The property cycle turns slowly

It is generally accepted that the real estate market moves through an irregular but recurrent pattern. The Property Cycle shows four distinct phases: boom, slow down, slump and recovery.

Each phase is characterised by indicators which measure “key drivers” that collectively propel the market through the various phases of the Property Cycle. These drivers tend to be demographic, financial and emotional.

Demographic drivers determine the level of demand for property (e.g. population growth, construction, vacancy rates, and employment levels). Financial drivers relate to the financial viability of property either as an investment or for owner occupation (e.g. rents, incomes, affordability and financing). Emotional drivers impact the confidence in property as an investment (which affects measures like listings, sales and days to sell).

The Property Cycle is represented as a “clock” and appears to be simple and predictable. However, in fact the property market is complex and unpredictable.   Experts seem to agree about where we are in the cycle at present. Auckland appears to be somewhere between 12:00 pm and 1:00 pm, while regions like Hawkes Bay appear to be somewhere between 11:00 am and 12:00 pm.

Despite regional variations some forecasters believe the overall market has passed its peak. The distortions affecting the market are attributed to, the bright line test (which was extended this year) and restrictive rules for loan-to-value ratios continuing. Others observe that momentum across New Zealand is easing because population growth and migration has stabilised; the interest rate cycle
is turning; credit remains tight; affordability constraints are putting pressure on the market; and LVR restrictions are still affecting the investor market.

That’s a powerful combination which is not expected to ease up in the short – medium term.

In a typical cycle when the clock nears noon the market experiences falling interest rates, increasing construction, a shortage of tradespeople, rising prices and valuations because there are more buyers than sellers. By noon confidence is high but rental yields are falling.

This appears to fit with what is being experienced in Hawkes Bay at present, and the expectation is that rising interest rates (which is typical between 12 and 3:00 pm) paired with unaffordability may move the market to a softer place.

The questions in our mind (and local sellers) are: whether growth will continue; and when any correction will begin. Unfortunately, both generally become evident retrospectively.

There are factors influencing further growth in Hawkes Bay and these include the spill-over effect of buyers from the main centers retreating to the regions, a favourable local economy, and political pressure to keep prices in check and a focus on social housing.

Downward pressure comes from continuing LVR restrictions, flat incomes and poor affordability, cautious lending, and the Reserve Banks desire to restrict household debt-to-income.

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The property cycle turns slowly