Despite its presence in our communities and vaccines rolling out across the world, the curious effects of COVID are far from behind us, clearly illustrated by the Reserve Bank (RBNZ) in its latest Monetary Policy Statement (MPS).

Sending a clear signal that New Zealand’s economy is in need of continued fiscal support to ensure it can meet consumer price inflation and employment remits, the MPS Committee has stayed the status quo in its latest monetary policy setting announcement.

Sitting at 0.25 percent since March last year, the decision to leave the Official Cash Rate (OCR), Funding for Lending (FLP) and Large-Scale Asset Purchase Programmes (LSAP) untouched highlights the ever-present threat of economic uncertainty as border restrictions remain despite the positive distribution of vaccination programmes.

Whispers of policy easing owing to positive economic performance circulated prior to the latest MPS announcement, however, the RBNZ is steadfast in their approach – they want to be certain of sustained inflation before reverting to more ‘traditional’ monetary policy settings.

While acknowledging the relationship between a buoyant housing market and an uptick in household spending, the RBNZ now anticipates housing inflation to peak at an astonishing 22 percent to June 2021, slowing to 10 percent by year-end.

This revised forecast, up from eight percent predicted for the year to June 2021 back in November, echoes the latest Real Estate Institute (REINZ) data in showing just how red-hot the residential market has been running this summer.

Looking ahead, however, clouds are appearing on the horizon in the form of persistently low stock levels, the anticipation of policy adjustments and fervent demand which has created a backlog for property professionals.

While building inspectors and valuers are run off their feet, an unsustainable workload has caused lenders to turn borrowers away with ANZ the latest bank to restrict which mortgage applications it now accepts.

This surge in loan requests and the inability of financial institutions to keep up with demand further feeds into the ultra-competitive environment that has become the new normal. With a backlog of bank applications, policy announcements looming and the threat of further price rises, we expect buyer appetites will persist to year-end.

In-depth reports:

• In its latest Property Focus report, ANZ Bank says OCR hikes are a long way off and constraints around supply and affordability are acting as headwinds for market performance. Despite this, mortgage rates will stay low for longer, continuing to feed market activity as purchasers look to leverage their borrowing power to access more debt and reap capital gains.

• In his latest Mortgage Advisors Survey, economist Tony Alexander finds anecdotal evidence that suggests there are fewer investors active in the market despite an increase in requests for refinancing. The rising cost of purchasing property, coupled with increased obligations under recent Tenancy Act reforms may be causing some investors to cool their heels, while a greater proportion of borrowers looks to leverage the equity in their current home to fund a new purchase.

• In its latest Cordell Housing Index Pricing report (CHIP) CoreLogic finds construction costs to have recorded their lowest quarterly rise since 2016. While demand persists through a mandate to increase government housing supply coupled with work on consented alterations and additions running at their highest levels in a decade, supply chain disruption and labour constraints are likely to keep the industry busy and cost pressures to mount.

Topical articles:

• ASB economists say we are in the midst of ‘the biggest housing boom for 17 years.’ The bank says value growth will reach well into double-digit territory this year before beginning to drop again in three years’ time when the OCR is expected to rise.

• Economist Cameron Bagrie says that while businesses have learnt to adapt to lockdown procedures the economic cost per day of lockdown is huge and New Zealand is already in a recession following a bounce in Gross Domestic Product (GDP) in the September quarter. March GDP data is expected to report a contraction, largely owing to a lack of international tourism over our summer.

• Building more houses won’t help our affordability issues, says economist Brian Easton. He says that high house price inflation is the result of speculative investing funded by offshore finance and suggests adding another tier to loan-to-value ratios (LVRs) to combat this form of financial leveraging.

• Residential building consent figures from Statistics New Zealand show the highest rate of growth since 1974, with very strong construction activity predicted for the year ahead. This is good news for the economy, feeding employment and business activity, however, questions remain as to whether it is enough to make-up for consistent undersupply over the last decade, especially as borders re-open in the future.

• Economist Tony Alexander expects banks may introduce a 50 percent deposit requirement for investors owing to bubbling market performance and an overwhelming backlog of loan requests. With projections for housing inflation expected to reach double-digits pressure is expected to continue to mount on policy-makers to take further drastic action against property speculation amidst out-of-control affordability constraints.