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Is Wellington Housing Affordable Now?

1 May 2022

Is Wellington Housing Affordable Now?

People are wondering how low Wellington house prices will go. But that’s not the question they should be asking, especially if they’re prospective buyers. No one can predict when a market will bottom out. And if you do try to time the trough, you risk jumping back into the market when it’s too late.

Just like sellers can’t time the peak of the bull market, except by pure luck, and those who waited too long are now looking back wistfully at last year’s prices, in a bear market it’s easy to wait too long to capitalise on the opportunity to save and make money at the same time.

Markets always go in cycles. We may have just emerged from an historic boom - the greatest in recorded history - where in the final year, values increased an
unprecedented 30%. But it’s important not to forget that between the end of the last boom to the start of this one - late 2007 to the end of 2015 - house prices in Wellington were stagnant. Nearly a third of the houses that came to market didn’t sell or were withdrawn, and prices neither rose nor fell,
other than minor fluctuations over time. That’s 8 years of a suppressed property market.

The good news was the market quickly stabilised after the turmoil of the GFC. Prices didn’t go up, but they stopped falling and went sideways instead. Over that period, however, forces were set in motion that led to the unparalleled bubble no one predicted or could have imagined. These included modest wage
inflation, which probably saw incomes rise by 20% while house prices stayed the same, the Reserve Bank cutting the OCR to a record low that fed through to rock-bottom interest rates, and the lowest volume of building consents we’d seen for decades. So, the combination of higher incomes, super-cheap credit and a moribund market made buying a house relatively affordable.

As more people recognised this and buyers returned, house prices started to rise and stock levels started to reduce — but not because there was a true shortage in the ratio of houses to people that wanted to live in them. The reality is that the faster houses turn over, and the shorter the time they
take to sell, the fewer houses are available for sale at any point in time, and eventually prices begin to rise. People see prices rising and more jump into the market at the same time, and the whole thing becomes a selffulfilling prophecy that can (if it goes on long enough) eventually create a bubble effect.

Everyone blamed the housing crisis on a shortage of stock. The real cause was excess demand. The spark that caused the fire was extremely cheap money. Ironically, it is possible that the building boom that came behind it, and is now losing momentum and will eventually end, could cause a true oversupply of dwellings just when the demand for houses is declining. The problem was demand-driven, not supplydriven. Everyone was trying to buy a house at the same time and FOMO took over.

When FOMO turned into the fear of overpaying (FOOP) late last year, and reform of the Credit Contracts and Consumer Finance Act (CCCFA) made it much harder to get a loan, it was the sharpest decline in buyer activity I’ve ever experienced. We went from an average of 15 groups per open home to an average of 3-4 groups in 2022, within a matter of weeks. Then suddenly it wasn’t about the CCCFA anymore, but people’s expectations of the future prices changing. As soon as people don’t believe that prices will rise anymore, and they expect prices to get cheaper, the demand drops right away.

There’s also a transition period when the market turns, and the gap between buyers and sellers can’t be bridged because sellers are still anchored to a price point at the peak of the market. That first few months, before the media gets hold of the story, and sellers do not realise the market has changed, is the hardest. You can’t bring a buyer and a seller together if there’s a massive gap. It’s been at least 8 months now since the market first changed, and sellers now understand the situation better, and many are now meeting the market. The resumption of house transactions is not the only sign of the market starting
to stabilise — the average number of open home attendees is now 3.8, from a monthly low of 2. But that’s still far from the average of 15 reached last year.

The REINZ House price Index shows Wellington Region values have fallen 12.9% from the peak at the end of October 2021 until end May 2022, and Wellington City values have fallen 13.8% in the same period. Another factor to consider is inflation. It’s not 2.5% anymore, it’s nearly 7%. And wage
inflation has jumped from 2.6% in December to 3% in March, and with unemployment so low, is likely to keep rising. When you have this combination of declining prices and rising wages, it is not inconceivable (albeit hard for some I am sure) to imagine that another period of relative housing affordability could start to develop over time. And with an unemployment rate of just 3.2%, most people feel secure enough about their work prospects that they can service debt, even at higher interest rates.

While these could offset the advantage of buying a cheaper home and impact on people’s ability to pay down their mortgages, you should look at interest rates over the lifetime of your debt. Yes, you need to service debt in the medium term but the true interest rate over the term of ownership is going to fluctuate. If you can afford it, and know you can pay the interest cost, then you can buy 15% cheaper right now. While I believe that at some point in the next
12 months we will see the market start to improve, you’ve got to look 10-15 years into the future and ask if the purchase you’re considering will be a good asset that you’ll be happy to own. If the answer is yes, then it’s a great time to jump into the market, with minimal competition from other buyers,
and far more choice available. You should now be able to tick off more from your wish list than before, meaning you would be happier in the house for longer.

Owners have adjusted their expectations, houses are transacting again, and we’re hitting that stable point in the market where the gap between buyers and sellers has shrunk. I believe we’ve passed the “big drop”. There’s no guarantee we’re beyond the nadir because no one can predict where the absolute bottom is. Historically, the floor of the last downturn was 11% across the entire NZ market. If you’re looking to buy a house, you’re sitting pretty compared to a year ago when the market was nearing its peak. Buying into a ‘down’ market is the right strategy because you can’t pick the bottom, and if you wait too long, you’ll be disappointed.

As legendary humorist Will Rogers famously and astutely quipped, “Don’t wait to buy real estate. Buy real estate and wait.”


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