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Market Steps Back, But Far From Full Retreat

The sobering news around house sales continues, but Sally Lindsay discovers properties are still moving.

By: Sally Lindsay

1 January 2023

Auckland’s housing market sales in November were the lowest in 12 years while stock levels for Barfoot & Thompson, the city’s biggest real estate agency, hit an 11-year high.

Despite this, Barfoot & Thompson managing director Peter Thompson says the market is far from being in full retreat in the face of rising mortgage interest rates, the return of inflation and low consumer economic confidence.

The agency sold 700 properties in November, up from 627 in October, but down from 1,182 or -41 per cent compared to November 2021. The 700 homes sold in the month was the highest for the past six months.

“Property is selling, albeit at a level lower than at the same time in 2021. What it demonstrates is vendors and buyers are reaching an agreement as to where prices are at,” says Thompson.

New listings for the month at 1,577 were up from 1,371 in September but down significantly on those for November in the past few years. At the end of last month the agency had 5,052 homes on its books, up 28 per cent on November 2021 and the highest number for any month for 11 years.

The median sales price at $1,065,000 eased down 2.2 per cent on the average median price over the past three months. November’s median price is down 14.1 per cent on the peak median price recorded in November 2021, but has remained stable for the past three months, says Thompson.

The average price for the month, at $1,153,795, which is more influenced by sales in the top price categories, tells a different story, he says.

November’s average sales price is down only 9.8 per cent on the peak average price, recorded in December 2021. November’s average price rose over that for October by 1.5 per cent.

‘Vendors and buyers are reaching an agreement as to where prices are at’ PETER THOMPSON

TOUGH CONDITIONS

December’s CoreLogic Buyer Classification data shows continued struggles for mortgaged multiple property owners (MPOs), but a relatively high percentage share of purchases by their cash cousins.

Broken down by size, it’s the smaller players that drove up mortgaged MPOs’ overall market share in the initial post-Covid burst, but they’re also now accounting for the weakness.

CoreLogic’s data shows a 20.9 per cent market share of purchases for mortgaged investors and on top of that it’s a low share in a quiet market. However, existing investors aren’t selling to any great degree and new builds are still a target for investors, given favourable deposit and tax treatment.

On the flipside, cash MPOs have been enjoying conditions, with their market share currently hovering at 14.6 per cent, a relatively high level. CoreLogic says some of these purchases won’t be cash per se, rather they’re likely to have involved the reshuffling (increasing) of debt on other properties in a portfolio in order to free up the equity for the latest purchase.

The country’s biggest trading bank is now forecasting a bumpy landing for housing with a 22 per cent peak-to- trough drop in prices, but values remaining 14 per cent above their pre-pandemic level.

However, the ANZ says when house prices are deflated by wages, to get a measure of the real price change, that 22 per cent decline becomes a 32 per cent drop, and the level of wage-adjusted prices ends up about 10 per cent below that prevailing just before the pandemic.

The bank is also forecasting the OCR to peak at 5.75 per cent; its previous forecast peak was 5 per cent. That means a higher mortgage rate outlook and more downward pressure on house prices than otherwise.

ANZ chief economist Sharon Zollner says as prices are already down about 12 per cent it means the bumpy landing is just over half way through the bank’s forecast. “We see the level of house prices finding a floor in the third quarter this year, not long after interest rates stop rising, with only modest growth thereafter.”

‘That’s not to say higher rates aren’t hurting – they are hurting some households a lot’ SHARON ZOLLNER

INCOME GROWTH

By the bank’s estimates, there is a “buffer” before the aggregate household debt-servicing burden breaks previous highs – not least because income growth
is so strong.

“That’s not to say higher rates aren’t hurting – they are hurting some households a lot,” says Zollner.

“It does suggest, based on our OCR call and a couple of assumptions around the likely pace of household income and credit growth from here, the burden isn’t
heading to unprecedented levels. And it shouldn’t need to – the housing market is in full retreat, a very different scenario to 2007.

“But devoting an increasing share of growing income to debt servicing is one thing; facing an increasing servicing burden when income contracts sharply is a completely different kettle of fish,” she says.

“Insofar as the most pessimistic house price scenario goes, this is it. High unemployment could be triggered by a policy mistake (ie over-tightening by central banks, exposing financial market vulnerabilities and/or spooking households too much), geopolitical events, a natural disaster, pandemic, a loss of central bank credibility, or
something else. These are what we call low-probability, high-impact risks. They don’t factor into our central outlook, but they are important to keep an eye on,
because if they materialise they could flip the outlook on its head.”

Auckland’s average weekly rent rose by just half a per cent during the third quarter of last year, reaching $626.08 at the end of September, up $3.64 on the
average at the end of June.

