Bayleys news & articles


Great expectations

Tags: Residential Residential Views

Closing a year characterised by disruption for economies and global chaos, 2021 offers the chance to repair and recover, sorting through the rubble of a COVID-affected world. But closer to home, how is the new year shaping up for our property market?


Showing strength and stability in the face of a global pandemic, New Zealand’s removed island position at the bottom of the world has helped her back on her feet following extended lockdowns and grave fears for economic performance.

Where initial reports saw unemployment skyrocket and sectors such as our high-performance property market effectively shut down, the actuality of a recovery that outpaced the rest of the world has surprised, delighted and saved the livelihood of countless Kiwis.

Containing the virus at our border allowed many of our most productive industries to open back up for business, which has added a spring in the step of consumers and facilitated a sustained spending spree on goods and services.

Favourable lending conditions driven by record low interest rates have been the leading factor driving the positive performance of New Zealand’s residential property market through the last year.

Favourable lending conditions driven by record low interest rates have been the leading factor driving the positive performance of New Zealand’s residential property market through the last year.

Encouraged by a comprehensive fiscal package - think wage subsidies, a shrinking Official Cash Rate (OCR), the Large-Scale Asset Purchase (LSAP) and Funding for Lending Programs (FLP) - financial measures have now flowed through New Zealand’s economy and found their way back to asset prices.

December 2020 saw our residential property market finish the year on an incredible high, with demand still soaring record prices were achieved across the country, but the big question now is, will it continue into the new year?

Policy

House prices have increased a reported 77 percent over the last decade and with wages unable to keep pace pressure is mounting on policy-makers to make meaningful changes that will allow more Kiwis into homeownership.

Prime Minister Jacinda Ardern has previously acknowledged the sheer scale of Kiwi wealth tied into residential assets, a central consideration when ruling out the use of a Capital Gains Tax.

While a regression in values is not the ideal scenario there is a social obligation to New Zealanders to make homeownership more achievable, which at the rate of current growth it is not.

Deputy Prime Minister Grant Robertson has signalled an interest in increasing the Bright Line Test from five years to 10 and we expect there will be an announcement regarding this by March.

Already announced and also in March the return of loan-to-value ratios for investors will see a 30 percent deposit required for people purchasing residential property for investment purposes.

While these measures are utilised to dissuade some from investing into the property market, the likely effect will be nominal and we expect that residential property prices will continue to show stability in the face of the new policy.

While we expect to see additional dampening measures be deployed in this first half of the new year, the focus will remain on social housing and building new homes at scale and pace.

Interest Rates

Given economic challenges across global markets, record-low interest rates have been deployed to shield borrowers from the worst effects of economic inflation.

New Zealand’s Reserve Bank (RBNZ) has signalled its intention to keep interest rates at record lows for a long time, using the OCR to ensure inflation stays within the target range of one-to-three percent, and employment remains sustainable.

Where mortgage rates have followed the OCR to record low levels, bank serviceability testing continues to be a key area of discussion, and the risks associated with the prolonged low interest phenomenon revolve around debt-to-income imbalances.

Despite the expectation that interest rates will stay low for a long time, we expect to see them start the slow creep upward at the close of the year with the trough in our rear-view come December 2021.

Construction

November 2020 saw the highest number of new homes consented in the North Island since the data series from Statistics New Zealand began in 1991, something we expect to see continue through the next decade.

With the finger of affordability constraints pointed firmly at a shortage of available housing, the government has been clear in its intention to increase the capacity of our construction industry and create more houses for New Zealanders.

Additional incentive for residential developers is said to be in the works, but it seems bank caution continues to impact the industry with record lending to residential mortgage holders while funding for residential development has slowly dwindled since COVID hit.

A shortage of skilled labour and availability of materials due to international supply disruption are further issues to overcome, and a reformed Resource Management Act is still in the works, however, we expect to see building consents continue on an upward trajectory throughout 2021.

Banking

With the economy back on track to make a full recovery, New Zealand’s banking sector is poised to continue its lending spree to home buyers, with a renewed focus on the business sector.

The Reserve Bank’s FLP has allowed banks to borrow credit at the cost of the OCR which is significantly cheaper than previous levels, with the hope that rate cuts will be passed on to consumers, ultimately benefitting economic activity.

Property Prices

Market values are on an upward trend across the country encouraged by low interest rates, a fear of missing out as prices continue to rise, a captive Kiwi audience, re-emerging employment opportunities and economic expectations for the new year.

Market values are on an upward trend across the country encouraged by low interest rates, a fear of missing out as prices continue to rise, a captive Kiwi audience, re-emerging employment opportunities and economic expectations for the new year.

So long as demand continues to outpace supply, creating competition for quality properties we expect to see the current rate of value growth persist.

However, the issue of housing affordability remains atop many a politician’s agenda and we expect to see the effects of their efforts ultimately increase housing supply and reign value rises to gentle lifts rather than the huge upswing we have witnessed in recent months.

Related articles