THERE’S a new buzzword in New Zealand’s housing market – FOOP, the fear of overpaying.
After a year of frenzied price increases when the fear of missing out, or FOMO, prevailed, a credit squeeze and rising interest rates are now driving the market in the opposite direction. Some economists predict prices will sink as much as 10% this year.
“There is now a fear of overpaying among buyers,” says Jen Baird, chief executive at the Real Estate Institute of New Zealand (Reinz).
“As a shift of sentiment sets in and buyers are less willing, or unable, to pay the prices we saw toward the end of 2021, pressure will come on vendors to adjust their expectations to meet the market.”
Last year, New Zealand had one of the hottest housing markets in the world, with record-low borrowing costs and tight supply fuelling annual price gains of close to 30%.
But new government regulations have made it harder for people to get a loan, while the central bank has started to raise interest rates to rein in the fastest inflation in more than 30 years.
House sales in February were the lowest for the month since 2011, and prices are now 2.3% below their November peak, according to Reinz data.
Amendments to the Credit Contracts and Consumer Finance Act (CCCFA) have acted as a brake on lending since they were introduced on Dec 1.
The rules require lenders to undertake an affordability assessment on all credit applications including home loans, and the result has been a squeeze on credit.
“Ever since it came in late last year we’ve seen the amount of lending coming off, the amount of approvals coming off,” says Jarrod Kerr, chief economist at Kiwibank in Auckland. “It’s clearly caused a bit of a credit crunch.”
The proportion of home-loan applications being converted into actual loans fell to just 33% in January from 39% in November, according to data from Auckland-based credit bureau Centrix.
“People who were getting credit prior to December the first weren’t getting it after December the first,” says Centrix chief executive Keith McLaughlin.
He couldn’t recall the rate being as low as this, and “I’ve only been in the industry about 50 years,” he says.
The government has responded to calls from financial advisers and the real estate industry and begun a review into “unintended consequences” of the CCCFA.
Last week, Commerce Minister David Clark announced interim adjustments to remove some impediments to lending while the review runs its course.
Kiwibank’s Kerr welcomed the changes but doesn’t expect them to turn the tide, particularly as borrowing costs rise.
Two-year fixed mortgage rates have jumped to 4.3% from 2.6% a year ago. “The biggest driver is the lift in interest rates,” Kerr says. “We’ve seen some seismic shifts. It looks like mortgage rates are going to be 5% to 6% rather than the mid-4% you are seeing now.”
The Reserve Bank of New Zealand (RBNZ) has raised its official cash rate three times since October, taking the benchmark to 1% and projects it will rise above 3% over the coming 18 months.
ANZ Bank predicts the RBNZ will be forced to hike the official cash rate to 2% in the next two months alone to keep a lid on inflation, which is expected to surge above 7% this quarter.
Most economists forecast that house prices will fall, but the pace is a matter of debate. The RBNZ projects a 9% decrease in the two years through December 2023, Kiwibank is picking a 5% decline this year, while ANZ predicts a 10% drop in 2022.
Still, a 10% retreat would only take the market back to levels seen in mid-2021, when policy makers were adamant it was over-valued and unaffordable to many New Zealanders.
“We’d characterise our expectation as a soft landing,” says Wellington-based ANZ economist Miles Workman.
“Putting a floor under our outlook is the fact that the labour market is very tight. In the absence of a negative employment shock it’s hard to see a large number of forced sales driving prices down meaningfully.” — Bloomberg