In 15 years of selling real estate I have never seen such a market. The rapid growth we have had is neither sustainable, nor healthy, for the real estate economy.
We are also not experiencing a 'normal' real estate winter. During winter, buyers usually go into hibernation and sellers get their properties ready for the spring. Not this year. There is so much demand, not enough supply, and this trend is not slowing down anytime soon.
Where is this demand coming from? What is pushing up prices? When will we see a market correction?
In a property bubble, people tend to be overly optimistic, and there is a lack of paranoia and rational common sense, along with a high level of confidence. Furthermore, the Government and laws brought in by the Reserve Bank have a degree of control over the market.
So what has led to this "bubble"?
As we edge towards the second half of 2021, first home buyers are finding it somewhat easier to get onto the property ladder, having more success securing properties.
We are also seeing more competition and demand for mid to high-end properties. This increased competition is partly due to expats moving back to Christchurch from overseas. Additionally, buyers from around New Zealand are realising how affordable properties in Christchurch really are.
In Christchurch, you can get much more bang for your buck compared to Auckland, Tauranga or Wellington. Instead of a two-bedroom unit in Onehunga, you can purchase a villa in Beckenham for $1.7 million, or a new build in Bishopdale for $1.3 million, or even a three-bedroom house in Huntsbury for $1.34 million.
An Auckland buyer who has just sold their house in Remuera for $3.5 million, can afford to pay 'crazy' prices for a house here in Christchurch. The average Christchurch buyer simply cannot compete with that kind of budget. These are not realistic prices in a 'normal' market.
A "market correction" usually refers to at least a 10% decline in property prices. There are three reasons why I predict a market correction is just around the corner.
1. Supply and demand
When there are more people wanting properties than there are properties available, there is more demand than supply. Property is in demand and prices increase.
When there is an increase in demand, developers look to acquire land. You only have to drive 10-15 minutes in any direction out the city to see land being subdivided and readied for development. It usually takes 12 to18 months for developers to get plans ready and consent issued. It is at that point that we will see more supply coming to the market.
2. Fewer national buyers
In approximately one year, this new supply of properties will be coming to the market, just as demand from buyers in the North Island will be cooling down.
What will happen when you combine this extra supply with the cooling demand for mid to high-end housing? Without the crazy demand, the property market will start to see a correction.
I believe that within the next 12 months or so there will be a growing gap between vendors' expectations and what buyers are actually prepared to pay for a home. For those that need to sell, they will have to be more realistic and meet the market.
3. Rising interest rates
Property values are highly dependent on interest rates, and we know that slowly, but surely, interest rates will rise again. Currently we have historically low interest rates, but what will happen when these rates start to increase?
With low interest rates, buyers can afford to borrow more, and consequently, they are willing to pay more for homes. The higher the interest rate, the less buyers can afford to borrow. Although this may not have an immediate correlation to the value of a property, it does mean that buyers will be more careful with their spending, and their budget will shift. This will see the 'ridiculous' prices start to settle.
However, for those that may have already stretched beyond their means to purchase a home on the premise of low interest rates, there is concern that when rates do rise, repayments will be out of reach for a select few. This could see an increase in forced sales.
To give you an example: If you have a $500,000 home loan at 2.19% interest over 30 years, your mortgage repayments would be $1,896 per month; a total repayment of $682,547. At a 4% interest rate, repayments would be $2,387per month, with a total repayment of $859,348. If interest rates were to once again hit 6%, repayments would be $2,998 per month, a total mortgage repayment of $1,079,191.
If your income remains the same, but the interest rate continues to rise, the amount you can afford to borrow diminishes. To use the example above, if you can borrow $500,000 at a 2% interest rate, and the interest rate hikes to 4%, then you would only be able to afford to borrow $390,000. At 6% interest rate, you could then only afford to borrow $310,000.
As one of the greatest investors of all time Warren Buffet said, "Be scared when people are greedy, and be greedy when people are scared."
At the moment, there is greed. It is almost as if buyers are scared that we are going to run out of houses in Christchurch. But there is a change coming.
If you are a buyer, my advice remains the same. Unless you have to buy, sit back and wait. Let the national buyers come in and purchase now. Then in 12 to 18 months once the market settles down, start your search for a home and put in a reasonable offer.
Looking to sell? If you have alternative accommodation for the next 12 to 18 months, perhaps with family or in an investment property, then we recommend selling your home NOW and buying - or building - later.
For further discussion on the above points, please take a moment to watch the following short video: