Opinion: The sound of stretching rubber

House sales volumes are sliding and inflation is slowing, but it's too early to say the bubble has burst yet.

Let's call it the moment of puncture. It's that moment when an over-inflated balloon is pierced and either goes bang with a hail of shredded rubber bits or whizzes off up to the ceiling with a whoosh and then down under the couch never to be seen again.

New Zealanders are forever trying to pick that moment of puncture for the housing market when a momentary slowdown in a 20-year trend turns into something more catastrophic. In retrospect it will look obvious, but in the millisecond before the rubber shreds, it's never clear.

It's tempting to look at the Real Estate Institute of New Zealand's figures for November and see a slight tear in the rubber. In Auckland, volumes fell 2.9% and the median price fell 3.9% in November from October in seasonally adjusted terms. Volumes fell 19.2% in Wellington and prices rose 1.2%. In nationwide terms, the seasonally adjusted number for sales volumes and prices fell 0.2% in the month.

The new restrictions on Loan to Value Ratios (LVRs) for rental property investors nationwide cooled the market from about July onwards and the slight fall in November's volumes represent the seventh consecutive month of seasonally adjusted falls.

But the new 40% deposit requirement is not the only factor. Long term mortgage rates have been rising since October and that has accelerated in the last fortnight since global interest rates spiked higher in the wake of Donald Trump's election. Global bond investors worry that Mr Trump will unleash an inflationary surge of infrastructure spending and tax cutting that will force interest rates higher. The Reserve Bank's most recent rate cut on November 10 was not passed on at all to floating rate mortgage borrowers by banks worried about a shortage of funds, and some on fixed mortgages are looking to fix for longer terms at higher rates in expectation that interest rates will start rising in the next year or two.

Auction clearance rates in Auckland in particular have dropped sharply through the middle of this year and into the traditionally stronger spring open home and sales season. There has also been talk that tougher capital controls in China and a new reluctance by banks here and in Australia to lend to non-resident buyers is dampening demand from overseas buyers.

But it's still too early to say this is that rubber-shredding moment. Unfortunately for the public debate, the Real Estate Institute doesn't publicly release its best measures of what's actually happening to the housing market. It sells the monthly information about its measure of the stratified house price index to banks. This measure strips out the skewing effects on median measures of a larger number of more expensive or cheaper houses being sold in any one month.

Auckland's stratified measure was flat in November, but rose 1.3% and 2.1% respectively in October and September. Auckland's annual inflation rate for the stratified measure is a very healthy 12.9%. An apparently earthquake-rattled Wellington market also showed a rosy glow in stratified terms, rising 4.6% for the month and being up 22.1% from a year ago.

The Reserve Bank was rightly cautious last month about calling the end of the current housing cycle when it noted a moderation since June. It said it wanted to see what happens right through the summer and into the winter of 2017. That's because many house sales happen in that autumnal period through February, March and early April. The Reserve Bank has also been here before. It's two previous rounds of LVR controls in November 2013 and November 2015 slowed the market for at most three to six months each time.

After a brief hiatus, the market came roaring back in February and March of 2014 and 2016.

The underlying reasons for the stretchiness of the rubber and the fact it hasn't burst yet are still there. Net migration is stubbornly high at over 70,000 per year, which at 1.5% of the population is three times faster than the migration rate into Britain and almost twice as fast as the migration rate into Australia.

Auckland is still not building nearly enough homes, and has accumulated a shortage of over 40,000 homes in the last decade. Auckland is building around 10,000 homes a year and needs to build at least 15,000 a year to keep up with population growth, let alone eat into that shortage and create some sort of over-supply to push prices down.

Interest rates are only barely off their all-time lows and could easily revert lower in the event of another bout of Global Financial Crisis triggered by political events in Europe or a bad debt crisis in China -- both of which the Reserve Bank has warned are possible.

We can all hear the sound of the rubber stretching and squeaking as it is prodded by the twin prongs of LVR restrictions and slightly higher interest rates. But there's plenty of elasticity in the balloon for now thanks to a lack of housing supply and an economy that's generating higher incomes and plenty of jobs.

There would need to be a red hot poker of a new global financial crisis, a sharp rise in interest rates and a big jump in unemployment to really put the balloon under some pressure. A combination with a big surge in state-supplied housing might finally do the trick and send the rubber flying, but that's a long way off.

*This column was originally published on RNZ.