FOOP drives Kiwi home buyers “into shadows”

Prominent economist Tony Alexander has released a new report arguing that “fear of overpaying” (FOOP) is behind the collapse in home sales and the ballooning in listings across New Zealand. Accordingly, “deep weakness” has permeated the housing market:

Sales of properties are running around 40% down from a year ago, it is taking 13 days longer than a year back to sell a dwelling, prices have fallen 9.5% from their peak, and listings are up 104%.

This situation of deep weakness in the residential property sector has not come about because of a wave of distressed sellers…

So, why has the housing market slowed down and gone into reverse? Because the buyers have slipped back into the shadows. Why are they hiding out of sight? Because getting credit suddenly became a lot harder late last year, mortgage interest rose 3%+ over a very short period of time, there was a cost of living crunch, and fears of prices rising and rising dissipated

82% say buyers are worried about high interest rates, 78% cite worries about getting finance, and 69% cite worries of prices falling. Only 11% say listings are a worry and a still low 11% say employment is a concern, unchanged from September.

So, the big concerns are interest rates, financing, and price declines…

Tony Alexander goes on to argue that buyer demand could soon rebound given that fixed mortgage rates – which dominate Kiwi borrowing – have begun to moderate despite expectations that the Reserve Bank will “take the official cash rate from the current 2.5% to a probable peak of 3.5%”.

That is, “fixed rates reflect market expectations of monetary policy and not where the cash rate sits at the moment”, and “those market expectations are for monetary policy to be easing by the end of 2023 with cuts continuing through 2024”.

The percentage of buyers fearful of price falls has also moderated for two months in a row, although “the decline from 73% to 69% is very small and not enough for me to yet feel confident saying that we have passed peak FOOP – fear of over-paying”:

Therefore, New Zealand house prices should continue falling over the months ahead; although the rate of decline should moderate.

The Reserve Bank has flagged further aggressive interest rate hikes in an effort to contain runaway inflation, which hit a 32-year high 7.3% over Q2.

My view is that so long as the Reserve Bank continues to lift rates, New Zealand house prices will continue to fall.