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Bayleys latest market round-up

The latest residential sales data from around the country shows property values have indeed declined from the highs of the last year, however, a healthy level of real estate activity continues buoyed by several supportive factors.

In its latest Pain & Gain research report, CoreLogic says 99.1 percent of sellers of existing homes made a median resale profit of $406,000 in the March 2022 quarter, which while down from 99.3% in the December quarter points to the enduring profitability of bricks and mortar investments.

The cyclical nature of the property market shows that historically, near-term volatility becomes less meaningful through a long-term lens, evidenced by CoreLogic’s finding that homes typically sold after seven to 10 years mean owner-occupiers made more tax-free capital gain each year than their salaries or wages.

Independent economist Tony Alexander echoes this sentiment in one of his recent reports, saying that falling property values are occurring at less than half the speed of the recent string of large rises - hardly something which will risk negative equity for anyone.

While true, the housing market is correcting according to the following factors; the influence of higher mortgage lending rates, investor tax changes, increased supply, reduced credit availability and the diversion of offshore spending, underlying price support is expected to prevent widespread value declines.

These, in the form of higher construction costs, worsening construction delays, an easing of the credit crunch and strong employment prospects along with fresh concerns about the returns on non-property assets continue to provide a reason for buyers and sellers to transact.

The Reserve Bank of New Zealand’s decision to lift the Official Cash Rate (OCR) by 50 basis points to two percent at its last Monetary Policy Statement (MPS) means the OCR is now at its highest level since 2016 – with forecasts seeing it reach 3.25 percent by year-end.

The extra expenses incurred by Kiwi households as a result of rising interest rates could see the cost of servicing debt increase from around five percent of households’ disposable incomes to around nine percent by 2023.

Households are clearly cognisant of the rising cost of living with residential transactions falling consistently month-on-month.

Despite this, the flow-on effects for the wider economy (a dampened wealth effect means less spending across other parts of the economy such as retail and hospitality), could negate the need for further, aggressive rate hikes.

While housing activity appears as though it is settling into a new and more stable pace, market sentiment shows fresh opportunities can be afforded by a flat-to-falling market, especially for would-be purchasers and potential sellers that have collected huge historical capital gains.

In-depth reports:

In its latest Economic Review, Westpac says New Zealand is moving into a new phase of the economic cycle, with change seen most clearly in the household sector through a downturn in the housing market and softness in household spending. It finds the housing market is a key influence on household wealth and confidence to spend in other parts of the economy and a slowdown, in whatever form, signals a period of softer economic growth forecast for the next few years.

In its 16th annual Wealth Report, Bayleys global real estate partner Knight Frank says private investors spent nearly $1.4b on property assets last year, with private capital the main, and growing, source of global real estate investment. The report shows the international cohort of Ultra-High Net Worth Individuals (UHNWI) grew nearly 10 percent in the year to 2021 with accrued savings finding their way back to tangible investments such as residential real estate. The savings pots of this growing wealthy elite have the potential to see increased investment into New Zealand assets, providing an interesting housing market dynamic to watch over the next few years.

A report by economic consultancy Sense Partners shows deeply embedded issues with the funding, development and delivery of new infrastructure that would enable new housing supply across New Zealand. The report entitled ‘New Zealand’s infrastructure challenge’ says Kiwis need $104b in capital, and a construction workforce that nearly doubles in size to provide the infrastructure necessary to create 115,000 new homes. The report shows that while building consents remain elevated, difficulties persist with the delivery of new housing which means constrained supply may continue to play a role in values over the medium-term.

Topical articles:

Recent analytics by property portal OneRoof found 2.86 million Kiwis searched for properties with swimming pools in the 16 months to May this year. TOther popular search terms were ‘water views’, ‘rental potential’, and ‘bach properties’ pointing to the continued Kiwi love affair with coastal homes. Three bedroom properties were the most popular size sought-after by searchers, closely followed by four bedroom homes.

A new report from the International Monetary Fund (IMF) says house prices have increased by almost four times the average in the OECD – and more than 250 percent since 1998, creating a greater divide between those that own assets and those that don’t. The report points to the availability of land supply, easing planning and zoning caveats and fostering infrastructure investments to improve affordability metrics. It also notes some $215b worth of residential mortgages are expected to be rolled over at sharply higher interest rates which will have a wide effect on economic performance, as Kiwis tighten the purse strings, over the coming year.

National property values have fallen some five percent, however, ANZ economist Finn Robertson says homeowners should maintain a cool head. He notes a 10 percent regression in values still nets homeowners a capital value 30 percent higher than they were in September 2019, meaning asset owners are still in a preferable position. Despite this, dampening factors mean we are unlikely to see prices gain the same momentum again in the next two to three years. /p>

Building projects across the country are grappling with a host of challenges including a shortage of building materials and the critical shortage of workers, industry heads say. Fixed price contracts for new build housing inked before the substantial price increases of materials and labour mean a growing number of small-to-medium-sized building and construction firms are facing losses and unsustainable delays. Bayleys experts say it certainly costs more to build a home than it did 18 months ago and because of this, it is imperative buyers seek qualified guidance on their contractual obligations when looking to purchase a new home off-the-plan.

RBNZ deputy governor Christian Hawkesby recently announced the central bank will work with New Zealand’s financial institutions to implement debt-to-income (DTI) limits by mid-2023 if required. Recent research by the International Monetary Fund found New Zealand’s average DTI ratio and its average mortgage repayments as a proportion of household income have risen rapidly, likely meaning the RBNZ would take a cautious approach to implementing this type of restriction. However, with house prices around 11 times the average annual wage, if implemented, this macroprudential tool has the potential to create a swift and meaningful impact on housing market activity.

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