the CCCFA changes announced in January by Commerce and Consumer Affairs Minister David Clark will be dragged out, although a final report is expected next month.
Alexander and Davidson say there is some scope for loosening the new rules and for banks to learn how to handle them, but it will take time and depend on whether the government has the fortitude to admit it should have listened.
“The CCCFA changes, higher interest rates and the debt-toincome levels (DTIs) the banks are experimenting with are also having a definite impact on house prices,” says Alexander. Overall it feeds into confirmation the housing boom is over.
Professionals Lower Hutt managing director John Ross says the effect of lending changes has been drastic for a handful of clients selling houses in the district, who have already had to drop prices by up to $150,000 to get a sale and new build projects will not be on the same scale as last year.
“Buyers are not prepared to pay the prices being demanded by developers when accessing mortgage funding has become such a major issue.”
Alexander says new builds will come unstuck when listings for existing houses increase.
“The numbers for new builds will not stack up for buyers. Some developers will have no choice but to either abandon plans for their projects or shut them down. Developers and builders are going to face a fraught environment for the next two years.”
The fact fear of missing out (FOMO) has left the market makes him confident in saying house prices will be flat to slightly down this year. “If it was still in play house prices would rise about 5%.”
At a very simple level, in the property market interest rates are about controlling the lending flow, says Mortgage Lab.
If money is a little too easy to borrow (often causing inflation), the Reserve Bank lifts the official cash rate (OCR). Inflation is now far above the Reserve Bank’s OCR remit and increasing. The OCR is likely to increase a few times this year. The bank has indicated it is on target to lift the OCR to 2.6%. The previous OCR peak was 3.5% in 2014-2015.
Banks factored these lifts into their interest rate increases early and they have gone up more than the OCR.
At the beginning of last year the average two-year rate for new borrowers was 3.49%. Reserve Bank data show by November that had risen to 4.65%, and has now eased back a bit.
About $215 billion in mortgages will be rolled over this year at sharply higher interest rates. For every +25 basis points rate rise there is an extra annual interest cost of $537 million. If there are two or three +25 basis points rate rises it could cost mortgage borrowers up to $800 million. The pace of increase in home loan rates has been described at the fastest in 15 years.
Alexander is predicting the oneyear mortgage interest rate will finish the year at just under 5% and rise to about 5.5% by the middle of next year “Other term rates will probably not increase significantly as they shot up last year when the Reserve Bank started increasing the OCR,” he says.
Changes coming in August to planning rules for tier one councils – Auckland, Hamilton, Tauranga, Wellington, and Christchurch – mean three homes up to three storeys will be able to be built on most sites without the need for resource consent.
Although the rare bipartisan agreement between National and Labour is touted as “game changing” by many, with the potential to deliver more than 81,000 homes over the next five to eight years, Auckland-based Simon O’Connor, Sentinel Planning’s managing director, says there is the danger there won’t be enough capacity left in existing infrastructure.
Many commentators doubt it will make much difference as councils will try to fight the new rules, being fearful that they will end up with “Soviet-style” blocks of slum-type apartments in their cities.
Despite the travails of the sector, property is still the world’s best wealth creator.
Two-thirds of global net worth is stored in real estate.
The value of residential real estate amounted to almost half of global net worth last year, while corporate and government buildings and land accounted for an additional 20%.
Other fixed assets make up only one-fifth of real assets or net worth