Involving so much more than just snap-decision making, choosing a home requires a big-picture approach to economic policy. Bayleys property reporter Katharina Charles speaks to economist Cameron Bagrie to find out what macro-economic trends are set to impact buyer behaviour this year.
“Closing a year that offered relative stability across our national property markets, the outlook for the first year of the new decade remains largely positive; driven by improving business confidence, renewed balance in our domestic economy and stabilised housing risks,” says Mike Bayley, Bayleys Corporation managing director.
Where uncertainty surrounding the introduction of new legislation and policy impacted growth for residential property in the first half of 2019, greater certainty as we enter the new year has seen house sales lift across the country.
As evidenced by latest announcements from the Reserve Bank of New Zealand (RBNZ), the low interest environment enjoyed by borrowers has made it easier to service existing debt.
“This, coupled with greater knowledge about the effects of the foreign buyer ban, healthy home standards and removal of the threat which was a capital gains tax, has painted a mostly rosy picture for both buyers and sellers hesitant to enter the market under previous ambiguity,” Mike says.
New Zealand’s General Election 2020 is poised to have an impact on the property sector, with activity building up to and during, generally slowing in anticipation of new policy and regulation.
While we will be paying close attention to debt-to-income ratio suggestions, quarter one and two 2020 look to be the sweet spot for both buyers and sellers benefitting from a resurgence in competition and stock on the market.
National Housing Inflation
According to the Real Estate Institute of New Zealand’s (REINZ) Housing Price Index (HPI), market values at the close of 2019 look to be on an upward trajectory; encouraged by low interest rates, greater policy certainty, wage growth and economic expectations for the new year.
“These indicators, combined with recent warmer and drier weather, are pointing toward greater levels of trading over the coming four-to-five months in what, apart from a few years during the 2012-2017 era, has traditionally been the busiest selling period for residential real estate,” Mike says.
“While listing numbers and sales volumes are picked to continue to rise over the short-term, we do not expect huge movement on pricing levels.
“Rather, value increases are likely to lift at a gentle rate, as such, we expect to see more composed market behaviour as we head toward spring and eventually, the General Election,” Mike says.
“The cyclicality now sits on top of a very stable long-term domestic economic situation, encompassing steady, albeit unspectacular, domestic growth; low levels of unemployment; and the enduring sub-two percent Official Cash Rate (OCR) which is keeping mortgage rates at low, low levels,” Mike says.
While we’re still weary of economic headwinds such as tighter credit availability, trading partner growth and business investment, the general consensus amongst economists seems to favour slow and steady growth spurred by fiscal stimulus which is anticipated courtesy of Government spending.
In necessary partnership with business confidence, household wealth and the equity created by residential property investment encourages spending as well as economic growth.
While household debt levels remain sustainable, we expect favourable market conditions will endure.
A phenomenon impacting economies around the world; interest rates for New Zealanders look set to stay low for longer, as the RBNZ uses the OCR to ensure inflation stays within the target range of one-to-three percent, and employment remains sustainable.
“Given economic challenges across global markets, the low-rate environment we’re currently experiencing is necessary to shield borrowers from the effects of weaker economic inflation,” says Mike.
Where mortgage rates have followed the OCR lower, bank serviceability testing has become a key area of discussion which has led to some of the major banks reducing the hypothetical interest rates offered to borrowers.
In light of the RBNZ’s capital review announcement which now requires banks to hold more capital against loans, a slight rise in interest rates is projected, though this is thought to be no more than 0.2 percent in the medium term.
Looking to the year-end, risks associated with the prolonged low interest phenomenon revolve around debt-to-income imbalances, which while presently unlikely, could see the use of macro-prudential tools like loan-to-value (LVR) restrictions revived in order to mitigate potential economic vulnerability.
As New Zealand’s third largest contributor to Gross Domestic Product (GDP) in 2017, financial technology (‘fintech’) and the concept of open banking are set to transform the traditional loan market, increasing competition amongst lenders.
Recent changes to the Credit Reporting Privacy Code allows consumers to have loans priced upfront without a credit enquiry impacting their individual credit score.
This, coupled with developments in the open banking space, which would see an increasingly collaborative loan market where borrowers could easily compare offerings, will benefit the consumer as we move toward greater transparency which will drive competition across the loan market.
“Wage growth has rebalanced the home affordability equation for many, and for rental increases which have raised yields to levels more palatable to the investment sector,” Mike says.
With a comprehensive capital gains tax off the table, and a better understanding of landlord’s obligations under new healthy home standards, the close of 2019 has seen a resurgence of investor activity in the national housing market.
While proposed amendments to the Residential Tenancies Act will affect some 270,000 landlords across New Zealand come early 2020, investors are expected to take changes on the chin, as rental inflation delivers attractive returns and persistently low interest rates disincentivises saving.
The nightmare that was New Zealand’s leaky home crisis continues to weigh on the construction industry, especially as we rush to accommodate a growing population.
Where a record number of cranes dot our national skyline adding vital housing and infrastructure across the country, the pressure on businesses to find skilled labour in order to meet the demand for new-build housing, results in rising construction costs.
“As cities move upwards, and outwards, creating community hubs, non-residential construction activity adds another element of pressure, as the demand for shops, restaurants and amenities to service new neighbourhoods grows,” Mike says.
Where proposed changes to the Building Act and the Resource Management Act aim to clarify stakeholder responsibilities while reducing complexity and laying out minimum standards, we expect that the balance between facilitation and regulation will be a key election issue.
“Legislative changes such as the new Residential Tenancies Act, the foreign buyer ban and the loss of tax breaks for rental properties, have all been absorbed into general real estate psyche,” Mike says.
November’s General Election is sure to deliver promises and a swathe of new policy designed to sway voters, however early indications from the current Government, as well as the Opposition imply a focus on infrastructure which, if resulting in greater spending, would have a stimulatory effect on the economy.
Looking ahead, housing inflation across the country is expected to grow approximately six percent over the 2020 year.
Given the element of uncertainty introduced by November’s General Election, the current combination of low interest rates, revised serviceability buffers, greater policy certainty and wage growth will be best leveraged in the first half of the new year, appealing to an interested market of first home homers, movers and investors.
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