The housing market is moving, at a sluggish pace

Guest Post by Tony Alexander

Last week saw the release by REINZ of their January data on real estate activity around the country. What the numbers tell us is that prices are still rising at an average pace of 0.5% a month however no acceleration in that pace is evident. Sales have pulled back recently after adjusting for seasonal factors and the best comment I could make is that their data and my own tell us that buyers still don’t feel they need to be in a hurry.

That feeling is likely to have been reinforced recently in response to some marginally stronger than expected employment data released recently causing one prominent forecasting group to predict two more rises in the official cash rate.

The widespread expectation through summer that the next policy change will be an easing doesn’t appear to have stimulated purchasing.

That said, people have overwhelmingly shifted to fixing their rolling over mortgage interest rate for one year or less. Talk of rates now potentially rising therefore will likely give cautious buyers more reason to take their time, and for the likes of first home buyers this is good news.

I can see from my monthly survey of real estate agents that there is no rush of investors coming into the market yet, though they are definitely showing interest. It looks like many are out and about looking but when they run the numbers things still don’t stack up.

Once interest rates fall perhaps by 1% and the already tightening rental market tightens even further because of the population surge, then investors are likely to step forward in far greater numbers. But probably not in the first half of this year.

Turning back to interest rates, is it in fact likely that a market-sapping extra tightening of monetary policy will occur?

I don’t believe so.

First, there are still many people yet to have their interest rates reset at and above 7%. That means there is extra restraint on household spending yet to hit the economy, business pricing power, and inflation.

Second, the Reserve Bank is already getting the strong downward pressure on household spending which it is seeking and the thing about monetary policy is that it operates with a lag. 

A policy change only has its true impact on inflation 18 months down the track.

The risk currently is that if the Reserve Bank were to raise the cash rate again, they would overly depress the economy and end up having to cut interest rates aggressively through 2025 and 2026. That sort of violent action is what central banks have been criticised for in the context of easing too much during the pandemic then having to tighten at the fastest pace we have ever seen in most countries.

Third, the employment data were slightly better than expected. But the jobs market lags what is happening in the overall economy, so it is not a good leading indicator of where inflation is headed. Also, the data have over the past four decades sometimes been strangely at variance with what other labour market indicators have been showing and that could easily be the case this time around.

Employers do not report the sort of strength which came through earlier this month in the Household Labour Force Survey and the Reserve Bank will be aware of that.

For now it seems reasonable to expect that in the first half of this year the residential real estate market will still be characterised by rising prices. But the pace is likely to be gradual. The second half of the year but especially 2025 will be more interesting as the strong factors I have repeatedly cited here come more visibly into play.

Those factors are booming migration, falling house construction, eventually falling interest rates, and tax changes bringing investors back.

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