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What will it take to slow the rise of house prices?

Two things: higher interest rates and/or building more houses. Let’s consider those options for a minute.

Higher interest rates

If the cost of borrowing money goes up then economics 101 says people will be less inclined to borrow the stuff and that in turn reduces demand for houses. Less demand equals less price pressure and so the foot comes off the house price accelerator pedal.

The trouble with that approach is that it also tends to increase the exchange rate and that clobbers the foreign income earnings we/exporters/tourism bring in to the country. We’d like to avoid that if we can.

The thing is that the current situation of low interest rates is going to persist so long as our northern hemisphere comrades continue to print bucket loads of money. Add in the fact that our RBNZ isn’t going to lift rates at this point for fear of giving exporters a decent kick in the guts (until domestic inflation forces their hand).

Strangely enough the laws of physics come into play here too with Newton’s third law (that every action has an equal and opposite reaction) front and centre. Changing one variable,  especially a price related one, means someone else gets an economic kick in the guts for sure, it’s just a question of who.

Build more houses

The other strategy to curb house prices is to simply make more of them available. Yep, build a heap more. That will have a reducing effect on prices for sure.

The trouble here is that it takes time to build enough houses to have a practical impact. It’s not like you can click your fingers and ‘boom’ 10,000 houses just slot into the trademe listings. That’s despite Len Brown’s ambitious proposal to add thousands of extra dwellings to Auckland in the next few years. The plan is laudable but there’s something about the practicalities of making it happen that have me scratching my head. Where will the manpower come from? I think Auckland has the land but can it be opened up quick enough? And there are many more issues to resolve like NIMBYs not wanting 5 storey buildings in their town centres. Still, to have the conversation and make some progress toward it is not a bad thing.

Do both?

So maybe we should do a bit of both – build a few more houses and lift interest rates at the same time? But higher borrowing costs don’t exactly encourage construction companies to build more houses now, does it?

I’m sorry to say there are no silver bullets and it’s a bloody tough problem no matter what angle you come at it from. Looks like Auckland house prices will keep on keeping on….

 

Thinking of switching your mortgage to another bank?

TSB bank logo

TSB bank logo

I noticed a Facebook ad today from TSB Bank touting a 15 month fixed rate of 4.95%, $1000 toward cash for your troubles plus an ipad or iphone. Sounds great doesn’t it?

But watch out for the T&Cs because all such offers come with strings attached. I’m not picking on TSB here because all the banks send this kind of message out from time to time. But I just want to remind readers of some of the things to think about before you leap into bed with a new bank and a new mortgage.

Can you do better with your current bank?

A lot of the time you can, actually. A large percentage of customers have the ability to change easily and the banks know it so let that work for you. You don’t need to threaten the bank with your pending departure unless you’re that way inclined. Talk to them. Tell them what you want. Chances are you may not need to change at all.

If your bank won’t budge, consider the costs

One of which is the fact you have to meet the new bank’s lending criteria. This might be harder than you think especially if your situation has changed since you took out your current mortgage. A mortgage broker is ideally placed to give you some advice on your chances of success (and to handle the process for you). Just remember you have to get through the assessment process.

These days banks are throwing cash at you to change to them and this can help offset the legal cost of doing so. But do the numbers on it. The new interest rate you get has to be substantially better to make the change worthwhile. Why would you change for a piddly $10-15/month reduction in your payments? Don’t get me wrong, a dollar is a dollar. I just think if you’re looking to save pennies then there are probably easier ways to do that (like having one less coffee a week).

For those with less than 20% equity then there is also a low equity charge to think about and this can add up. It’s either charged as a lump sum (and added to your mortgage) or your interest rate is increased anywhere from 15 to 50 points (50 points is like going from 5.00% to 5.50%). This specific charge is usually what stops most people in their tracks.

Most people stay put

Because the numbers just don’t work out. For those that do change it’s normally because they’ve gone to their bank with a specific proposal in mind and been turned down. So they’re looking for an alternative.

My advice – before you rock up to the new bank get some info and crunch some numbers. Or have us do it for you. We’re here to help you with decisions like this.

Is Home Buyer Fatigue Setting In?

In the Auckland area home buyers continue to find the going tough in the search for a house. It’s been that way for a while, of course.

They tell stories of how they keep bumping into the same people at open homes and auctions where hopeful couples exchange knowing glances at each other as they get outbid, again.

How houses they like the look of end up selling above their expectations and above their budgets.

They’re keen to find a home but in a market where listings are short and getting shorter they’re beginning to wonder “will I ever buy?”

Tony Alexander’s report yesterday shows anecdotal evidence that the number of people through open homes has fallen. Not a big surprise there as it tends to happen at this time of year when winter edges closer and the weather means less people are going through open homes. This time of year also signals the usual seasonal fall in listings you get too. We’re on the cusp of that right now.

Low listings generally and going lower as winter approaches combined with no real change in demand is a recipe for prices to continue to climb. By the time Spring comes around the average price is likely to be higher again and I can’t see the listing volume changing too much. Home Buyer fatigue could easily set in under these conditions.

A similar kind of price change happened in the 2000’s when I was buying my first house and by the time we got to open home number 40 we were sick of it too. Back then the price change was driven by increasing demand on the back of low interest rates and a debt fueled housing bubble. We’ve actually got more favourable interest rate conditions now but it’s lack of supply which is to blame this time around.

That means it’s going to be very hard to put the brakes on house prices. In fact I reckon you could put interest rates up by a whole percentage point and nothing much would happen to house prices. Sure demand might fall off a bit but not so much that prices will flatten off. It’s all a bit disheartening for home buyers but as someone who’s been there before I’d say the frustration you’re feeling is just par for the course.

My advice to first home buyers? Stick with it – especially through winter. Make the effort to do the open homes in the cold and the rain because your competition will still be in bed suffering the effects of fatigue while you’re out there doing the work.

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