Bayleys June Market Round-Up
House price momentum, currently sitting around 17 percent has the potential to push above 20 percent by the third quarter, recent data suggests.
The positive performance of our national housing market has bucked expectations 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.
Better-than-expected economic performance over the first quarter of 2021 has increased inflation expectations and seen many market hawkers revise forecasts for both the Official Cash Rate (OCR) and house price growth.
However, continued market momentum has the potential to give policy-makers impetus to introduce more heavy-handed tools.
While the design and industry consultation of these tools will take some time, DTIs, if implemented will have a significant impact on the amount borrowers can secure as funding.
At this stage, however, Robertson has noted restrictions should apply ‘only to investors’.
So far, higher LVR limits for residential property investors have appeared to stop them from paying exorbitant prices, with their market share dipping five percent according to recent CoreLogic data.
However, first home buyers and movers have stepped in to pick up any slack, with low listing numbers exacerbated by persistently high demand.
Looking ahead, the outlook for interest rates will have a significant bearing on value projections.
Despite the expectation that credit conditions will tighten, and Kiwi mortgage holders will start to pay more as rate rises hit, residential property investment remains the key pathway for wealth creation.
Funding models seldom allow individuals to leverage equity for alternative investments the way they do for residential assets, which continues to add to the attractiveness of residential property as the key vehicle to grow household wealth.
In-depth reports:
• The Government has released a 143-page discussion document detailing plans to remove mortgage interest tax deductibility for investment properties and the extension of the Bright-Line Test, with public feedback due by July 12. The document, while explaining the definition of a ‘new-build’, and the timeframe for phasing out interest deductibility makes some confusing omissions including the duration for which a ‘new-build’ remains a ‘new-build’ and therefore a taxable expense.
In its June ‘Home Truths’ report, Westpac emphasises that financial factors remain the key determinant of house prices. Home sales continue to run above pre-pandemic levels and 2021 is shaping up to be one of the strongest for house price growth on record. However, politicians have a difficult road ahead given the role of residential assets in household wealth and the importance of household wealth for the general economy. Falling house prices are a political concept, and unpopular to instigate.
A recent study by Bloomberg Economics shows New Zealand has ranked first as the ‘world’s frothiest housing market’ according to price-to-rent and price-to-income ratios. This highlights the huge disparity between house prices and wage inflation, and the role this has played in the rising wealth gap. The report notes New Zealand is not alone in this phenomenon, with house prices across the world rising to unprecedented levels.
Topical articles:
House prices have risen by an average of 6.8 percent every year since 1992, but independent economist Tony Alexander expects this will slow to around four percent per annum. Residential property prices are thought to have increased more than 22 percent in the year to June 2021. However, factors including rising interest rates, muted population growth and an increase in housing supply could see value growth slow. While stabilisation of house prices is important, we expect value growth to continue slowly and steadily, supported by interest rates that are still low by historical standards, a supply-demand imbalance and the global vaccination rollout which will see borders begin to reopen, facilitating migration inflows.
Despite the highest ever issuance for building consents in our biggest city, council data indicates we could have reached the peak of residential construction activity. Recent data shows fewer homes are being completed in Auckland when compared with the second half of 2020, as rising costs owing to shortages and supply chain disruptions, capacity constraints and a pronounced labour shortage continue to hit the industry hard.
Treasury’s forecasts throughout the pandemic and following recovery have been consistently wrong, with commentators now debunking their claim that house price growth will slow significantly over the coming years, while job growth, a falling unemployment rate and the general economy strengthens. The Government arm has also predicted there to be no interest rate rises until 2025, which has already been proven incorrect as wholesale funding rates rise and a strengthening global economy pushes New Zealand closer to a shift in the OCR.
Amidst rising property prices and the huge windfalls enjoyed by landowners whose sites have been up-zoned to allow greater density, more Kiwis are undertaking amateur property development. However, as credit conditions tighten, successful and profitable projects are achieved by those with a clear understanding of feasibility, market appetites, land attributes, and urban connections.
The landscape for mortgage rates is changing, with some saying longer-term rate rises are a clear indication that we can expect to see a rise in the Official Cash Rate sooner rather than later. New Zealand’s big four banks have moved to trim short-term rates while raising three-and-five-year terms, with anecdotal evidence showing shifting borrower sentiment as they prefer to fix for longer amidst a changing tide.
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