So, just when the housing market is getting really interesting, the end of the year comes leaving us with loads to ponder over in terms of where the market goes from here.
We'll now have to wait past the summer 'silly season' – probably March-to-April - to get the next meaningful sets of information clarifying what's happening.
We know that following the October introduction of 40% deposit rules for investors there have been signs of a slow-down, particularly in Auckland.
It's worth remembering, however, that there was a slow down late last year as well after the Reserve Bank introduced Auckland-specific LVR rules for investors.
That bout of slowing was washed away by a torrent of New Year buying. Are we to expect the same thing again then come March/April next year?
Well, I still think there will be a resurgence of buying interest and prices in the late summer.
Having said that, it is worth bearing in mind some crucial differences this year.
The RBNZ’s Auckland investor LVR moves introduced in October 2015 crimped the Auckland market for a while, but prompted Auckland investors to look further afield.
It can be argued that the spreading of the housing heat from Auckland to around the country this year was therefore at least in part caused by the RBNZ move.
Now that the whole country has investor LVRs there's no regional difference that would spark renewed New Year interest next year in the way that occurred this year.
Another different and less easily quantifiable factor this year is the extent to which banks are now rationing credit.
Banks’ funding struggles
Banks have been lending loads, but increasingly struggling to attract depositors’ funds. To some extent they’ve made up the shortfall with money borrowed offshore. But that’s now getting more expensive.
As well, new rules in Australia are requiring the New Zealand subsidiaries of the big banks to fund more on their own account rather than through their Australian parents.
It all makes for a squeeze.
So, just quietly, the banks here were probably relieved when the RBNZ put more LVR clamps on. The RBNZ rules provide a nice screen behind which the banks can quietly tighten up their own lending criteria.
The real interesting thing will be the extent to which that behaviour either continues or abates as we get into the New Year. That’s going to be more significant for the housing market in the short run than whatever the RBNZ does next.
What about the RBNZ?
And what does the RBNZ do next? It would have loved before the end of this year to get agreement in principle from the Government to add debt-to-income ratios to its macro-prudential toolkit.
The RBNZ's promised it wouldn't use the DTIs at the moment, but clearly it now sees them as a valuable weapon to have in the armoury for potential future use.
The Government's been delaying on this issue in any case and now, with the reshuffle at the top, has the perfect excuse for further delays.
I now rate the RBNZ's chances of getting approval for DTIs before the next election at somewhere between nought and zero.
If I’m right we likely would not even see DTIs sanctioned for use before 2018. And that's just sanctioned. If the RBNZ wants to use them it would require a consultation and notification period.
It could be a good two years before DTIs potentially see the light of day – assuming they might still even be necessary or wanted. A lot is likely to have happened by then.
Interest rate rises?
The mention in passing of income raises another potential issue.
House prices have gone up enormously. Wages have not.
While this Government's policy of pumping up immigration has helped to keep wages down, there are some signs that pressure is now building for more meaningful wage rises. This is one factor that could see New Zealand's apparently moribund inflation revive.
The ‘market’ expectation is that interest rates won't move at all next year.
Frankly though, if you look back over recent years at what various economists, Reserve Bank’s included, were forecasting would happen to interest rates a year or two ahead…well…they haven't been close. Nobody has.
It would not surprise me to see the RBNZ having to push interest rates up in the second half of next year.
With the amount of money some people have borrowed and are having to borrow, even small rises in interest rates will have an impact pretty quickly.
If all of these factors swirling around the house market were not enough, there's the not-small matter of next year's election itself.
The house market took a fairly significant pause ahead of the 2014 election. And remember, that was an election that never seemed likely to have a particularly close result.
Courtesy of John Key and his decision to walk away, next year's election suddenly promises to be a tight-run thing.
This means that the various policies unveiled by the political parties – even the ‘third tier’ parties – are likely to have the marketplace jumping around. The fact that housing itself is sure to attract a lot of policy promises will further fuel potential house market volatility.
What does this all add up to then?
I can still see renewed late summer early autumn activity with further price gains.
Beyond that though things definitely look cloudy.
A renewed surge in house price rises will likely see more RBNZ intervention. And if the central bank can’t use DTIs then it will probably ratchet up the minimum deposit requirements for investors even further.
The attitude of the banks and their willingness, or otherwise, to keep freely lending, will be key.
Once the halfway point of the year has been reached the other factors such as possible signs of interest rate rises and, most critically, the uncertainty of the election outcome, will start to kick in.
In such an environment a ‘stalling’ of the market in the second half of next year would be no surprise.
See what 2018 brings
The big thing then would be to see what sort of Government is in place when 2018 comes, where interest rates are, and what the housing supply situation is looking like.
And of course, I’ve focused on New Zealand issues. There’s a big wide world out there containing probably more potential fishhooks and nasties than we’ve seen for a few years.
And I haven’t even mentioned President Trump.
Yes, there’s plenty to digest this Christmas.
SOURCE: www.interest.co.nz/news - David Hargreaves