The Lowdown on the slowdown
Strong arguments can be made for why the OCR might not increase much, if at all, in the future. Inflation is low and technology is reducing firms’ pricing power.
The world is struggling to generate growth strong enough to absorb spare capacity and in many places, key pro-cyclical sectors such as housing are now “rolling over”.
We live in a world beset by low inflation and New Zealand is not immune to these forces. Additionally, the prudential policy is increasingly doing the job the OCR used to do.
The OCR is only one factor that shapes borrowing rates and they could change for other reasons, such as bank funding costs. But the OCR is still a material influence and while we can debate whether or not it will lift from current low levels, what is increasingly clear is that it is not going to move by much in any case.
Regional house prices
We estimate the nationwide REINZ House Price Index fell a further 0.4% m/m (seasonally adjusted – sa) in July, which was the third consecutive fall and the fourth fall in the past five months.
It saw annual growth fall to just 1.1% y/y, which is the lowest since mid-2011 (the chart is presented in 3-month average terms).
Auckland continues to bear the brunt of the softening, with prices falling 0.4% m/m (sa) in June, to be down 4% since January.
Across the rest of the country, prices dipped 0.1% in July (sa) and are still up 7.5% y/y.
Of the major centres, Wellington is recording the strongest annual price growth of 10% y/y, although this is well off its highs.
Sales and median days to sell
How long it takes to sell a house is also an indicator of the strength of the market, encompassing both demand and supply-side considerations. Larger cities tend to see houses sell more quickly, but deviations in a region from its average provide an indicator of the heat in a market at any given time.
Nationally, the median time to sell a house rose by 0.2 days to 35.9 days (sa) in July. While that remains below its historical average (39.6 days), it is up from less than 31 days 12 months prior. The median time to sell a property is below historical averages.
REINZ house sales volume
Sales volumes and prices tend to be closely correlated, although tight dwelling supply can complicate the relationship. Seasonally adjusted sales volumes tumbled 9.3% m/m in July, which followed a 6.5% m/m drop in June.
In fact, sales volumes are down 24% y/y, and are at their lowest monthly level since November 2011.
Again, Auckland is underperforming, with turnover down over 31% y/y, although every region is now experiencing negative annual turnover growth. Excluding Auckland, sales volumes fell 10% m/m (sa) in July and are down 21% y/y.
Migration flows to and from New Zealand are one of the major drivers of housing market cycles. The early-1970s, mid-1990s, mid-2000s and most recent house price booms have all coincided with large net migration inflows.
On a three-month annualised basis, net permanent and long-term migration held at around 72k in July. This is near record levels and over 1½% of the resident population. Although departures have started trending higher off low levels, arrivals continue to lift strongly.
While we are perhaps reaching a “peak”, net inflows are expected to remain strong. New Zealand’s labour market continues to perform well (even relative to an improving Australian market), and in a world of fractured international politics (Brexit, US political uncertainty), there’ll be no shortage of people with a desire to move to New Zealand.
Annual change in investor lending by LVR
New lending to investors is well off its mid-2016 peak. In fact, it has effectively halved, dropping 49% y/y in June. Investors’ share of overall new lending, at less than 24%, is well down from a peak of 38% in June 2016.
This is no doubt related to the latest round of RBNZ LVR restrictions, which officially came into force on 1 October 2016, but could also reflect uncertainty around the upcoming election and the housing market outlook in general.
Related to the LVR restrictions, a larger share of new lending is on less-risky terms. In June, the share of total investor lending done at LVRs of less than 70% was 90%. That is a far greater share than in late-2014 when it was less than half.
Regional house prices to income
One commonly cited measure of housing affordability is the ratio of average house prices to incomes. It is a standard measure used internationally to compare housing affordability across countries. It isn’t perfect; it does not take into account things like average housing size and quality, interest rates, and financial liberalisation.
Therefore, it is really only a partial gauge as some of these factors mean that it is logical for this ratio to have risen over time.
