The housing market conundrum

Predicting the path of house prices in New Zealand is a bit like economists attempting to forecast future inflation, an interesting exercise but ultimately a futile one. That is not to throw ‘shade’ on economists but more an acknowledgement that it is a very challenging task and none of us have the benefit of a crystal ball.
What is now becoming apparent is the negative shift in sentiment from market commentators around the upward trajectory for prices of residential houses. It has gone from a moderating in price, to in some quarters a market crash just around the corner. To be clear, I sit in the former and not the latter camp but let’s look at the drivers.
There is no question that the three key drivers that have pushed the market higher over the last two years are disappearing. Most notably, historically low interest rates, easy access to credit and investor tax advantages.
Mortgage rates re-pricing is not a new story and we have around ~60% of all residential mortgages up for renewal in 2022. For many the pain of servicing debt at 2.50% to then around 4.00% is likely to be felt quickly. For new entrants to the market, accessing credit is becoming increasingly difficult with the banks scrutinizing household spending, in some cases at an itemized level. This impact is not limited to first home buyers as it affects those looking to ‘trade up’ and their ability to increase existing lending. We are also yet to see how the withdrawal of interest deductibility will impact property investors, but needless to say its not likely to be a positive driver, particularly when you consider the impact to cashflow.
If you throw in household debt to disposable income which is running at ~170%, then chances are you would have to be weary about entering the market, particularly as an investor.

Source: RBNZ

However, it is never that simple when it comes to housing. Many a commentator has been left looking foolish when predicting the demise of the housing market, remember prices were meant to plummet ~20% post the Covid outbreak.
I am reading only today that ‘It’s easier to sell a $5m property at the moment than a $2m one,’ all adding to the confusion of the overall picture. So, there is clearly capital to be put to work and maybe for those who aren’t so exposed to the three key risks I discussed above. Furthermore, there is evidence to suggest that post covid, we can re-open the immigration channel that many saw as a positive catalyst for house prices in the John Key era.
Household and business confidence can erode quicky for New Zealanders, particularly considering a lot our wealth is directly linked to the value of our houses. So why many see a storm coming in residential houses, my sense is its more likely to be a squall.