Do rising mortgage rates depress price appreciation?

by Alistair Helm in ,

Just last week I undertook a detailed analysis of property sales and property prices for the past 20 years and matched them to the movements of mortgage rates in the article "Mortgage rates on the up - what will be the reaction of the property market?

A comment on that post raised my interest:

Hello Alistair
I refer to your graph entitled Rising mortgage rates generally depresses price appreciation.
I contend that the data indicates that for the first 3-4 years of the 5 year period displayed, median prices continued to increase, perhaps conservatively by 10% year on year. I don't have the raw data but it would be very interesting to overlay the 2 data sets and create a single line.
My point is this. The Reserve Bank just started increasing rates from all time lows. Historically your data indicates approx. 10% median increases in property prices for 3-4 years thereafter. So my conclusion is the opposite to yours, and price appreciation will occur, to the tune of 10% p.a. over the next 3-4 years in the absence of any major economic setback. Factor in Improving employment, Canterbury rebuild and Chinese investment and you have a glass half full situation in my opinion (if you own real estate).

The graph to which he refers is this one tracking the periods of 1994 to 1997 and 2003 to 2008. My contention as I stated in the article was that during these periods when mortgage rates were on the rise property price appreciation was depressed. Not that prices fell, just that price appreciation was curtailed.

As per the recommendation of the writer of the comment I have redone the chart to align the two periods on split axis.

I would agree, that the fact is, that given the historical experience of mortgage interest rates being raised whilst property prices have been growing at a reasonable rate the impact is not to instantly depress price appreciation, rather as the chart would seem to indicate the market adjusts. 

It is possible to argue that the reaction of the market is to mark-time for the first year as interest rates are raised, then adjust to a lower rate of appreciation for anything from 2 years to 4 years - that is all the data that is available.

Apply this analysis to the current market it would be possible to support the writer of the comment and suggest that the likely trend in prices is to see a continuation of the current rate of price appreciation of c.10% per annum for the next 3 - 4 years.

Have we reached a new normal with property prices?

by Alistair Helm in

House prices.jpg

I was attracted to an article today posted by entitled “Expect slow house price rises, says RBA” – now given the fact that Australia seemed to have skipped the last property price crash allied to the GFC I thought this was a very interesting headline and article, certainly worth reading and sharing.

The article referenced a speech by Luci Ellis, the head of The Reserve Bank of Australia’s financial stability department delivered this week in Sydney.

Now I am not an economist. I have an interest in the subject and with an eye for statistics and trends I was fascinated to delve a little deeper into this hypothesis presented by Ms Ellis that we are at, or at least close to, a new normal that may well see slower increases in house prices and more occasions when prices are  falling.

The full text of her speech and contextual charts are available to read and I would encourage a review as they are very enlightening. I hope someone may be motivated at Statistics NZ or the Reserve Bank here in NZ to produce similar charts to see how paralleled our markets and economies are in this regard.

To summarise the hypothesis. The view is that the move to lower inflation through the 80’s and 90’s lead to lower interest rates. As this occurred, lenders were more comfortable to increase the scale of lending without driving up loan-to-income ratios. In the view of the presenter, this resulted in almost a doubling of the amount households could borrow. This rise in borrowing capacity almost had to result in higher property prices which eventuated in the past decade or so.

Reserve Bank of Australia, Financial Stability Dept: April 23 2013

Reserve Bank of Australia, Financial Stability Dept: April 23 2013

After this adjustment worked through the system the household debt-to-income has in Australia remained largely flat. The capacity to repay debt grew in the same period in someways replacing ‘old fashioned’ savings which in total edged down to zero although has crept back up as house prices have stabilized.

Reserve Bank of Australia, Financial Stability
Dept: April 23 2013 



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Reserve Bank of Australia, Financial Stability Dept: April 23 2013

The view is that these adjustments, having now worked through the system, have created a less volatile environment where house prices are less likely to experience significant rises and may self correct with price falls.

What is very interesting in studying the charts within the presentation is the similarity between Australia and NZ on issues such as scale of new construction, urbanization, immigration and land availability. These similarities whilst no guarantee that this hypothesis will be experienced in NZ, certainly give pause for thought around the much discussed and often debated view as to the future of house prices here in NZ.

Auckland house prices - making sense of the data

by Alistair Helm in

Auckland house market cools in hot January - Business - NZ Herald News.png

If there is one certainty with property prices is that there is always uncertainty! - That is never more true than with the Auckland property market and its property prices.

The headline from earlier this week speaks of property prices falling in Auckland as the market cools in January; yet a few days later another report seemed to scare us with the view that Auckland is within the world's top 20 priciest cities!

What can we make of the mix of data and where is the market going?

My view is you have to be focused on core data and avoid being hijacked by random erroneous data, reports and surveys. The good news is that we in NZ do have good property data, it is well structured, easily accessible and is right up-to-date.

The most reliable indicator of property prices in Auckland is the REINZ Stratified median price index. Published monthly it uses the most recent month's sales data and makes adjustments to ensure that for example higher sales in high priced suburbs, matched to other extremes such as low sales in low price suburbs does not skew the median price. The method is professionally administered by The Reserve Bank and used as a trusted pricing method for property reporting worldwide.

The latest data including January for Auckland shows that the last 2 months has seen property prices ease. From the peak of $578,150 in November the stratified median price has slipped to $548,750.

Auckland house price index Jan 2013.png

As the chart above shows this is now 13.3% above the peak of prices seen before the GFC in 2007.

However as a cautionary reminder if you adjust for inflation as the chart below shows Auckland prices have barely made any gain in the past 5+ years. In November we came within 1% of the CPI adjusted peak price from July 2007 but the past 2 months has seen this fall to 5.3% below that peak. So based on this you would have to assess that property in Auckland barely keeping pace with inflation over half a decade.

Auckland house price index CPI adjusted Jan 2013.png

Other sources of property price information

There are other sources of property price information available for Auckland, the most recognised one is the Barfoot & Thompson data. Now B&T are the largest real estate agencies group in Auckland and currently represent around 40% of all sales in the region which makes them a key indicator of the market. However they do not represent the whole market, 6 out of 10 properties sold in Auckland are not sold by B&T. Additionally their property data which is released within the first few days of the month and therefore gains early media attention is very raw data, however a major weakness of their data is that their property prices are just based on average price, rather than median or stratified median which leaves the data open to fluctuations, especially with high priced property sales.

Whilst the average price of sales by Barfoot & Thompson may be out of line with the REINZ Stratified median price for Auckland property as the first chart below shows, the trend of price movements as the second chart shows is more consistent.

B&T REINZ monthly property prices to Jan 2013.png
B&T REINZ price movements to Jan 2013.png

I would therefore as ever be cautious in reading media reports and look to the REINZ Stratified median price as the best guide for what is happening to property prices in our major city. Certainly read the indicator trends of the B&T data when it is released but be wary of that average price which they now shows to be sitting atop $600,000