As prices reach record highs, Prendos valuations expert Gordon Edginton gives us his opinion on ‘where to next’ for the New Zealand housing market.
“Prices in Auckland are now up 24% from the same time a year ago, when the COVID shock first arrived. This is an astonishing increase in a time of considerable uncertainty and nervousness, when all economic forecasts were for a collapse in the economy and unemployment spiralling upwards.
There’s no doubt that house price inflation has been driven by ultra-low interest rates. As soon as the Reserve Bank dropped the OCR to 0.25% in April 2020 in response to the pandemic and level 4 lockdown, the property market took off.
But this sharp growth should really have come as no surprise. With borrowing costs now as low as 2.25% and poor returns from other forms of investment, investors have been driven towards property as an asset class. Not only this, but – initially anyway – property actually became a whole lot more affordable for first home buyers, as they could easily fund the interest cost. In fact, owning a home and paying interest was a lot cheaper than renting, and we saw first home buyers taking a large share of the market in mid 2020.
What’s fascinating, however, is that the supply of new housing has also risen dramatically – despite the fact population growth has slumped thanks to COVID. Building consents are at record levels and we are now building far more houses than we actually need. With this construction boom likely to continue for some time the ‘housing shortage’, for the most part, will quickly be eroded. However, for those who require social housing, a shortage will remain until the Government or local Councils build the housing stock required by this group.
In March, the New Zealand Government announced its latest policy to bring housing inflation under control. Directed entirely at the property investor, it involves the removal of interest rate deductibility and the extension of the Brightline Test to 10 years – with the aim being to reduce housing demand by making property less attractive to investors.
Data from Corelogic shows investors have been taking nearly 50% of the market lately, and the new policy will certainly have an impact on that demand. Investors will start to see their returns fall and begin to exit the market and, with real estate now less attractive as an investment, it’s likely price growth will slow. The possibility of a correction in prices is very real – more so if building continues at its current very high levels against near zero population growth. A glut in housing supply has been seen in past cycles and is a distinct possibility this time around.
However, with a four-year phase in period for the loss of interest deductibility, there is plenty of time for investors to digest this and adjust to the repercussions. Its impact will be felt primarily by investors who are more highly geared. So, while the new rules will certainly give investors pause for thought, returns from leaving money in the bank are so low that it’s likely they’ll still be attracted to real estate, despite the changes.
In addition, while the Government’s new policy will, to a certain extent, discourage investors from purchasing existing homes, it may drive them to look at investing in new developments or new home purchases, as these may be exempt from the new tax deductibility rules and remain within the five-year Brightline rule. This will further fuel the already booming construction sector and development industry – and just how they’ll manage is not yet clear. The building industry is already at capacity and there are supply issues with many products. There aren’t enough tradespeople, our borders are closed to new migrants, and the improvement to apprenticeship funding is long term. It’s likely we’ll see construction prices rise as a result.
The construction industry isn’t the only area to see some small gains from the latest policy changes. More funding into infrastructure has been made available, but it’s unfortunately a drop in the bucket: more a long-term assist for releasing future land to create sections.
First home buyers have had a small boost, through the Government’s raising of income and house price limits dictating who can access First Home Grants and loans. They’ll also benefit from not having to compete so much with investors to buy a house and constantly losing at auctions. But, at the same time, they’re likely to see more competition from investors for new builds, given the exempt nature of new housing from the new rules.
Overall, the outlook for the real estate market is now far less rosy. The Government is clearly determined to stop house price inflation, and the latest policy changes will go a long way towards achieving this. If they don’t meet their goal this time around, there will likely be more intervention to come.
The losers in all this are those investors who need to borrow to purchase, as well as renters – who are likely to see rent rises due to increased costs to landlords, especially in provincial centres. Whatever way you look at it, the real estate boom is coming to an end and the Government is making sure this happens.”