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Bayleys August Market Round-Up

Tags: Residential Residential Views

A summary of some of the recent developments shaping New Zealand’s housing market over the last month.


Here we go again! The dangerous Delta-variant has reared its ugly head and the country finds itself scaling up the dreaded alert levels once again.

New Zealand’s snap lockdown on 18 August saw an immediate reaction from markets as trading activity halted, New Zealand’s dollar fell sharply and the Reserve Bank of New Zealand (RBNZ) defied all previous expectations, keeping the Official Cash Rate (OCR) unchanged at 0.25 percent.

Until now, New Zealand’s economy has been recovering well following previous lockdowns and global disruption caused by the pandemic, reporting strong demand for goods and services from consumers and the export market. Thus, driving the market expectation that the RBNZ would announce a rise in the OCR in its August Monetary Policy Statement (MPS).

While our central bank noted the dangers of sustained periods of lockdown to the economy, informing its ‘least regrets’ strategy to fiscal policy, it has been clear in its intention that it wishes to lift the OCR as soon as is practicably possible.

For homeowners, we have already seen the effects of expectation, with mortgage lending rates beginning a slow and steady climb for the past several months.

Expectations for the residential real estate market are that we’ll follow in the footsteps of last year’s extended lockdown, which saw prices climb some 30 percent across the country, owing to pent-up demand, stimulatory monetary policy and preferable lending conditions.

However, the impact of debt-to-income restrictions (DTI) looms large on our radar.

This year the Government agreed to include DTI measures to the RBNZ’s macroprudential toolkit, with consultation on implementation due to begin this October.

At its most basic level, a DTI limit sets a number by which the size of your mortgage cannot exceed your actual income.

The RBNZ has discussed a number around seven, meaning a borrower with an income of $100,000 could borrow up to $700,000 – some $126,000 short of the median purchase price for properties across the country in July.

So as not to unduly impact first home buyers, DTI implementation could model what we have seen overseas with three possible scenarios including; a cap on mortgage lending as a multiple of income; a cap on the percentage of the borrower’s income allocated to servicing debt; and a floor for test interest rates used by banks in serviceability assignments.

While the results of October’s consultation remain to be seen, we expect any use of DTI limits will have a significant impact on housing market activity, potentially limiting the elevated prices buyers can pay for homes.

Despite this, we anticipate an extremely slow lead-in time if these measures are employed, with the Government and the RBNZ reticent to set off rapid value declines with news the property market is New Zealand’s largest sector – and a key contributor to our economy.

In-depth reports:

• In assessing how buyers’ priorities, motivations and attitudes are changing in a pandemic world, the Knight Frank Global Buyer Survey 2021 found 39 percent of its international respondents had purchased a home in their native country since the beginning of the pandemic. At Bayleys, this matched with website analytics which finds 50 percent of new traffic to the Bayleys website comes from offshore enquiries. It is evident the desire to be closer to family remains the top reason expatriates wish to come home.

• In its Quarterly Property Market & Economic Update, research firm CoreLogic notes while nationwide the rate of housing inflation is slowing, mortgage lending remains at elevated levels. Previously unsuccessful first home buyers are re-entering the market, while patient owner-occupiers are searching for opportunities and actively pursuing low interest rates before they lift further. The report finds in the 12 months to July, New Zealand’s housing market has grown in value nearly 25 percent - illustrating the persistent demand for residential property.

• In its most recent MPS, the RBNZ left the OCR unchanged at 0.25 percent bucking commentators’ expectations in light of New Zealand’s sudden plunge into Alert Level Four lockdown restrictions. For housing, the report was bleak, noting it expected housing inflation to decrease from 26 percent in 2021 to eight percent in 2022. Though the RBNZ notes the weird and wonderful unpredictability of the housing market in the statement ‘as seen recently, momentum in house price growth can persist, even when prices, and the fundamental factors that determine them, look disconnected.”

Topical articles:

Lockdown has proven no barrier for sales activity with Bayleys’ live virtual auctions recently reporting a 90 percent success rate for properties sold under the hammer. “Organised buyers are acting confidently and decisively through this latest lockdown, not wanting to waste time in case prices take off again, as they did following last year’s extended national lockdown,” says Conor Patton, Bayleys national auction manager.

• In its Survey of Expectations dated July 2021, the RBNZ found house price growth is expected to slow from more than 25 percent in the 12 months of 2021 to circa seven percent in 2022, slowing to four percent after two years. Bayleys finds these forecasts excessively pessimistic, given well-documented issues around supply which continue to underpin demand for residential housing across the country. Pressure continues to mount on the construction industry in light of lockdown measures with capacity constraints and difficulty sourcing materials and labour further exacerbating challenges facing the industry. Despite record numbers of building consents, the actual output is failing to meet demand.

• In his weekly Tony’s View newsletter , independent economist Tony Alexander notes New Zealand can take heed from consumer behaviour during recent lockdowns in Australia, showing real estate activity is expected to remain strong. He notes Kiwi sellers can expect a fresh surge in buyer activity once restrictions are relaxed locally with investors and first home buyers slowly coming back to the fray following a fall away after policy changes in March.

Julien Leys, chief executive of the New Zealand Building Industry Federation (NZBIF) warns post-pandemic business model reviews have seen New Zealand drop off major global shipping and business supply routes. He notes the full impact of the pandemic on our local construction industry is yet to be realised, with a lag time for new builds widening every day as issues around supply and sourcing skilled labour threatens to negate the effects of muted population growth for our residential supply.

Following a rough ride for inner-city apartments in our larger centres, early indications show the landscape has stabilised. Approximately 65 percent of the 40,000 apartments around Auckland’s CBD are owned by investors, heavily impacted by border closures and the absence of international students. However, prices are holding steady with particular interest from buyers and renters for one- and two-bedroom residences positioned near universities and hospitals.

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