In light of rising inflation and an economy that is performing better-than-expected in the face of resurgent pandemic disruptions, economists across the country now anticipate a lift to the Official Cash Rate (OCR) sometime in the next three months.

Strong domestic demand for goods, services and homes has prompted the Reserve Bank of New Zealand (RBNZ) to call an end to its Large-Scale Asset Purchase (LSAP) bond-buying programme introduced as an emergency measure in response to COVID-19’s effects on the economy.

And while the message is clear; we can expect to feel the effects of tightening monetary policy from here on out, recent developments including an out-of-control COVID spread in Australia and the Pacific coupled with capacity constraints and the difficulties facing businesses across New Zealand could see a ‘proceed with caution’ approach assumed by the RBNZ.

The situation is akin to the government’s intervention in the housing market, with targeted policy reform so far failing to produce the downturn some had anticipated.

Globally, house prices are rising at the fastest pace since 2006 with the property industry’s contribution to the economy felt no more strongly than in New Zealand.

In the decade to 2019, New Zealand’s property industry directly contributed $41.2 billion (or 15 per cent of total Gross Domestic Product) to the economy, this, up from $21.6 billion (12 per cent) in 2009. following unprecedented interventionalist policy which saw a rise in loan-to-value (LVR) requirements for investors followed by unpopular tax reforms and a pledge to scale up building supply.

Finding the property industry employs one in 11 Kiwis with more than $3 billion of Kiwisaver funds invested in residential assets, the recent findings in a Property Council of New Zealand-commissioned report provide a clear indication of the value of this important market segment.

…And several big reasons why it is not in the Government’s nor ordinary Kiwis’ interests to see values regress.

Recent high-profile transactions are indeed bucking expectations for winter market activity with the latest, a $9.525 million beachfront home in Tauranga’s Mount Maunganui sold by Bayleys salesperson Kay Ganley, providing evidence that there remains strong interest across the marketplace for quality homes.

In-depth reports:

• In its latest Quarterly Property Market and Economic Update, information and analytics firm CoreLogic found the positive outlook for New Zealand’s economy is having a large influence on the mortgage market through rising interest rates and the expectation we could see the OCR lift before 2022. Despite this, new disruption caused by the devastating Delta variant of COVID-19 is worsened by ongoing supply shortages, shipping delays and capacity constraints across many of our key industries. This could make a case for keeping monetary policy at status quo to year-end to support small-business dominant New Zealand through a persistently difficult period.

• In its First View economic publication, Kiwibank says inflation accelerating beyond the RBNZ’s target band – annual inflation hit a 10-year high of 3.3 per cent in June’s CPI release – will see our central bank raise the OCR in three phases starting next month. Despite near 30 per cent annual house price growth, businesses are less worried about demand than supply and we expect addressing capacity constraints and managing migration will become front-and-centre for policy-makers over the coming months.

• The effects of drastic cooling measures implemented by the government to control the housing market are evident through latest data, OneRoof says. The impact is most pronounced in Auckland, where investors have a larger market share than other urban areas. 40 per cent deposit requirements for property investors and the phase-in period for the end of interest deductibility are likely giving investors a reason to re-strategise, perhaps turning them away from existing homes and onto new-builds that are exempt from new regulations.

Topical articles:

• Despite current border closures, higher rates of immigration into New Zealand over the next few years are expected to underpin house price growth, say ANZ economists. In its latest New Zealand Insight Publication the Bank used economic modelling to forecast annualised house price inflation of between 13 and 7.5 per cent over five years. While even the low end of the forecast picks a total increase of 72 per cent, their assumptions are not unreasonable given residential properties across the country grew in value by 57 per cent in the five-years to May 2021 and 98 per cent in the five-years to June 2007.

• Kiwis are keeping a keen eye on the mortgage market with rising interest rates set to impact borrowers. An estimated 77 per cent of all mortgage debt is currently on terms of a year or less, with forecasts picking the average homeowner with a 30-year, $800,000 mortgage could pay an extra $1,824/year in line with recent rate rises from the big four banks. Bayleys expects that while this has the potential to impact the price buyers are willing to pay, it will most likely provide an impetus for buyers to act and borrowers to lock in preferable mortgage rates sooner rather than later.

• Latest data shows the average homeowner made a $92,000 windfall during 2020. Monetary policy aimed at supporting the economy through the pandemic-induced recession flowed through the financial system and into the hands of asset-owners. However, over the next six-to-12 months easing monetary stimulus, increased deposit requirements, targeted government regulation and the prospect of rising interest rates are set to slow the rate of value growth, with sellers looking to maximise the value of their assets this side of the new year.

• There are fresh calls from researchers for the Government to investigate the introduction of a Capital Gains Tax (CGT) given evidence that housing has become the prime vehicle for wealth creation in New Zealand, owing to super-low interest rates, free-flowing credit and tax-free gains. Researchers from the University of Auckland propose a Fair Economic Return (FER) model which is calculated by taking the value of a property minus mortgages (net equity) and treating it as if it were on a term deposit earning two-or-three per cent. The return would then be added to the owner’s taxable income and taxed at their marginal tax rate. The team proposes an exemption of $1 million of equity per resident. Despite evidence a system like this would disincentivise inefficient use of property/land, the current labour Government has unequivocally ruled out the use of a CGT, instead choosing to extend the Bright-line Test from five-to-10-years which has been criticised as a ‘CGT by stealth.’

• ANZ Bank is the first of several banks to make it easier this month to secure a loan for small apartments. Billed as an affordable alternative to standalone homes amidst rising property prices, New Zealand’s apartment industry is set to offer buyers greater protection through a shake-up of the Unit Titles (Strengthening Body Corporate Governance and Other Matters) Amendment Bill. The Bill seeks to provide greater clarity for buyers, whilst ensuring Body Corporates undertake adequate financial planning for future building works. Buyers requiring a mortgage on small apartments have historically found funding difficult to secure, with the industry welcoming moves from the big banks to make this property type more accessible to house hunters.