Nationally, the ratio has been broadly stable at just below 6 times income for the past 12 months. Auckland, however, has seen its ratio fall from a high of just under 9 times to an estimated 8.5 times in the June quarter.
That is the lowest level in 18 months (although still extremely high) and reflects recent house price falls. Elsewhere, the ratio has continued to rise, and at 5.1 times, is now a little over where it peaked in 2007.
Regional mortgage payments to income
Another, arguably more comprehensive, measure of housing affordability is to look at it through the lens of debt serviceability, as this also takes into account interest rates, which are an important driver of housing market cycles.
We estimate that for a purchaser of a median priced home (20% deposit), the average mortgage payment to income nationally is around 34% at the moment.
However, once again there are stark regional differences, with the average mortgage payment to income in Auckland around 49% for new purchasers. While off its highs, it is still broadly on par with the highs reached in 2007, despite mortgage rates being near historic lows currently.
It highlights how sensitive some recent home-buyers in Auckland would be to even a small lift in interest rates.
Auckland house prices are falling and momentum across the rest of New Zealand is easing up. There are still strong legs of support from natural population growth and migration.
However, the interest rate cycle has turned, credit is harder to come by, affordability constraints have pressured the Auckland market, and LVR restrictions have knocked the investor market.
That’s a powerful combination that is not set to ease up anytime soon. We expect the market to remain subdued into 2018.
We use ten gauges to assess the state of the property market and look for signs that changes are in the wind.
AFFORDABILITY. For new entrants into the housing market, we measure affordability using the ratio of house prices to income (adjusted for interest rates) and mortgage payments as a proportion of income.
SERVICEABILITY / INDEBTEDNESS. For existing homeowners, serviceability relates to interest payments to income, while indebtedness is measured as the level of debt relative to income.
INTEREST RATES. Interest rates affect both the affordability of new houses and the serviceability of debt.
MIGRATION. A key source of demand for housing.
SUPPLY-DEMAND BALANCE. We use dwelling consents issuance to proxy growth in supply. Demand is derived via the natural growth rate in the population, net migration, and the average household size.
CONSENTS AND HOUSE SALES. These are key gauges of activity in the property market.
LIQUIDITY. We look at growth in private sector credit relative to GDP to assess the availability of credit in supporting the property market.
GLOBALISATION. We look at relative property price movements between New Zealand, the US, the UK, and Australia, in recognition of the important role that global factors play in New Zealand’s property cycle.
HOUSING SUPPLY. We look at the supply of housing listed on the market, recorded as the number of months needed to clear the housing stock. A high figure indicates that buyers have the upper hand.
HOUSE PRICES TO RENTS. We look at median prices to rents as an indicator of relative affordability.
How to select the best mortgage term & rate?
The 1-year rate remains the lowest point on the curve. We have maintained for some time now that it is also the “sweet spot” on the curve given the likelihood of the OCR being on hold for at least the rest of the year.
If we think in break even terms, you’d have to expect the 1-year rate to rise by at least 0.47%pts (from 4.55% to 5.02%) over the next year in order for it to be cheaper fixing for 2 years at 4.78% than rolling two 1-year terms. That could happen, but it is unlikely if the OCR is still at 1.75% this time next year, as we expect.
However, we do need to acknowledge that some people value certainty. Accordingly, with just 0.23%pts separating 1 and 2 years rates (for borrowers with 20%+ equity), and all fixed rates below 6%, some borrowers may wish to spread their borrowing over a number of longer terms.
That makes sense from a risk-management perspective, and having a number of tranches rolling over more regularly does smooth interest expenses. We’re also mindful that we do still expect rates to ultimately rise rather than fall – even if we think the rise will occur later rather than sooner.
That may leave some borrowers feeling a bit nervous and make them more inclined to select a longer term. These are all valid considerations, even if, as noted, a pure cost emphasis would shift the focus towards the 1 year.
Source: ANZ Bank
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