Migration and the Silicon Valley Bank collapse

Two new interesting things of relevance to the NZ residential real estate market have happened over the past fortnight since my last column. First is the striking turnaround in net migration flows into New Zealand.

A year ago the country suffered a loss of 17,000 people as more of us were leaving than others were coming in. But now in the year to January the net flow has risen to a strong gain of 33,000. This is not as high as the net flows of over 50,000 achieved from 2014 – 2019 before the pandemic had its special impact. But it exceeds the average net inflow for the past two decades of 25,000 a year.

We have seen this sort of strong turnaround before and on each of the three occasions this has happened over the past three decades house prices have reacted upward relatively quickly. But on those past occasions interest rates were falling by amounts between 1% and 1.5% so there was an extra source of buyer demand.

This time around it is not likely that interest rates will fall 1% in the remainder of this year. But that is where we get to the second significant development of the past fortnight.

The collapse of Silicon Valley Bank

The bank's downfall, brought on by poor management of their liquid reserves exposing them to capital-draining losses from the Fed’s tightening policy, has raised expectations that the pace of rate rises is about to slow.

The markets have embraced this view because of a belief that worries about financial sector instability will cause the Fed. to deprioritise inflation fighting for a while. That might not alter the ultimate height to which interest rates go were it not for the depressing impact which the bank collapse is expected to have on business and consumer sentiment.

Falls in US wholesale interest rates of between 0.4% and 0.8% have placed downward pressure on NZ bank wholesale borrowing costs of between 0.2% and 0.3%. At this stage these falls merely reverse some rises which have happened since banks last undertook a round of mortgage rate cuts two months ago. So fresh mortgage rate cuts are not likely.

However, the altered interest rates outlook in popular discussion is going to encourage more people to back away from deep fears of rates going a lot higher here. This is likely to see a few more people start to enter the housing market as buyers.

Already the first home buyers are back in as seen in the results of my monthly surveys of mortgage brokers and real estate agents. But as noted here previously, it will be some time before investors step forward again given the special pressure they face from falling ability to deduct interest expenses from taxable rent income.

On a general basis buyers are likely for a few months longer to feel that time is on their side

But we are back in the end game again for the period of falling house prices and monthly data from REINZ show that when we adjust for seasonal factors the pace of price decline is slowing.

At some stage the growing queue of buyers waiting for the bottom and holding off until it feels “safe” to make a purchase will openly acknowledge the migration surge, altered interest rates outlook, and one more developing factor as well.

The number of collapsing builders and related companies is growing. New house construction is about to fall away substantially and awareness of the reduced pace of new supply growth will eventually occupy people’s minds. Some may be put off housing entirely because of business liquidations. But many potential buyers of new properties will switch to searching amongst the 28,000 existing properties listed for sale.

The general election later this year is likely to be seized on by many as an excuse for doing nothing.

But the clock for the end of the period of falling prices from December 2021 is ticking more loudly and could see a general flattening of the cycle near mid-year.

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