Housing again flavour of the month

By | May 27, 2009

27 May 2009

Source: NZ Herald

Confidence in the housing market has improved in ASB’s quarterly survey, with six out of 10 respondents considering it a good time to buy.

But the bank’s chief economist, Nick Tuffley, said that while the market was showing signs of bottoming out, that was a far cry from saying it was about to take off again.

Many of those surveyed expect house prices to continue to fall. But that view became less emphatic over the three months of the survey, Tuffley said.

Expectations about interest rates, like interest rates themselves, plummeted last year but in the three months to April that moderated and by April itself responses were evenly split between those expecting rates to rise and those expecting further falls.

“The sharp spike in long-term fixed mortgage rates in late March no doubt swayed respondents’ views,” he said.

“The surge in fixed rates may have prompted prospective buyers to get off the sideline and act. That rush may have contributed to the surprising strength of house sales in April.”

But since then Reserve Bank data on mortgage approvals had subsided, suggesting some of that heat would cool.

Other indicators suggested that while it was still a buyer’s market, the pendulum was starting to swing back, Tuffley said.

The median number of days it takes to sell a property has fallen in recent months and at 42 days is not far from the long-run average of 38.

Likewise, the number of listings in Auckland – and anecdotally elsewhere – had shown a decline from very high levels to slightly above-average levels.

Tuffley said the main positive factors the market had going for it were low interest rates and an emerging rise in net immigration.

The net gain in migrants last month was 2200, the highest since January 2004. The last three months annualised would translate into a gain of 22,000, about twice the long-run average but half the previous peak in 2003.

But although early signs of stabilisation in the housing market were appearing, they would not necessarily translate into a noticeable recovery.

“Although prices have fallen over the past 18 months, they remain high relative to both incomes and rents. In other words, houses are now merely expensive instead of being really expensive,” he said.

Unemployment is expected to climb and the number of mortgagee sales with it. ASB forecasts the unemployment rate to rise from 5 per cent now towards 8 per cent by the end of next year.

Compared with the start of the last housing boom, around 2002, households are collectively carrying much more debt and have less room to increase it.

The banks are demanding more equity from borrowers.

Tuffley said buyers should bear in mind that house prices might continue to fall in the short term and over the next cycle were likely to deliver “a shadow” of the growth seen in the 2002 to 2007 boom.

“For investors any price gains would be best viewed as a bonus rather than a given. Cashflow, not paper gains, is ultimately what services mortgages.”

As for owner occupiers, the Reserve Bank in its May financial stability report noted that the recent boom had pushed house prices to nearly six times incomes, when the long-run average is less than four, and mortgage payments as a share of income to 40 per cent, when the long-run average is 30 per cent.

The subsequent fall in the housing market, about 10 per cent since the start of last year, has reduced the multiple of house prices to incomes, but it is still above five and well above its long-run level.

“We do need to see some rebalancing occur,” Tuffley said.

It might be that the house price side of that adjustment had largely run its course. But that might mean a longer period when house prices went sideways and incomes, gradually, improved.

“In real terms we are expect virtually nil growth [in house prices] over the next few years.”


ASB’s housing confidence survey

Net per cent of respondents who:
* Consider it a good time to buy

April: 46 per cent
Jan: 38 per cent

Net per cent of respondents who:
* Expect house prices to fall

April: 45 per cent
Jan: 51 per cent

Net per cent of respondents who:
* Expect interest rates to fall

April: 30 per cent
Jan: 49 per cent