Subdued activity has persisted across the majority of the country this month, although signs of slowing monthly value regression in the residential market are underpinning a degree of cautious confidence.

Buoyed by the huge benefits of capital gain collected by residential assets during the pandemic, households remain remarkably resilient in the face of rising consumer costs, higher mortgage lending rates and global tensions that make nightly news tough to watch.

While these create uncertainty in markets, recent data from Statistics New Zealand has found that home-owning households have seen their income rise at least 12 percent since the onset of the pandemic back in March 2020.

This was further aided by the net value of assets including property, shares, businesses and cash rise by more than $620 billion.

Market observer Bernard Hickey says this data demonstrates the resilience of home-owning households, underpinning a degree of stability in the national housing market.

His analysis shows households across New Zealand have a collective loan-to-value ratio (LVR) of 10.2 percent and the collective LVR on homes is 20.4 percent with collective mortgage servicing costs barely six percent of disposable income.

Data from the Reserve Bank of New Zealand (RBNZ) estimates just one percent of financial institutions’ mortgage books would be in trouble if house prices dropped by 30 percent, a scenario that market observers say is unlikely given the housing market’s responsiveness to current dampening measures.

Anecdotal evidence from Bayleys’ salespeople across the country suggests buyers are active and aware of improving affordability metrics which could see buyers previously waiting in the wings for market conditions to cool, welcomed back to the front line.

In independent economist Tony Alexander’s recent Mortgage Advisor’s Survey, he echoes this sentient saying market conditions may be improving for the real estate market as more advisors are reporting an improvement in activity. A rise in both investor and first home buyer activity indicates we may be past the worst of the credit crunch, a factor aided by last month’s announcement of relaxed responsible lending conditions which hampered sales activity when introduced in December 2021.

For the housing market and the months ahead, the increased cost of goods, services and debt will likely see dampened demand eventually cause a return to more sustainable long-term interest rates, however, to the close of 2022 activity is likely to remain somewhat steady and Bayleys salespeople are already looking forward to the warmer spring months for an uplift in sales activity.

In-depth reports:

• CoreLogic’s quarterly Cordell Construction Cost Index (CCCI) has shown national residential construction cost pressures have continued to escalate with both quarterly and annual rates of indexed growth reaching new record highs. However, anecdotal evidence suggests the central bank’s rising Official Cash Rate is slowing the rate of construction inflation already. Over the last six months, demand has continued to push prices up owing to a significant dearth of housing, however, the rising cost of materials is slowing demand and may see developers adopt a more competitive position to ensure they’re not sitting on unsold supply and vacant land sites.

• Consumer prices rose 1.7 percent in the June quarter taking annual inflation to 7.3 percent, its highest level since 1990, Westpac CPI June quarter analysis says. Of interest to the housing sector, the cost of purchasing a newly built home rose by 4.5 percent in the three months to June 2022, while construction costs are up 18 percent over the last year and rents have risen rapidly with the annual increase of 4.3 percent the largest since records began. Rising construction costs and challenges facing the building sector are seeing fewer new homes come online with an impact on the housing supply. This has the potential to limit the impact of value declines as New Zealand is still in need of new homes to meet current levels of demand. Rising rents also serve as encouragement for investors to renter the market, with yield metrics more attractive when values have regressed and rental rates are rising.

• In its June Property Focus report, ANZ Bank says it is difficult to discern how much of New Zealand’s cooling housing market is impacted by waning demand given the potent cocktail of market fundamentals driving uncertainty. The bank is predicting an 11 percent decline in values over the year, which would take equity gains back to this time last year. Challenges continue to face the sector in the form of sharp increases in global interest rate expectations and shortages of both materials and labour that limit upside growth potential for the residential construction sector. This continues to play a big role in buyer perceptions, though an extremely tight labour market is acting as key support for current levels of transaction activity.

Topical articles:

• Bayleys salesperson Sharon Hall recently achieved a regional record sale price for a beachfront property in Mount Maunganui in Bay of Plenty. The sale reflects an ongoing divergence across residential market segments where high-end buyers less impacted by rising mortgage lending rates and current financial conditions are continuing to transact, while investors and those at the lower end of the market are considering their options more carefully. The architecturally-designed home occupied a preferable waterfront position and was built to exceptional aesthetic standards, key features salespeople note are in perennial demand with well-heeled residential purchasers.

• Recent data from digital marketplace TradeMe shows asking prices have dropped three percent or $24,500 in the last four weeks, with the national average asking price of $925,150. The recalibration in seller expectations is good news for buyers under increasing financial pressure to collect a deposit, secure finance and manage rising mortgage lending rates. In Auckland, asking prices dropped by four percent in June but were up nine percent year-on-year. While reflecting high supply and muted demand, this also demonstrates a degree of strength in the housing market that is still noting year-on-year value growth.

• The building industry has welcomed a six month extension to the deadline for complying with new energy efficiency regulations in homes. The Ministry for Business Innovation and Enterprise (MBIE) has extended the start date for wall, floor and roof insulation requirements which were previously set for November 2022. Landlords and property owners will now have until May 2023 to ensure their homes comply with Healthy Homes standards. The extension reflects supply chain disruption and local materials shortages and is expected to serve as a reprieve for landlords, but also a further reminder of the benefits of investing in new new-build properties that are built to the latest specifications and offer added benefits of exemption from recent tax changes.

• Aspects of a recent speech by Reserve Bank of New Zealand chief economist Paul Conway in which he said the ‘one-way bet’ for housing is about to turn have been debunked by an independent commentator. He points to flawed assumptions including the ability of new infrastructure to intensify communities (roadblocks are still occurring here) and a political unwillingness to make housing ‘affordable’ for fear of losing support as key reasons housing will remain resilient.

• In a recent article by property portal OneRoof, Bayleys Canterbury general manager Rachel Dovey says a sale by auction can work well for sellers in a shifting market because it provides a deadline for buyers to act. Purchasers sitting on their hands in an attempt to pick the ‘bottom’ of the market are running the risk of transacting at the wrong time, with data releases lagging behind market fundamentals. This means by the time we’re aware prices have bottomed out; they may already be on their way back up again.