Bernard Hickey Opinion - 10 Reasons why the March housing surge was an 'Indian Summer'

The weather as I write this (driving hail here in Auckland) suggests winter has arrived with a vengeance, but an initial look at a closely watched indicator of house sales out today appears to show the sun returning to the market that drives the New Zealand economy.

Real Estate Institute of New Zealand (REINZ) figures show housing sales volumes jumped 28% to 6,694 in March from February, which was the best monthly sales figure since the market peak for prices in November 2007. The median house price rose to NZ$335,000 from NZ$330,000.

REINZ President Mike Elford struggled manfully to contain himself, saying the previous three months volumes had been light and the coming winter months would also be subdued, but the restraint didn’t last. “I’m hearing that March was the best month for some time with properties available for sale and genuine buyers and sellers ready to meet market prices,” Elford said.

“The indications are that there is renewed interest in the real estate market stimulated by the drop in interest rates and the affordability of properties,” he said. “We’re seeing investors back too, moving away from equities and returning to controlled investments such as real estate.”

So has the market bottomed and can all property investors and home owners breathe a sigh of relief that the worst is over?

Here’s 10 reasons why I think the worst is yet to come for prices and that this is an ‘Indian Summer’ of a recovery rather than the real thing.

1. Unemployment is expected to rise over 8%. The last set of jobs figures showed our unemployment rate at 4.6% and that employment actually rose in the December quarter. This won’t last. Business confidence surveys of employment intentions show a wave of layoffs is approaching. Bankers and real estate agents know that the threat of job losses and actual job losses are what really deter home buyers and bank lending managers.

2. Credit criteria is tightening. The easy 90-95% loan to value ratios from the past are gone. For example, Kiwibank became the first bank today to cut its 2 year fixed mortgage rate since Alan Bollard’s warning about long term rates last week. But the catch was that deposits had to be 20% or greater. A couple earning NZ$100,000 who have a NZ$40,000 deposit can now only buy a NZ$200,000 house with a 20% deposit, whereas the same couple could use that NZ$40,000 deposit a few years ago to buy an NZ$800,000 house with a 95% loan. That is the power of deleveraging.

3. The rush to buy in March may have been a one-off and the sales volumes figures were exaggerated. Agents say the market seemed to clear in March as exhausted vendors finally gave up on getting peak era prices and ‘met the market’ at the same time as buyers jumped off the sidelines. Mortgage brokers tell us that many of the buyers had been sitting on pre-approved mortgage approvals from their banks that were set to expire at the end of March. Some thought they would not get such good pre-approved deals if they had to apply again. Also, longer term fixed mortgage rates bottomed out around 6% in early March. Many buyers rushing to buy were also rushing to fix. That surge may not be repeated again this year. March’s sales were much better than February and the same month a year ago, at least partly because there were full 5 weekends in the month this time, while February was short and had a long weekend, while March last year had Easter.

4. Interest rates are rising again. Despite Alan Bollard’s attempts to calm down the long term interest rate markets last month, longer term fixed rate mortgages have risen by between 100 to 150 basis points since mid March. That is not going to be reversed. 5 year swap (wholesale) rates have now reversed their falls immediately after Bollard’s comments last week. Bank funding costs are higher and rising because of the virtual cessation of longer term bank bond issues offshore. Banks are actually increasing their term deposit rates to attract savings from local investors because Mums and Dads have revolted at bank deposit rates under 5%. Regardless of what the Reserve Bank does with the Official Cash Rate on April 30 (a cut from 3% to 2.5% is widely tipped), banks will find it difficult to pass much more on to short mortgage rates and rising long term wholesale rates leave them little choice with long term mortgage rates.

5. The global economy is contracting fast. The OECD is projecting GDP in the most developed economies will fall 4% this year, which is the worst since World War II. Industrial production, exports and stock markets have fallen faster in the first year of this global recession than they did in the first year of the Great Depression of the 1930s, according to these two academics. This will hit us. Look at the woeful business confidence figures to find out how this hammer blow of lower global demand for our exports is hitting us.

6. New Zealand cannot side-step the immense power of global debt de-leveraging. I’m referring here to the global move by international financiers to pull back their lending on overseas assets as banks are nationalised and as shareholders and politicians demand less leveraging of precious equity, particularly outside of their own countries. Banks who have reported massive losses are pulling in loans whenever they can. New Zealand’s banks have borrowed over NZ$100 billion from foreign institutions to fund their lending to New Zealand home owners. Since July last year there has been only one long term loan by a New Zealand bank offshore, which was ANZ National’s US$1 billion issue last month. The IMF is set to announce that banks globally have US$4 trillion of toxic assets. The de-leveraging has only just begun and the global financial crisis will not be fixed until the big US and European banks have cleared toxic assets from their books. This has not been done yet.

7. The surge of cashed up expatriates returning home to buy houses is a myth. There is much speculation about New Zealanders returning home from weak employment markets in Britain, Australia and America with plenty of cash to buy houses. This was true from 2003 to 2006 when Kiwi expats returned with plenty of cash from Britain, in particular. The New Zealand dollar was weak against the pound in 2005 and 2006 and there was plenty of work here. Also, houses were easy to sell in the UK. Now, the NZ dollar is strong against the pound, jobs are not easy to find here and houses are hard to sell in the UK. The migration surge in the last couple of months actually came from India, the Philippines and South Africa.

8. The budget on May 28 is going to be tight. New Zealand’s government is fighting to keep its AA+ credit rating and will have to show Standard and Poor’s on May 28 how it can wrangle its budget deficit and debt issuance back under control. Government spending will have to contract and the promised tax cuts for next year and beyond are likely to be delayed or cancelled.

9. The New Zealand dollar has stopped falling. Many commentators say the fall in the New Zealand dollar will make New Zealand property more attractive to foreign property investors and returning expats. The New Zealand dollar fell sharply against the US dollar in late 2008 and early 2009, prompting some buying in February and March. The New Zealand dollar has strengthened significantly in recent weeks and is likely to stay strong while the US dollar is weak because of money printing fears.

10. Kiwibank cannot keep up the growth. Kiwibank wrote more than two thirds of all new mortgages in the December quarter before running out of steam in the March quarter because of a lack of capital. That has been rectified to an extent by a capital raising by NZ Post, but it cannot keep up the 50% plus growth it managed late last year without significant capital injections. Kiwibank’s aggressively lower rates than the big banks have dried up in recent weeks. The government can’t afford to pump more capital in either, meaning their will be less pressure on the Australian owned banks to compete for mortgage market share with lower rates.

I am sticking to my forecast for a 30% fall in the REINZ median from its November 2007 peak of NZ$352,000 to around NZ$250,000 within the next couple of years. March was just an Indian Summer before a long winter.

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Posted: 12 Apr 2009