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New regulations impacting property market

Tags: Auckland Property Insight Residential

The latest raft of rules and regulations intended to cool the Auckland property market are having the desired effect, according to findings by Bayleys Research.

The rapid rise in Auckland residential property prices witnessed over the past two to three years has caused concern at the highest levels with both the Reserve Bank and Government stressing that a collapse in Auckland house prices would be bad, not only for home owners but for the national economy as a whole.

Traditionally, the tool used to cool runaway housing markets has been the Official Cash Rate (OCR) - through increasing the OCR and dragging mortgage rates with it in order to dampen demand. In the post Global Financial Crisis (GFC) world however, where interest rates across the western world are being held at historically low levels this instrument has not been available to the policy makers.

In order to retain momentum within the national economy, New Zealand’s Reserve Bank has, in 2015 unwound all the rate increases which it made in 2014. Mortgage rates have followed with home buyers now benefitting from multi decade low rates, said Bayleys Research manager Ian Little.

“As a result of this domino effect, the Reserve Bank and Government have had to turn to a raft of new targeted rules to contain value increases within the Auckland housing market,” he said.

“The aim of these tools is to ring fence the Auckland housing market, allowing low interest rates to be maintained in order to support the rest of the economy.”

To date, new rules and regulations introduced, which are aimed at cooling the Auckland market include:

  • Residential property investors in the Auckland Council area using bank loans to purchase property are now required to have a deposit of at least 30 percent.
  • A new ‘bright line’ test for non-residents and New Zealander’s buying residential investment property was introduced on October 1, meaning if the property is sold within two years Capital Gains Tax will be payable. In addition, in order to bring about greater transparency in relation to overseas buyers the following controls have been introduced:
  • A New Zealand IRD number is now required as part of the land transfer process. Non-resident buyers and sellers must provide their tax identification number from their home country and also need a New Zealand bank account before they can get an IRD number in order to buy a property.

While the new rules and regulations have been in play for only a short period of time, initial sales data released by the Real Estate Institute of New Zealand (REINZ) indicate they are having an impact on the Auckland market.

November sales figures showed a drop in the level of sales activity and a slowing in the rate of value appreciation, said Mr Little.

According to the Institute’s latest figures 2,514 sales were concluded in November 2015 - down by 433 or nearly 15 percent on the corresponding month in 2014. As recently as September, monthly sales in the region sat at more than 3,150.

While Auckland’s median house price increased in November compared with October, the latest figure of $765,000 is still below September’s peak of $771,000. “This has resulted in a slowing in the pace of annual value appreciation. In September annualised price growth stood at 25.4 percent. The November figure equates to a 12 month growth of 14.2 percent,” said Mr Little.

“These early figures therefore indicate that the latest raft of rules and regulations are having the effect the Reserve Bank and Government wanted when they implemented them in October and November.

“It is too early to assess with certainty whether the Auckland market is merely taking a breather or whether the softening shown over the last two months will become a longer term trend. However, sales figures from the traditionally strong summer sales period will help to clarify matters.”

The introduction of low interest rates to stimulate the economy post GFC is not confined to New Zealand. Many countries around the world are currently employing the same tool. This has seen Governments and central banks facing similar problems, in terms of selected property markets, as is the case with Auckland.

Investors in a number of cities therefore are seeing an increase in minimum deposits and/or higher interest rates. To date the impact of new regulation is starkest in Dublin. Concerns over house price escalation, which reached 24.5 percent in the year to September 2014 saw the introduction of limits on borrowing which equate to 3.5 times the annual salary of purchasers. This has seen house price inflation slow to just 2.4 percent in the 12 months to September 2015.

There seems little doubt that house value appreciation in Auckland will slow over the next year in response to recent regulatory changes, said Mr Little. Although the drivers of the market, predominantly, low interest rates, record migration and the city’s housing shortage will see values continue to rise.

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