Property market not all doom and gloom
Wednesday, 02 November 2022
While the Reserve Bank is forecasting housing market doom and negative equity for some recent buyers, it is far from that with prudent decisions taken by banks a year ago.
Banks’ were stress testing mortgage applications at 7% - this has now risen to 8% - and the steep loan-to-value ratios were reintroduced meaning investors needed 40% deposits and home owners 20%.
Despite predictions of house prices slumping up to nearly 30% from peak to trough, there have been few forced sales so far and home owners are retaining their jobs and pay rises have been above the rates of inflation.
However, in its latest Financial Stability Report, the RBNZ has told banks, businesses and borrowers to brace for financial stress that will “test resilience”.
It says rising interest rates have reduced how much people can borrow to buy a home and the attractiveness of property investment.
“Our assessment is that house prices remain above their sustainable level, and that a further gradual decline will be positive for long-term financial stability,” says the RBNZ.
Due to falling house prices, a small number of recent buyers are in negative equity, meaning that the value of their mortgage is greater than the value of their property. As most experts point out this only affects property owners who want to sell, not those who retain their property investments and homes for the long-term.
The RBNZ says numbers in negative equity will continue to grow if prices continue to fall. “With widespread negative equity, banks will be more at risk of losses if people can no longer afford their mortgage, for example if they lose their job.”
Over the coming year, the bank says consumption is expected to slow as households face higher mortgage payments and a decline in wealth from falling house prices.
It then goes on to say results from its latest stress test show the country’s banks will be resilient to a severe scenario involving ongoing high inflation, further increases in mortgage rates, a significant rise in unemployment, and a large fall in house prices.
Falls in house values eased last month, tracking down -1.3% compared to -1.5% in September.
Any shoots of optimism are likely to be cut short by future increases to the Official Cash Rate (OCR), starting from 23 November, says property analytics company CoreLogic.
Property values continued to fall across the North Island’s four main centres, with Wellington yet again continuing to experience the weakest performance. Values across the broader capital area (including the Hutt and Porirua) fell a further -2.6% over the month, although the quarterly fall of -7.5% was a slight improvement on the three months to end of September (-8.5%). The annual fall has grown to -13.1%, extending the record for the region, first broken last month.
Lower Hutt, in particular, had large falls, down -3.1% over the month, -9.5% over the quarter and -16.8% over this time last year.
In Auckland, after a minor improvement in the quarterly rate of fall in September (to -4.0%), the rate deteriorated again in October, down -4.8%, illustrating continued uncertainty and weakness.
Despite a diverse city of property types, locations and prices, the relative weakness was evident everywhere, with values falling across the board, from -1.3% in both the North Shore (average value $1.52 million) and Franklin ($980,000) to -2.2% in Papakura ($1 million).
On the longer term annual measure, the smaller outer areas of Rodney, Papakura and Franklin have held up better, with average values in these areas remaining above the same time last year. Something that can’t be said for the more populous areas closer to the central city.
For the other main centres in the North Island, values are now lower than they were a year ago for the first time since this downturn began.
In the South Island, Christchurch and Dunedin had a drop in the rate of value falls, in Dunedin’s case back to 0.0%, from -1.7% in September. It’s too early to call the end-game for the southern-city however, with persistent monthly falls below -0.5% since February and the quarterly drop of -4.2% illustrating a more relevant trend of a market in retreat.
The monthly results were more mixed in the other main urban areas with mini-bounces in value occurring in both Nelson and Gisborne after prior monthly falls.
Values remain down on the quarterly measure everywhere except Queenstown, but New Plymouth has shown similar resistance to the adventure capital of the world with values still 10% above the same time last year.
Meanwhile Nelson (-1.6%) and Whanganui (-1.3%) have joined Napier (-9.1%), Palmerston North (-7.8%) and Hastings (-4.8%) as main urban areas where the average property value is now below the same time last year.
CoreLogic research head, Nick Goodall says the biggest constraint on the housing market is affordability, with potential buyers stretched by both increasing mortgage interest rates and the more stringent serviceability test rates.
Stretched affordability is constraining the ability and willingness of all buyers to get or extend a mortgage, while property investors looking to grow their portfolio are also faced with tighter tenancy regulations alongside increasing costs and reducing rental growth, he says.
“This all leads to reduced demand and contributes to falling prices for our largest asset.”
Goodall says that it might not be too long before the RBNZ shifts away from its focus on containing inflation, and also consider more deeply the impact of tightening monetary policy on the economy, employment and property values.
“For now, the impact has been manageable and limited, but with each OCR hike comes a heightened risk of a deeper and longer recession and with it growing unemployment and financial stress.”
He says while the RBNZ has acknowledged the banks are well capitalised and have shown a willingness to fight hard on rates and cashbacks, the competition has appeared to recede more recently, with some turning an eye to favourable buyers who may remain more active than other groups - first home buyers.
The latest CoreLogic Buyer Classification data shows this group has managed a bit better than other buyer groups in the tightened environment, with 24% of sales going to them in September – their highest proportion since March 2022. Short-term uncertainty perhaps playing less of a part in their decision making than other buyers, particularly investors.
“Those investors could also well be looking at greater yield available elsewhere, especially as the residential property market remains surrounded by regulation, has reduced capital growth prospects and appears to return a stubbornly low yield”, says Goodall.