News that house prices fell this month represents a tiny glimmer of hope for ever-gloomy first home buyers. But is that optimism, however feeble, at all justified? Economist Shamubeel Eaqub investigates.

House prices fell in February, per latest data from QV. Time to celebrate the popping of the bubble, right? Hold on, don’t uncork the champagne quite yet. Housing market data is noisy and we don’t yet know how much of this is noise, versus the beginning of a much-needed correction in the housing market.

I am not convinced this is the beginning of the big correction. Demand for housing is strong from population growth, there is lots of pent up demand from people who have missed out in recent years, and we are still not building enough houses.

There is no political leadership or will to fix rules for land supply, infrastructure funding, investor bias in taxes, lending rules and renting rules. Without fixing these fundamentals, what we are seeing in house prices in recent months is just noise.

Quirks of data

The data from Quotable Value are for transactions that have settled. And QV releases data that is an average of the latest three months they have available. In effect, their data is old and smoothed – showing us trends that happened roughly three months ago.

More timely data from REINZ, which collects data at the point of transactions going unconditional, shows similar patterns. For example, house prices in Auckland fell sharply in November and a little in December… but they rose in January.

Trends versus noise

The monthly moves up and down in house prices is not a helpful indicator of what is happening. Looking at broader trends, for example the chart below, shows that house prices are still rising fast. But house sales, which tend to lead house price changes by about six months, have slowed sharply.

The level of sales in January, excluding the usual seasonal patterns, was at the lowest level since 2011. If sales volumes stay around these levels, we would expect house prices to barely rise this year, based on past correlation.

This is the indicator I am keeping a close eye on. If houses aren’t selling, then prices are likely to follow.

Regulatory noise

Its hard to tell how much of the fall in house sales is because there aren’t enough houses listed for sale, banks getting tough on lending, or just the uncertainty from the introduction of new lending restrictions by the RBNZ.

There are few houses for sale. Even at the current low level of sales, the current stock of listings will be exhausted in three and a half months. This has risen from historic lows of just under two months through much of 2015 and 2016. This is a far cry from the glut at the worst of the downturn in 2008, when listings would have taken over a year to clear.

We know from brokers and others that banks are getting pickier with their lending. This means there is less money available. If this continues, then the housing market will have a downturn.

But its hard to tell if it this tightening on lending is short term, a blip while banks figure out how to grow their deposits and borrow long term money from international markets.

The other reason banks are picky is because of new regulations from the RBNZ. New rules have restricted lending to investors, particularly in Auckland. In the past such rule changes from the RBNZ had short term impact on house sales and prices. But within three to six months, the appetite to borrow and buy houses had returned. Whether it will be the same this time is uncertain.

The fundamentals still suck

Whatever the noise in the housing market, the problem is the fundamentals still suck. Right now, there is still strong demand from population growth, investors, and priced out buyers. Supply is still too low and hasn’t made up for under-building for decades.

Rents are growing fast in many parts of NZ, suggest the housing supply-demand mismatch is increasingly widespread. The housing crisis is spreading to the regions, rather than retreating.

There has been no progress in changing rules and regulations to fix the housing crisis for good. The technical solutions are known (see the work by Auckland Council [PDF], the Productivity Commission, or the book I co-authored with Selena Eaqub: Generation Rent. What policies we need to implement we know. What is missing is the political will, political honesty and political leadership to deliver.

Shamubeel Eaqub is an economist and partner at Sense Partner, a boutique economic consultancy. He is the presenter of The Spinoff’s Hey Shamubeel! series of videos explaining the New Zealand economy.

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