Corrective phase is underway

New Zealand’s residential property market is working its way through a corrective phase involving prices retreating from unsustainably high levels. The triggers for the correction are well known and have been discussed here since before the middle of last year when I wrote about the housing market price boom entering its endgame.

What’s contributing to the correction?

Higher interest rates are one trigger, but not the biggest one. Rising numbers of new builds are relevant – but not yet especially so. Net negative migration outflows of 4,000 people in the past year are also relevant, but not really important yet.

Instead, the main driver of the correction is a shock credit crunch brought on by three rule changes all occurring at the same time. Low deposit lending has been curtailed since November 1 by the Reserve Bank halving the proportion of banks’ new lending which can be done with less than a 20% deposit.

Some banks have also been experimenting with DTIs – debt to income ratios – in anticipation of the Reserve Bank officially requiring them to be applied plater this year.

Of greatest significance however have been the Credit Contracts and Consumer Finance Act changes effective from December 1.

As discussed here previously, many borrowers are now denied finance because banks can no longer take their word that they will cut back spending once they have to meet mortgage repayments.

The credit crunch has brought a turning in the housing market about half a year earlier than I thought was going to happen and the turning is very clear in many datasets. Of greatest importance is the monthly House Price Index produced by REINZ which shows that average NZ house prices fell by 1.5% in December and by another 1.1% in January.

Then there are results from my monthly survey of real estate agents alongside REINZ. My late-January survey showed only 21% of agents felt that buyers were displaying FOMO – fear of missing out. That reading was above 80% from August 2020 to February 21 and was 35% in April 2020 when we were in the first nationwide lockdown.

My latest survey for which full results have yet to be compiled shows FOMO is now being seen by only some 7% of agents. FOMO has all but disappeared – to be replaced by FOOP. This is fear of over-paying. People can see that prices are pulling back and becoming concerned that after buying their property might suffer a reduction in market value.

This is the point at which we perhaps need to inject some common sense.

Some people might think that if a person expects the price of a thing to fall, they will not buy it. But for housing things are different. Most people buy a house with the intention of owning it for a great number of years, perhaps raising a family or experiencing their retirement there.