A sign of things to come

Against a backdrop of rising mortgage lending rates, tightening credit conditions and the ongoing effects of a global pandemic, market confidence in the residential property sector remains strong, buoyed by the expectation that housing inflation will continue on a steady path.

“It’s been quite a ride for the those who have bought or sold residential property since the onset of the pandemic, with unprecedented conditions contributing to market exuberance and what feels like the unstoppable performance of the sector,” Bayleys’ national director of residential Johnny Sinclair says.

However, globally, interest rates are rising and New Zealand’s central bank has embarked on a tightening cycle that is expected to see the Official Cash Rate (OCR) rise from record-low levels to around 2.5 percent by 2023.

DEBT SERVICING AND THE TIGHTENING CYCLE

Almost immediately following the emergence of COVID-19 on our shores, Kiwi policymakers embarked on a sustained programme of fiscal protection aimed at providing support to our economy in a time of great uncertainty.

“While cutting the OCR to its lowest-ever level of 0.25 percent, the Reserve Bank of New Zealand (RBNZ) also implemented a huge programme of money printing and opened up a pipeline of cheap funding for retail banks to ensure continued lending and economic activity,” Sinclair says.

At the same time, the temporary removal of loan-to-value ratios (LVRs), and a supply-demand imbalance had a supportive effect on asset prices which has helped housing inflation to peak around 30 percent in the 12 months to December 2021.

Now, the dial is shifting on the low-interest environment, as policymakers return to more traditional monetary settings to encourage Kiwis to build up their savings and control inflation.

“Kiwis have already seen the effects of a rising OCR feeding through to higher mortgage lending rates at the same time that tighter lending criteria are being applied by financial institutions,” he adds.

With the cost of debt servicing expected to increase from eight percent of household income to around 11 percent by 2023, financial institutions are becoming more contentious in their debt assessments.

“Also on our radar, are the results of RBNZ consultation on the use of Debt-to-Income (DTI) limits, which could cap buyers’ borrowing power relative to their incomes.

“Changes like this often encourage a rush of market activity as buyers and sellers speed up their plans to combat the change in market conditions,” he adds.

MIGRATION

With the announcement that New Zealand’s borders are set to gradually reopen from 2022, Sinclair says the long-awaited easing of travel restrictions is poised to have a significant impact on our economy, and the property sector.

For nearly 24 months, migration, one of the key drivers of population growth, has been absent from the marketplace which has impacted everything from demand for housing, goods and services and the availability of labour.

When migrants return, we can expect to see an uplift in spending in key areas including tourism, hospitality and the international education sectors.

“What we’ll be watching is the move to regional areas, as both urban residents in our main centres and migrants look to relocate through the country in search of affordability and lifestyle features,” Sinclair says.

CONSTRUCTION

Sweeping changes under the National Policy Statement on Urban Development (NSP-UD) have facilitated greater density in some of our busiest urban areas, with huge growth projected for the future.

Residential building consents are tracking at historically high levels, with an estimated 80 percent of the 47,715 new homes consented in the year to October 2021 expected to come online within the next two years.

With border closures forcing migration down some 94 percent, New Zealand has been presented with a golden opportunity to make up for a historical deficit in housing construction. Now, with borders reopening, the industry is faced with some monumental challenges.

“Global shortages of key materials like steel and timber, supply chain disruption impacting the price and availability of some materials and a severe skills shortage contrast against ongoing regulatory hurdles to make developers’ jobs anything but easy,” Sinclair says.

“Demand for new homes remains high, evidenced by impressive interest from buyers across the country in our latest Bayleys-marketed projects, and we expect to see strong house building over the next 12 months,” he adds.

OPPORTUNITIES

Despite a change in the underlying market fundamentals that have driven housing inflation over the last decade, consumer confidence in the value of housing remains high, with recently accrued household wealth driving market activity through the new year.

“The significant reduction in mortgage lending rates since the beginning of 2020 has provided Kiwi households with an estimated $600 million boost that continues to encourage investment into proven assets such a residential property,” Sinclair says.

“Despite the rising cost of debt, homeowners have benefitted hugely from historic value gains, all while being tested by higher mortgage servicing rates that are used to ensure borrowers can manage higher repayments.

“Kiwis have kicked off the new year with a renewed willingness to transact, and we expect to see this continue with anecdotal evidence supporting increasing demand from non-resident Kiwis and exempt foreign buyers from Australia and Singapore,” Sinclair says.

Similarly, he says, it’s exciting to see new affordable housing supply coming online that offers opportunities for both first home buyers to get a foot onto the property ladder, and investors to continue to offer valuable rental stock to the market while securing tax exemptions.

“2022 will likely herald a moderation in value growth, which is only natural given a deterioration of affordability and tightening credit conditions, but as we open up to a post-COVID world, the effects of migration, recent value gains and the enduring nature of bricks and mortar investment will continue to underpin the health of our housing sector,” Sinclair says.

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