Auckland and its housing market have been topics hot off the press for the past few years. Rents have skyrocketed, regulations have been tightened and most prominently, valuations seemed to have forgotten the meaning of the word ‘down’. After such a strong showing, the housing market finds itself at an interesting crossroads, with the road ahead, as always, unclear. Yet, the question seems too hard to resist – is it a good time to buy a house in Auckland?

After a period of constant growth, February saw average national house prices fall by one percent. Auckland house prices have followed a downward trend for the last three months and, to many, these are dominoes to a timely market correction. Why is a one percent blip perceived as a correction indicator?

To add some context, the median national house price five years ago was approximately NZD $500,000. To begin 2022, the same figure had crossed NZD $900,000. Growth in Auckland was much the same, with the median house price peaking in November 2021 at NZD $1,300,000. A common folly within any financial market is the naïve belief that what is happening now will continue to happen. Hence, perhaps the surprise is not that prices have fallen. Rather, it is that they have not risen further. 

Either way, prevailing economic conditions, both nationally and globally, indicate more of the same over the coming year. 

Traditionally, the Reserve Bank of New Zealand (RBNZ) tends to follow in the footsteps of the US Federal Reserve when it comes to economic outlook and interest rate changes. Inflation rose 7.9% in the United States over the past 12 months and has exceeded 5% in New Zealand for the first time since 2011. Consequently, both central banks have made clear an intention to control inflation via interest rate hikes. 

From my limited economic knowledge, low interest rates encourage market participants to borrow more, intending to stimulate additional spending and thus, local economic activity. Conversely, high interest rates correlate to high borrowing costs, incentivising us to save our money and seek fixed investments that can be trusted to deliver solid returns. The reduction of money in circulation due to high interest rates is what ultimately reduces inflation numbers. Circulatory in nature, yes, but what’s important is the ability to use the former to control the latter. Hence, given the emergence of a post-pandemic world, which has coincided with trailing upward inflation pressure globally, it is all but certain that interest rates are due for a reversal. 

Just over a month ago the RBNZ announced a rise in the official cash rate (OCR), lifting it to 1%, from 0.75%. The OCR, in general, determines the interest rate at which registered banks can lend to and borrow from a nation’s central bank. Subsequently, it serves as a benchmark for the rates at which banks are willing to transact with the holistic market.

Historical inflation in New Zealand since 2000

An OCR of 1% is historically low as far as New Zealand is concerned. But the journey to the bottom has been unavoidably catalysed by the Covid-19 pandemic, fuelling the need to incentivise internal economic activity in an effectively locked down global market.

What does this mean for house prices? Well, an increasing OCR correlates to higher mortgage rates and in turn, higher mortgage interest payments and decreased affordability. Affordability perhaps deserves an article of its own, but we’ll save that for another day. 

However, New Zealand banks have already begun to crack down on lending standards with more prominence compared to interest rate hikes. Low deposit mortgages have been reduced, alongside increasing restrictions from the RBNZ regarding lending with a high loan-to-value ratio (LVR). The LVR of a loan is the amount a bank lends relative to the value of the property offered as security. Inevitably, if valuations rise disproportionately to income, the task of securing a strong upfront deposit very quickly becomes a nightmare. 

Another piece to the lending puzzle is the Credit Contracts and Consumer Finance Act (CCCFA). The act has heavily increased the need for regulatory compliance and tight affordability assessments for banks both before and after lending. Although much more complex, it is important to factor in such relatively fresh changes when assessing the holistic lending market. With a central bank that is aiming to peg back house prices and a growing regulatory climate, banks themselves are limited. A slowdown in prices until 2023 seems to be the current consensus, however, how much importance should a slowdown be given? 

The merit of any investment can be boiled down to the likelihood of it failing. If the value of an investment were guaranteed to fall, no one would buy it of course. In a similar vein, if one were to invest in property, what are the odds of losing money? First and foremost, losing money on a house purchased in Auckland tomorrow would mean that prices have temporarily peaked and both demand and sale activity will consistently fall going forward. Although the former may prove to be true, it is hard to say the same for the latter. One can only imagine the demand for housing in Auckland will continue to rise further, particularly following a post-Covid immigratory resurrection. Sales volumes may indeed saturate over the next year, however, unless heavily burdened by regulation, long-term growth is inevitable. 

It is tough to predict an economic future because deep down we are all simply guessing. New Zealand’s housing market, following years of acceleration, could collapse – there’s no denying it. But the odds remain low. A period of saturation, provoked by underlying regulatory movement and overarching macroeconomic conditions, is perhaps a more likely outcome. It’s a tough game to lose for investors who plan to hold onto their properties for more than 15 years, at least. Economic conditions will change, and so will governments, reserve bank forecasts and mortgage lending rates. Amid this, waiting for the market to fall is a fool’s pastime. As they say – time in the market beats timing the market. 

The question begs: is it a good time to buy a house in Auckland? For all investors with time on their side, I have a question in return – is it ever a bad time?

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APRIL 4TH 2022 | ISSUE NO.31