Our Take - An encouraging sign from the housing market

Key points

• Amongst the soft REINZ housing market data in July there were some encouraging signs. Auckland posted a second consecutive, and decent monthly increase, in sales activity. Sales activity tends to lead prices.
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• National house price appreciation sputtered along at around 1.5% yoy, but as has been the case of late the underlying regional story is mixed.
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• As we highlighted in our property insight note we are cautiously optimistic about the outlook for the housing market. NZ still faces a severe shortage of affordable homes, which is slowly being addressed. Moreover, policy uncertainty has abated, and mortgage rates are heading lower.

The housing market remains a shell of its former self according to REINZ’s July housing market report, but there were some encouraging signs among the data too. Housing price appreciation continues to soften and the median number of days to sell at a national level continue to trend higher – suggesting there is less anxiety among buyers to dive into housing. National house price appreciation sputtered along at 1.5% yoy in July, a rate it has been near since April. A year ago, House price appreciation was closer to 5% yoy. The median number of days to sell were three days higher than last July at 40 days – and this compares to 31 days back in 2016. Regional disparities remain, with Auckland dragging down the national level price data. However, sales around the country were generally stronger, particularly in Auckland, which has seen two consecutive monthly increases in seasonally adjusted sales. This is an encouraging sign as housing market activity tends to lead house price movements. We don’t know if this is a true turning point in the Auckland market, but investors now have less policy uncertainty to contend with. Moreover, mortgage rates have drifted lower since the start of the year and last week’s 50-point OCR cut and the signalled desire to do more by the RBNZ is likely to keep rates heading lower.

Looking at a regional level Auckland continues to stand out with moderate price falls, but activity was a little stronger. Auckland experienced a 3.4% yoy fall in prices in July, up from the low of a 4.3% yoy fall recorded back in April. As we recently outlined in our latest property insight note we expect the current modest falls in Auckland house prices to continue heading into 2020, before a modest recovery ensues. We may have already hit the nadir in the rate of price declines in the City of Sails. At the time we put together our property note we hadn’t expected the OCR to be down at 1% this soon. The 1,894 sales recorded by REINZ for Auckland were 6.5% higher than a year ago and were the largest number for a July month since 2016. Seasonally adjusted, we have seen two consecutive months of a decent lift in sales activity. Only time will tell if this is the beginning of a recovery.

A lift in sales activity in July was seen in a number of regions around the country. However, this was far from universal. Otago’s housing market for instance is showing signs of fatigue. Sales were down 6% mom in July, median days to sell at 34 is 5 days higher than last July, and house price appreciation has slowed to around 8% yoy – down from 13% yoy seen as recently as January. We know the foreign buyer ban has hit the Otago lakes district fairly hard. The standout parts of the country still include Manawatū/Whanganui, the Hawkes’ Bay and Southland.

Our general outlook for the housing market remains unchanged. Across the nation, prices will rise a little this year. And we expect aggregated price gains to pick up towards 5-6% into 2021. It’s a mixed picture, as it was this time last year. And as it will still be this time next year. What we worry about, is the potential restriction in mortgage credit growth into 2020, as the banks prepare to load more capital.

Policy Implications

We wait to see if last week’s surprise 50bp cut by the RBNZ to the OCR puts a fire under the housing market. A lift in activity in recent months may suggest the lifting of the shackles of policy uncertainty (e.g. GGT) may have enticed some back into the market. Financial stability concerns have taken a backseat with credit growth contained. The RBNZ is likely to take a close look at macroprudential policy settings and potentially loosening them further in the coming months.

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