Here are five things to know about the housing market this week
Kelvin Davidson (pictured above), CoreLogic’s chief economist, has delved into the complexities of today’s housing market, offering a nuanced view on recovery, affordability, and the ongoing challenges for both homeowners and renters.
A patchy recovery across the board
Davidson characterised the current upturn in the property market as inconsistent, with sales volumes in January of around 3,200 showing only a slight increase from the previous year.
“This property market upturn could prove to be underwhelming compared to previous cycles, and is likely to be variable from month to month and across regions too,” he wrote in an article for OneRoof.
Regions like Auckland, Hamilton, and Dunedin even witnessed a drop in sales.
“It wouldn’t be a surprise to see a bounce-back in February, but still, the ongoing pressures from high mortgage rates are pretty clear to see,” Davidson said.
The cost of buying a home is cheaper, but not cheap
While houses may be cheaper now than at their peak in early 2022, Davidson pointed out that affordability remains a pressing issue.
“Yes, if you look at measures such as the number of years it takes to save a deposit, property is less expensive than it was at the worst point in the first quarter of 2022, when it took 11.5 years, compared to 9.3 years now,” he said.
“But even so, I doubt many people are rushing around saying: ‘Look how cheap houses are!’
Indeed, another way to gauge affordability — mortgage payments as a percentage of gross average household income — still stands at 49%, nearly matching the record high of 52% recorded in late 2022.
“Clearly, we still have a significant affordability challenge in our housing market, which may be helped to some degree over the medium term by caps on debt-to-income ratios,” Davidson said. “Ultimately, however, it’s about building enough houses (of the right type/location) to meet demand.”
Rising rents add to the housing strain
The situation is no better for tenants, with rents on new leases climbing significantly over the past year. According to the most recent figures from Stats NZ, rents on new leases surged by 6.8% in the year leading up to January, a rate more than double the long-term average of 3.2%.
Davidson attributed the increase to factors like wage growth, high demand from net migration, and a dwindling supply of rental properties, further complicating the housing affordability crisis.
Debt-to-income ratios under scrutiny
High debt-to-income ratios are currently minimal, with only 6-7% of first home buyer loans exceeding a DTI of >6, and a very similar figure for investors at DTI >7, thanks to stringent mortgage rates. However, the introduction of caps on these ratios could influence future lending practices.
“These figures are way below the proposed 20% caps, with high mortgage rates currently doing the job of restraining the size of loans in relation to incomes,” Davidson said. “Indeed, the DTIs are all about the next cycle, and will only start to bind when mortgage rates drop again.”
He suggested that while these measures might slow portfolio growth for investors, they're crucial for the next cycle when mortgage rates are expected to drop.
Avoiding recession and its implications
Looking ahead, Davidson remains attentive to economic indicators that suggest New Zealand may have dodged a recession in the last quarter of the previous year.
“The NZAC hints that we might have avoided recession in the final quarter of last year, so it’ll be interesting to see how 2024 has started off,” the CoreLogic economist said. “Remember there are trade-offs here; a stronger economy should support employment and the housing market, but it’d also tend to keep inflation a bit higher for longer, sustaining the pressure on mortgage rates.”
Read the OneRoof article here.
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