April has proven to be a busy month for the residential property market, with significant data releases and the push-pull of economic drivers creating new angles for analysis.
While continuing to regress year-on-year, the rate of value decline has eased across the country, leading many to surmise we may be at or near the trough of the residential market decline.
Data from various firms, including Valocity, Real Estate Institute of New Zealand, Quotable Value and CoreLogic, shows that Kiwi sellers are still better off than they were pre-pandemic, and there continues to be strong demand for well-presented homes in the right locations.
This improving market sentiment comes amid easing immigration controls and increasing net population gain, putting upward pressure on rental rates nationwide while providing a supportive demand factor for residential property values.
To put the market downturn into perspective, analysis from independent economist Tony Alexander found that average house prices have declined 1.1 percent each month since December 2021 in seasonally-adjusted terms.
At the same time, a one percent boost to the population will require an additional 19,000 houses while building consent data nationally is down nearly 20 percent year-on-year.
The numbers create an interesting juxtaposition between supply and demand, despite economic volatility continuing to impact buyer decision-making.
Rising demand fundamentals like migration and a lack of supply are an increasingly important feature of the market, potentially creating a fear or missing out amongst buyers eager to maximise the current trough.
On the financial side, the Reserve Bank of New Zealand’s (RBNZ) surprising move to increase the Official Cash Rate (OCR) by a larger-than-expected 50 basis points (0.50 percent) came before quarterly inflation data, which tracked downward.
Although some alarming features remain hidden amidst the metrics.
While core inflation – driven by global factors – moved lower, Kiwi feet remained on the accelerator of the local inflation pedal, continuing to push operating costs, including wages, upward. This underlying trend in price rises will contribute to persistently high inflation expectations for the coming months, making the central bank’s job of bringing the current 6.8 percent back down to the target one-to-three percent band more challenging.
The months ahead will prove particularly interesting for the residential real estate sector as supportive features we haven’t seen for many months begin to reassert their influence, offering upside potential to motivate previously-hesitant homeowners off the sidelines and back into the game.
Whatever the outcome, we know a backlog of serious buyers has been building for some time, making now the best time to capitalise on attractive purchasing conditions before the next cyclical upswing.
The RBNZ surprised markets in early April with a move to raise the OCR by a larger-than-expected 50 basis points, taking it to a new cycle high of 5.25 percent. While shocking, the central bank’s justification is clear, as it pointed to recent downward tracking wholesale lending rates influencing the regressive movement of fixed mortgage lending rates. The Monetary Policy Committee reiterated its commitment to bringing inflation and expectations back down to where they need to be quickly, while pointing to the potential inflationary pressures of the North Island’s cyclone rebuild and election-year spending. For homeowners, this has had an impact on floating mortgage lending rates. However, popular fixed terms of one-and-two years remain primarily undisturbed, leading commentators to conclude that despite recent movements, we are at or near the peak of this rate-tightening cycle.
In an early April edition of his Tony’s View newsletter, Tony Alexander emphasises the role of rapidly escalating post-pandemic migration as a key driver for economic growth in New Zealand. Noting data from Statistics New Zealand, net migration inflows have soared from a loss of 16,000 just seven months ago, to a net gain of 33,0000 recently – which has broad-based impacts for the national housing and rental markets. Perhaps the biggest immigration tide change in recent years is currently occurring at the same time house building and construction activity is running more than 20 percent less than the year prior, with future growth prospects for the industry muted for the near term. This is a significant relationship as the supply-demand imbalance, particularly across regional centres, looks to play an increasingly more substantial role in residential value growth over the next few years.
Business service firm BDO says New Zealand’s construction industry still has more work than it can cope with. Still, its recent construction sector report notes a significant proportion of firms are concerned about an ongoing slowdown in activity. The survey found that of the respondents, in the last six months, just 12 percent said that residential projects were being completed on time, with risks around cost escalation and long delays forcing developers to cancel projects due to begin late this year and next. While not surprising, the point of the anecdote shows ongoing stress across the sector, emphasising the value of projects undertaken by quality, established, and well-capitalised developers. Ongoing challenges will continue to restrict new housing supply, providing supportive demand for residential values in the mid-term.
Following years of work to improve trans-Tasman relations, Australian Prime Minister Anthony Albanese has recently announced a suite of measures to strengthen Kiwis’ residency rights in our larger counterpart. The move, while considered a win for Kiwi residents already entrenched in Australia, has sparked fears for the outflow of skilled workers, given wages can be up to 50 percent higher across the ditch. Moves like this could see policymakers work harder to attract and retain talent, further loosening migration policy or incentivising valuable young and skilled workers to remain at home. While the effect on the housing market remains to be seen, high migration inflows have provided a recent demand boost, a trend Bayleys will be watching closely over the next few months.
Come 4 May, additional loosening measures will be introduced to the government’s long-criticised Credit Contracts and Consumer Finance Act (CCCFA) reforms. Enacted at the end of 2021 to protect consumers from predatory payday lenders, a lack of transparency and understanding from larger retail banks meant highly restrictive credit assessments criteria was deployed, blocking qualified buyers from access to appropriate mortgage lending. The new changes come amid prior reform, and will explicitly exclude discretionary expenses from affordability testing while extending exceptions from full income and expense assessments for refinancing existing loans. The changes are expected to encourage first-home and leveraged buyers whose borrowing capacity has the potential to improve.
New listings data from property platform realestate.co.nz shows the number of properties listed for sale hit a 16 year low in March, down nearly 18 percent year-on-year. While the data suggests ongoing uncertainty amid volatile economic conditions continues to play a pivotal role in residential decision-making, bright spots are appearing across the landscape. Buyer enquiry peaked in the Central Otago region, with the average asking price increasing to an all-time high of nearly $1.5 million. Homes in Cromwell, Jack’s Point and Wānaka benefitted from increased buyer search enquiries, largely dominated by Auckland-based buyers, which points to ongoing interest and the role lifestyle factors still play in the search for a new home.
Credit scoring and checking firm Centrix reports a seventh consecutive month of mortgage arrear rises in its March Monthly Outlook. However, numbers remain so low policymakers are unconcerned by intense mortgage stress. Figures from the RBNZ show that just 0.2 percent of Kiwi mortgages have been overdue for more than 90 days, while demand in mortgage applications rose month-on-month in March. Despite rising costs for daily items like food and services, more than one-third of Kiwi households own their homes without a mortgage, and the vast majority of those still servicing debt benefit from ownership of an asset worth significantly more compared to value pre-pandemic – a fact that will continue to ease Kiwi concerns as the backlog of residential buyers builds.
Despite raising the OCR by a surprisingly high level during April’s Monetary Policy Statement, the RBNZ remains challenged by lending behaviour which continues to add inflationary pressure through its prioritisation of profits. Data shows the proportion of new mortgages advanced in the first few months of 2023 is less than half that reported during the same period two years ago, as lower real estate turnover tightens bank profit margins leading them to become more competitive to attract new business. In some cases, this has seen special rates offered off-market for qualified buyers, but broadly, it opens the door for a new round of fixed rate reductions. While a key demand factor for the residential housing market, this would be counter-productive to the RBNZ’s cooling inflation objectives, requiring more heavy-handed monetary policy, should green shoots sprout too soon.