Unintended consequences of macro-prudential economic policy
It may be too early to tell, but I have a deep concern that the Reserve Bank may have unintentionally applied a volatile accelerant upon the property market just when what they wanted to do was quell the flames of a heated market.
Property sales when measured on an annualized basis are this month edging closer to 80,000. The rise in sales has been steady and progressive from the low in year to April 2011 when sales bottomed out at just below 55,000. This is a far cry from the heady days of 2007 when the market was overheated at well over 100,000 sales.
What is more interesting is that the rate of growth in sales is slowing and has been for 9 months, slipping from 21% year on year growth to 14% year on year growth in the 12 months to July.
The fact is that price follows sales in property market cycles and as sales slow and inventory builds which we certainly witnessed in the July data from the NZ Property Report so prices will ease.
So just as we start to see some meaningful easing in the market the Reserve Banks screams “Restrictions from the 1st October” and all those in the property market rush to the bank to secure a mortgage based on their current deposit of less than 20%.
Armed with this pre-approved mortgage willingly offered by the friendly banks who are only too happy to lend before the deadline these eager property buyers will be pouncing on almost any property they can on the basis that at least they can get a foothold on the property market.
All of this is fine if it ends up that these properties meet the needs of the buyer, however the fact an added surge in demand placed upon a still listings-short property market mixed with an exuberant real estate industry hell bent on auctioning anything that looks like a house with a 2 week marketing period is very likely to lead to buyers panicking. That panic could well lead to lapse due diligence, rash purchases of property ill-suited to buyers true needs and over-commitment of mortgage debt.
I hope this is not the case. I am not in the situation of being such a buyer, however when reading this excellent heartfelt opinion piece by Nadine Chalmers-Ross the host of TVNZ Business News, I was struck by the true feelings and anxiety of those who do feel disadvantaged by this new policy and who may be rushing as you read this to the bank to secure what might seem like a last desperate chance to grab a hand-hold on the property ladder. I just hope that the ladder is not engulfed in the flames fuelled by this latest move by the Reserve Bank, it would be a sad irony.