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Understanding the Real Estate & Economic Cycle

By Chris Gemmell AREINZ

4th May 2023.

Picking exactly where we are in the economic and property cycle is always a challenge.

Historically, a complete circumnavigation of the clock below can be 8 – 10 years, depending on the location, type of property, economic factors, and demand and supply.

Where do you think we are currently sitting?

An interesting question. When one looks at the clock face, most pundits and commentators feel that there is still some way to go before the bottom of the cycle and the market is reached. Tony Alexander is one of the best-researched economists, with his regular surveys of agents, businesses, mortgage brokers, and investors. In his view, the bottom of the cycle may not be far off.

Let us consider the various factors presently at play to more accurately answer this question.

Converging waves.

When one looks at the economics out there, inflation, whilst running hot, may well be in the early stages of being tamed.Interest rates are pivotal in people’s decisions about property, and mortgage affordability will prove to be a test in the next 6-12 months as mortgages roll over from record-low interest rate levels in 2021. 

Balanced against these challenges, supply versus demand remains one of the broad fundamentals determining value. Net migration is a wave moving against the tide above, with a reported net gain of 52,000 people last year. Typically two-thirds of arrivals choose to reside in Auckland as our main metro. This equates to around 35,000 people. Applying 3-4 people per household, the extra demand for housing (owner occupiers or tenanted) would be 10,000 homes. I realize this is rather a simplistic calculation, but if this trend continues, then demand will be back big-time.

Job Market

The job market is strong. Employment statistics this week indicate a low unemployment rate of 3.4%, with average wage increases of 7% in the last year. Another converging wave, countering the interest rate affordability.

General Election

Phew. No matter what your political leaning is, the final result of this year’s mid-October general election will play a part in determining where we end up on the cycle clock-face by the close of 2023. Residential property investors will be closely watching this event, as National has indicated they will repeal legislation and roll back restrictions on interest rate deductibility and the 10-year bright line.

The North Shore Residential Market

Listing numbers – down. Despite the media doom and gloom for much of this year, we have experienced a shortage in good quality stand-alone homes under $1.5 million. Our immediate area of Birkenhead – Hillcrest – Northcote – Birkdale & Beach Haven have been running short, with over 75% clearance rates on my sales team’s auctions.

Buyer volume and motivation

Watch the first home buyer patterns and trends. What are they doing? The well-published F.O.O.P. (Fear of over-paying) was alive and well for much of last year and the beginning of 2023. First-home buyers were hesitant and cautious, believing values would continue to fall and the bargain buy would be around the corner.

The question on their lips now is: – Do they go now, before interest rates move further, or when values shift upwards through higher demand and investors come back into the stream competing for the listing stock?

Buyer Sentiment

Buyer sentiment is certainly changing in this market segment as we experience more first homers coming through our open homes, being fully pre-approved on finance and determined to buy.  As proof of this trend, we have negotiated strong multiple offers in the last month for apartments (previously slow to move) and entry-level homes.

Action at the bottom of the market begins to flow through. Two homes in Verran Road have yielded very strong enquiry as buyers up-size. This is evidence of “green shoots” of recovery, building buyer confidence, and the eventual turn of the cyclical wheel or clock face.

Picking the bottom of the cycle is never easy, when one considers all the factors at play, as above.

However, one can summarise that the positive signals are currently outweighing the negative. A ray of sunshine that we all can do with!

Should you wish to have a confidential chat regarding your home or investment property, our advice is always free. Just ask.

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