The industry is loud with chatter about the path forward for residential property, yet big changes introduced recently by the Reserve Bank of New Zealand (RBNZ) and the Government have not yet produced the seismic shift in confidence once anticipated.

Against the backdrop of the global pandemic, the international economic outlook is improving, with implications for interest rates at home, while migration remains extremely low and interventionalist policy is tasked with reining in house price growth.

While the factors which have driven housing inflation now appear to be shifting, what can we expect from our national housing market?

INTEREST RATES

In response to the COVID pandemic, the RBNZ cut the Official Cash Rate (OCR) to its lowest ever level of 0.25 percent, while also embarking on a huge programme of bond purchases and providing a cheap funding line for retail banks.

These moves were designed to keep the economy ticking along by encouraging spending and investment, as Kiwis saw a reduction in the benefits of saving while term deposit rates bottomed out and the cost of borrowing became ever-more affordable.

Safe to say, the RBNZ has achieved its goal there, with New Zealand now finding itself in the preferable position of having a hot housing market, consumers that are spending and businesses that are expanding, investing and employing.

In May’s Monetary Policy Statement (MPS), the RBNZ indicated this positive economic performance may lead to a series of rate rises in the second half of 2022, with the current level of stimulus no longer required.

Since that release, Gross Domestic Product (GDP) data, which shows the total value created by economies, has revealed New Zealand is in an even better-than-expected position, rising 1.6 percent compared against December 2020, and bucking Treasury’s expectation of a -0.6-percent regression.

For the housing market, this means interest rates are sure to rise, but the question is when?

Pre-some of this positive economic data, Treasury predicted no rate rises until 2025, meaning one of the single-biggest factors underpinning house price growth will remain in play for the next four years.

However, our big four banks have all forecast a rise in the OCR somewhere between November this year and the middle of 2022.

For purchasers, this may mean a little less borrowing power, however positive economic performance associated with asset value growth, rising employment, wage inflation and higher consumer spending are being demonstrated across the economy right now, and all things considered, look set to remain in place.

Manageable adjustments to interest rates and their potential to materialise as slower value growth by early next year pale in comparison to the 29 percent value gains homeowners have collected over the last 12-months.

POLICY CHANGES

Unsustainable property prices and a large market share to investors brought about the announcement of unprecedented changes to residential policy back in March.

While the Bright-Line Test was extended from five to 10 years, property investors’ top lines were hit with the curveball that the Government intended to phase out their ability to deduct interest expenses from rental incomes over the next four years.

Set against a backdrop of higher loan-to-value restrictions (LVRs) that require investors to provide a 40 percent deposit, residential tenancy reforms that raised compliance costs, and looming chatter about the use of debt-to-income (DTI) limits, property investors have been systematically hit from every angle.

But while pockets of the country have reported a pullback, it is not nearly as pronounced as would otherwise have been expected, with investors still accounting for 36.6 percent of the market, according to May Buyer Classification data from CoreLogic.

This has led market hawkers to revise previously low forecasts for housing inflation to year-end.

While the expectation of profitability for investors has been tempered by policy changes, first home buyers, movers and other purchasers remain largely uninhibited, with recent sales data showing there is plenty of pent-up demand to fill any void – if one should appear.

So far, prices are likely to trend upward as investors either hold their assets or look to buy more, most likely a new-build given their exemption from recent announcements.

Looking ahead, we are keeping a close watch on consultation regarding DTI tools, which would almost certainly have a profound effect on the spectrum of property purchasers, but that both the RBNZ and Government have signalled would have a long lead-in time before implementation.

INCREASING SUPPLY

In the absence of a precise figure for New Zealand’s housing shortfall, we can look to the pandemic-induced landscape for clues.

Where previous population growth outstripped new supply, building consent issuance has reached record new levels, while migration owing to border closures remains muted.

Thus, we have a really great shot at increasing much-needed housing supply across the country.

However, capacity constraints, rising costs for materials and a shortage of skilled labour are already having a dampening effect on construction activity.

While demand is expected to persist, our ability to deliver may be what constrains us.

So too could disproportionate investment between Auckland and the regions.

Where residential construction activity in our country’s largest city is running more than 100 percent above the 10-year average, consent issuance in our regions is less than half, meaning we run the risk of not replenishing stock in the places that need it the most.

Set against the global vaccination rollout, it is likely we will see higher rates of immigration (though perhaps not quite at the previous annualised peak circa 90,000), which will provide another powerful stimulus for residential value growth.

The housing market, while being a complicated beast has shown resilience in the face of a global pandemic and ensuing recession, while adapting quickly to change and ploughing ahead despite shifting goalposts and ambiguous policy.

It is worth more than one trillion dollars – quadruple the value of our annual GDP and for many New Zealanders, it is the most accessible option for wealth creation and a retirement plan.

Whether this is good or bad, it is true, and it demonstrates that the innate value Kiwis attribute to residential investment would require a powerful combination of fundamental changes to ease demand and see values regress.