Year-on-year, to the end of September the Auckland average of $626.08 a week is up $20 (3.35 per cent) from last year’s $605.77 for the 16,500 properties managed by Barfoot & Thompson.

Director Kiri Barfoot says it is a slower rate of increase than recorded in the previous two quarters.

“However, looking over the past year, the city continues to follow its well-established pattern of rents rising by about 3 per cent annually.”

What is particularly visible in the data are the differences in price movements across the city.

Rents have been steady in the central suburbs and fringes of the city, with increases between 0.02 and 2.23 per cent. The lowest average increase was just 11 cents a week for a central city apartment, for example.

At the same time rents for homes further to the east and south are increasing near and above 4 per cent. In Franklin and rural Manukau the year-on-year rent rise reached 6.49 per cent, about $30 more a week on average.

“While these areas are still among some of the lowest priced in the region, such pronounced shifts could be a sign they are catching up, as people are attracted to these traditionally more affordable areas,” says Barfoot.

INVESTORS DOING WELL

Investors are still doing well when they sell their properties.

Although their share of resales dropped in the September quarter to 97.1 per cent from 97.6 per cent in the June quarter, the median sale was at a gross profit of $337,750, compared to $324,000 for owner-occupiers, CoreLogic’s latest Pain & Gain report shows.

Across the country the number of all property types selling for a profit has fallen to its lowest level since the end of 2020, while the median profit has dropped $109,000 for houses and $158,000 for apartments.

In the three months to September 96.8 per cent of property resales made a gross profit, down from the peak of 99.3 per cent at the end of last year and the lowest level since the fourth quarter of 2020 when they were at 96.3 per cent.

While the drop may be significant, CoreLogic data shows through 2000 and 2001 it was common for the profit share to be as low as 75 per cent and in the
post-GFC period that figure was often as low as 80 per cent. The latest figures are still well above those marks.

In dollar terms, the median resale profit for houses dropped to $331,000 from the peak of $440,000 at the end of last year.

Profit-making resales for houses fell below 97.5 per cent, the lowest proportion since the third quarter of 2020 but still well above the pre-Covid average.

However, profit-making resales for apartments are steadily declining, from a peak of about 94-95 per cent in 2021 to 82.4 per cent, the lowest since the first quarter of 2015.

The median resale profit for houses was $330,000, and apartments achieved $158,000.

In terms of losses, houses saw a median of -$40,000 and apartments -$43,000 (although this figure only covers a relatively small number of apartment transactions).

The bulk of the loss-making apartment resales were in Auckland, which is unsurprising given the city has the most apartment stock. Wellington also had a handful of loss-making apartment resales.

WHAT’S DRIVING HOUSE PRICES?

HOUSE PRICES: DOWN

After peaking at $992,832 in January last year, the national average asking price fell below $900,000 in November for the first time since mid-2021, realestate.co.nz data shows. This is a drop of about $10,000 per month. The national average asking price was also down by -8.4 per cent, or $82,083, in November last year compared to November 2021.

OCR: UP

The Reserve Bank’s official cash rate sits at 4.25 per cent with the Reserve Bank saying more rises are to come.

INTEREST RATES: UP

The BNZ only added 45 basis points to its floating rate. The hike is far less than both the Reserve Bank’s OCR rate rise of 75 basis points, and its rivals. This leaves BNZ’s floating rate now even below the equivalent Kiwibank rate. For every fixed term, BNZ’s offers are equal or lower than each of their big Aussie bank rivals.

BUILDING CONSENTS: UP

The number of new dwellings consented across the country fell 11 per cent in October for a total of 50,252 consents over the past year. However, that was an increase of 5.1 per cent from the year ended October 2021.

MORTGAGE APPROVALS: DOWN

A total of 15,118 mortgages were issued in October, down 27.7 per cent from October 2021 and a record low for an October month since 2013. The average value of new mortgage commitments across all borrower types rose, following four consecutive monthly decreases, up 4.9 per cent from $352,243 in September to $369,626 in October. Investors borrowed $909 million, up from $809 million in September and $1.306 billion in October 2021. First home buyers were loaned $1.219 billion, up from $1.064 billion in September, and owner- occupiers borrowed $3.379 billion, up from $3.207 billion in September.

RENTS: UP

Stats NZ stock measure shows rents rose 0.3 per cent in October compared with September and were up 4.1 per cent for the year.

MIGRATION: UP

The government has opened up the Skilled Migrant Category, but with different criteria. The points-based system has been closed since 2020. Until November 9, the government selected applications at the existing threshold of 160 points and after this selection points increased to 180. The visa grants residence to incoming migrants, giving them the right to stay in New Zealand indefinitely.

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