New Zealand’s runaway housing market has enjoyed an unprecedented upward value trajectory, seemingly unstoppable in the face of a global pandemic, but with policy-makers seeking more control, Bayleys asks whether looming changes will finally pop our property bubble?

With news that more than 78 percent of homes across New Zealand’s suburbs have earned median value gains exceeding $100,000 in the last 12 months, policy-makers are more determined than ever to exact change and reign in our rampant value gains.

In spite of a persistent supply-demand imbalance exacerbated by global supply chain disruption and a shortage of skilled labour, policy-makers have zeroed in on demand-side dynamics as the silver bullet.

“Policy-makers have taken aim at property investors, and since higher deposit requirements and tax changes have thus far done little to quell the Kiwi penchant for housing investment, the lens is looking at owner-occupiers,” says Johnny Sinclair, Bayleys national director – residential.

**TIGHTER LOAN-TO-VALUE RATIOS **

Following a short consultation against the backdrop of a fresh nationwide lockdown and median property prices which rose 26 percent year-on-year in August, the Reserve Bank of New Zealand (RBNZ) has confirmed a reduction to the proportion of high loan-to-value (LVR) lending from 1 November 2021.

Flagged by the central bank in early August, the change means bank lending to owner-occupiers with small deposits of less than 20 percent will be halved to now, only 10 percent of the bank’s total new mortgage lending.

“This move is an interesting one, given policy so far has focussed on giving first home buyers a leg up, yet they are the demographic most likely to borrow at high LVR levels,” Sinclair says.

Noting high household debt as a contributing factor, the RBNZ has all but acknowledged the move will disproportionately impact an already segmented marketplace.

“Policies like this, focusing on demand-side measures, fail to have a meaningful impact on house prices because at its core, values keep rising and the country needs more quality housing stock,” Sinclair explains.

“I expect these tightened lending requirements will have a minimal dampening effect on property prices going forward, especially for larger homes in desirable suburbs which are already beyond the reach of budding buyers with small deposits.”

“The greatest effects are likely to be felt by the 24 percent of the market identified as first home buyers, who now face increased competition from investors for tax-exempt ‘new build’ properties,” he adds.

**THE BEGINNING OF THE END FOR INTEREST DEDUCTIBILITY **

When the Government announced sweeping changes to the tax treatment of investment property back in March, landlords across the country paused for thought, before ploughing ahead with new purchases, albeit at lower levels.

Since 1 October, property investors are no longer permitted to deduct interest expenses from properties purchased on or after 27 March 2021.

For properties purchased before the March date, investors’ ability to deduct interest expenses will be gradually phased out over a period to the end of March 2025.

“Property investors have had time to adjust to these new conditions, and while this shift in tax policy certainly impacts their cash flow, it has been interesting to see activity continue along relatively steady levels,” Sinclair says.

The willingness by investors to continue to engage with the market, despite tax changes and higher targeted deposit requirements, could be due in part to the exemption of new build properties.

Releasing their consultation on what defines a ‘new build’ under new rules, the Government has stated properties will be considered ‘new’ for 20 years from the time their Code Compliance Certificate (CCC) is issued.

The window will still apply to subsequent purchasers if the property is bought and sold within the 20-year timeframe.

“Where traditionally first home buyers and investors duke off for comparable properties at the lower end of the market, I expect this exemption will feed heightened investor demand for homes that are ‘new’,” Johnny says.

“Conversely, the backlog of first home buyers with deposits of more than 20 percent will likely pick up any lower-value properties left behind by highly leveraged investors,” he adds.

Unfortunately for renters, a recent survey of landlords conducted by independent economist Tony Alexander found 77 percent said they would increase rental pricing in order to recoup higher compliance costs and expenses once covered under interest deductibility.

A RISING OFFICIAL CASH RATE

The mortgage market has been humming with rumblings of a rise to the Official Cash Rate (OCR) for some time now, given New Zealand’s better-than-expected economic performance and the rising cost of goods and services.

Where the RBNZ has said they are keen to lift the OCR as soon as possible, recent lockdown restrictions stalled best-laid plans, yet projections remain intact for the OCR to hit 2.1 percent by late 2024.

“The ultra-low interest environment has offered homeowners access to cheaper credit than ever before, but by the RBNZ’s own predictions, we are likely only to reach levels managed in 2016 by 2023,” he adds.

“For borrowers, this means mortgage rates will rise from incredibly low levels to slightly higher ones,” Sinclair says.

While the 0.25-percent record-low OCR has undoubtedly encouraged housing market activity, rising rates at forecasted levels are unlikely to have the dampening effect that proposed debt-to-income (DTI) limits may impose.

“The RBNZ is due to consult on the use of DTI limits this month, these having perhaps the greatest potential to restrict the high price buyers are willing to pay for residential property, based on incomes,” Sinclair says.

“We will be watching developments here closely, however, the kinks of implementing DTI limits are unlikely to be ironed out by early next year,” he adds.

Where across the world, developed economies continue to report rising property prices, fed by the fiscal response to the global pandemic, asset prices at home have risen steadily courtesy of a complex blend of insatiable demand, lack of supply and a preferable lending climate.

“While policy-makers are doing their level best to influence the latter, national housing inflation is set to tick over 30 percent by year-end, demonstrating that until more homes are built and offered to the market, competition will continue to feed rising property prices,” Sinclair says.