The number of downbeat stories about the housing market has increased since the middle of last year. And although the market is not quite as red-hot as it was in late 2020 and early 2021, we’re not convinced that things have hit the wall yet.

Sales numbers have been distorted by the effects of lockdown in August and September. The nationwide lockdown in the second half of August dragged activity down 12% from the previous month (seasonally adjusted), and September’s activity in Auckland was just half of its July level as the region stayed at Alert Level 4. Chart 1 shows that reduced COVID-19 restrictions saw sales volumes return to more normal levels in October and November 2021 – down 18% from the very strong December 2020 quarter, but still higher than at any time between September 2016 and June 2020.

The median number of days to sell for property tells a similar story. Chart 2 shows that, since loan-to-value ratio restrictions were reintroduced in March, the length of time on the market for houses has been trending upwards, from 27.9 to 32.0 days (seasonally adjusted, ignoring the effects of lockdown on results for September and October). But as with sales numbers, the most recent figure is still faster than anything recorded in the 2016-2020 period.

Arguably the biggest shift over the last couple of months has been a jump in the number of homes available for sale. We examined the shrinking housing stock in the middle of last year. Chart 3 shows that there were signs in September and October that inventory levels were stabilising. November recorded a 20% jump in the stock of housing (seasonally adjusted), which was sustained into December, suggesting that maybe the shortage is starting to turn around. Even so, inventory levels are still low by historical standards, with the equivalent of less than 11 weeks’ worth of sales available. That 10-week level is well below the 26-week average since 2007.

Importantly, although December stock numbers were up by 30%pa, new listings were only up 6%pa. This gap suggests that the increase in stock numbers has been caused by fewer properties being sold, rather than a considerable increase in the number of houses coming onto the market.

Nevertheless, given the massive surge in property values since COVID-19 struck, all these other indicators are really only useful as lead indicators of house prices, and whether these stratospheric increases will continue. Rhetoric in mid-2021 implied that house price growth was easing, but our reading of the data suggested that the “slowdown” was being overstated by the market’s usual seasonal pattern during winter. Chart 4 shows that, after seasonally adjusting the numbers, the three softest months for price growth (April-June) still all recorded monthly increases of 1.0%, implying an annualised growth rate of 14%pa.

We are now closely monitoring lending data from the Reserve Bank for evidence that would back up claims of a credit crunch currently hitting mortgage borrowing. Changes to lending requirements made under the Credit Contracts and Consumer Finance Act have reportedly made it a lot more difficult for borrowers to secure finance. These changes have come in addition to the tougher loan-to-value ratio requirements for both investors and owner-occupiers, changes to tax rules for investors, and interest rate rises that have been much more rapid than expected a year ago. Some banks have also implemented debt-to-income restrictions, and we think the Reserve Bank is likely to formally introduce debt-to-income restrictions for all mortgage borrowers by mid-2022.

Lending data to date only shows two clear trends.

• Investors have been squeezed out of the market by increased deposit requirements. The proportion of new lending with investment property collateral plunged from 44% to 34% since February 2021, with a 31%pa increase in the value of lending to investors with a loan-to-value ratio (LVR) of under 60% comfortably outweighed by a 52%pa decline in the value of lending with an LVR of over 60%. Investors have been forced towards buying brand new homes – almost 40% of lending to investors has an LVR between 60% and 80% and is exempt from the LVR requirements. 1
• First-home buyers have been squeezed out of the market by soaring house prices and increased deposit requirements. First-home buyers’ share of new lending dropped from 20.2% to 16.3% between August 2020 and March 2021, briefly climbing back up to 19.2% by June as investor demand faltered. This proportion has slipped to lower levels since mid-2021, and it could ease further during 2022 as the screws tighten further on high-LVR lending. With 77% of all lending with an LVR of over 80% now going to first-home buyers, first-home buyers are clearly most heavily affected by Reserve Bank changes to the LVR requirements.

By the end of 2022, house price inflation forecasts range between -3.2%pa (BNZ) and +5.6%pa (the Reserve Bank). In other words, there is a broad consensus that the housing market will have slowed and possibly even have started to correct, if BNZ or Westpac’s forecasts are to be believed. Westpac’s forecasts are the most “pessimistic” (see Chart 5), with a 14% decline in house prices over the three years to June 2025. After adjusting for consumer price inflation, Westpac is predicting a 21% fall in real house prices between 2022 and 2026.

At first glance, this result sounds fantastic for buyers who have been priced out of the market by the rapid increases in property values during 2020 and 2021 (not to mention the previous big price rises during the 2000s and 2010s). However, even Westpac’s forecasts do not see real house prices falling far enough to get back to June 2020 levels.

Put another way, the housing market is broken, and even if 2022 is the year that price growth slows, nobody thinks that the serious underlying issues are going to be fixed.

1 Buying a brand new home is the only substantive exemption from the LVR requirements for investors, and offers the additional benefits of being exempt from the extension of the bright-line test from five to 10 years, and being able to treat interest as a tax-deductible expense for the first 20 years of the property’s life. Unfortunately, lending data with this level of detail is only available back to March 2021, so we do not know how much the rule changes in 2021 have altered behaviour.