BNZ Economist Tony Alexander provides an enlightening piece on why a housing market goes into overdrive. While this is written with reference to the Auckland market, I can apply some of what to a more localised level. Alexander cites a rush of new investors entering the market, probably caused by three key things.
- A change a sentiment regarding New Zealand interest rates – away from expecting further rises beyond the 1% seen over 2014 toward decreases and many years of low rates.
- The “capitulation moment” – the point in an asset price cycle when those people who have been holding off and holding off, expecting prices to fall before buying lose faith in their view after being repeatedly wrong and jump in to make their purchase. They capitulate.
- The “FOMO effect” – or fear of missing out. Some people, generally non-traditional investors, got tired of feeling that they were missing out on seemingly easy money and started buying. Perhaps people in this last group, being quite inexperienced, started attending investment courses and the like.
To a degree, we’re seeing this with the ‘as is, where is’ market – there are a number of new types of purchasers in the market for damaged and uninsured properties.
“It is not the actual doing of a thing which FOMO acts upon, but getting rid of a feeling of regret from not doing the thing. In this way most critics of the property market are wrong when they say it is driven by greed. Instead, late in the cycle at least, prices get a last strong shot upward from people driven by a desire to avoid feeling in a year’s time the regret they feel now for not doing something they now think might be easy.”
Are these factors still at play in today’s market?
“The low interest rate expectations factor certainly is, to the point where the Reserve Bank is quite concerned about that way in which their cutting of interest rates to reflect inflation near zero is stimulating the market. This raises bank exposures should the unthinkable happen.”
“Capitulation of investors who have been holding off is probably still happening, though many are looking outside of Auckland to make their purchase, seeking better yields and smaller mortgages in markets where there is strong potential for a catch-up in prices after years of lagging behind Auckland.”
“But the third factor of inexperienced non-investors being driven by FOMO to buy anything has probably been killed off by the measures introduced to slow the Auckland housing market. These include the 30% minimum deposit and two year capital gains tax bright line test. This is a positive development because it is generally these people each cycle who end up being burnt when the pace of price gains slows down and the actual value of the property they signed up for off the plan is not what they thought.”
Has the Christchurch market peaked? In terms of price-rises, it probably peaked last year. At the moment we’re tracking at 2.3% capital growth YTD on last year’s median of $420,000. Nevertheless, the market remains active and in good heart. My inherent self-interest aside, there’s probably no better time to be buying and selling property!