Change in the air

Signalling a seismic shift in the path of fiscal policy, interest rates are on the way up, but just what impact will rising mortgage rates and other policy changes have on the residential property market?

Igniting fresh calls for intervention, data for the year to August shows property prices across the country rose nearly 30 percent, the equivalent of nearly nine times the median household income.

“Exacerbated by a historical supply shortage and the low interest rate environment, property prices have been rising rapidly for the better part of a decade,” says Johnny Sinclair, Bayleys national director – Residential.

“For years, policy-makers have sought, unsuccessfully, to slow the rate of value growth by targeting demand-side measures, however, the goalposts have shifted with the recent rise in the Official Cash Rate (OCR) and projected building activity,” he adds.

“Policy-makers have sought, unsuccessfully, to slow the rate of value growth by targeting demand-side measures, however, the goalposts have shifted with the recent rise in the Official Cash Rate (OCR) and projected building activity,” says Johnny Sinclair, Bayleys national director - Residential.

MONETARY POLICY

Almost immediately following the emergence of COVID on our shores, Kiwi policy-makers 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 economy activity,” Sinclair says.

Loan-to-value (LVRs) restrictions were also temporarily removed for the housing market.

Designed to support economic health, the measures had the unintended consequence of inflating asset prices to levels described as ‘unsustainable’ with around 26 percent median value growth recorded in the last year.

During this time, a strong health response facilitated a better-than-expected bounce back from the pandemic-induced recession which now predicts Consumer Price Index (CPI) inflation to increase above four percent in the near term, exceeding the central bank’s target of between one-and-three percent.

In its most recent Monetary Policy Statement (MPS), the RBNZ raised the OCR by 25 basis points to 0.50 percent, which while widely anticipated, still constitutes the first rate rise in seven years.

“By raising the OCR, the RBNZ shows they have moved away from emergency settings, signalling that we are now back on the path towards more traditional monetary policy,” Sinclair says.

For homeowners, a rise in the OCR is usually passed on by retail banks as higher mortgage lending rates, but with this latest hike so widely anticipated, several of New Zealand’s banks had already priced in the market movement.

“So, this time around some mortgage holders mightn’t have noticed higher mortgage repayments, but projected rate rises through to 2022 will be felt at some point,” he adds.

Forecasters have noted a one percent rise in mortgage lending rates could have the potential to facilitate a 10 percent decline in property prices, to which Sinclair disagrees.

“With the RBNZ’s commitment to gentle OCR movements, this is unlikely to occur in the near-term or all at once,” he says.

“Instead, we are likely to see a more manageable rate of value growth which slows from the three percent monthly average.”

TAXATION

The huge market presence of residential property investors was the catalyst for unprecedented changes to residential policy back in March, with clarification on the tax changes revealed earlier this month.

While the Bright-Line Test was extended from five to 10 years, property investors’ top lines were hit with the curveball that the Government intended to phase out their ability to deduct interest expenses from rental incomes over the next four years.

Set against a backdrop of higher loan-to-value restrictions that require investors to provide a 40 percent deposit, residential tenancy reforms that raised compliance costs, and looming chatter about the use of debt-to-income (DTI) limits, property investors have been systematically hit from every angle.

Despite a temporary pullback as they acclimated to new conditions, investor activity has held steady throughout 2021 following March’s housing announcement, with investors still accounting for 36 percent of New Zealand’s buyers’ make-up.

“Where changes to the tax treatment for investment property was expected to start a huge move out of the market, residential property investors have now embraced change, indicating they will work with policy that exempts new-build properties,” Sinclair says.

“Where changes to the tax treatment for investment property was expected to start a huge move out of the market, residential property investors have now embraced change, indicating they will work with policy that exempts new-build properties,” Sinclair says.

“Private residential property investors provide a very valuable social service housing some 1.5 million tenants across the country, so it has been important there is some encouragement to invest in new-build housing.”

“Ongoing consultation on the implementation of debt-to-income limits looms large on our radar, and we are also watching Treasury’s comments on the tax treatment of large inheritances and gifts as policy-makers struggle to juggle superannuation payments and an ageing population,” he adds.

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, which, if translated into building activity will mean New Zealand has a fair shot at clawing back some of the historical deficit between supply and demand,” Sinclair says.

With border closures forcing migration down some 94 percent, New Zealand has an opportunity to build at speed and scale to meet the current demand for housing.

However, the construction industry is faced with big 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 the developer’s job 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 while we expect to see strong house building over the next 12-months, market factors may accentuate timelines or impact relatively new developers’ abilities to get projects off the ground,” he adds.

Hot competition for properties across our urban centres and regional areas continues to underpin current property prices, which Sinclair says will persist until we can bridge the gap between supply and demand.

MOVING FORWARD

To year-end, Sinclair says, we are watching the pandemic response carefully, with a scale down the alert levels in the Upper North Island expected to facilitate a spike in housing activity as buyers and sellers capitalise on pent-up demand and warmer weather.

“The latest lockdown has been brutal for businesses but we do expect to see heightened economic activity once lockdown and travel restrictions ease,” he says.

“Looking to 2022, we expect improving job security, accelerating wage growth and the ability to work remotely facilitating a push into regional markets will reinvigorate Kiwi families to assess their current lifestyles, driving residential sales activity for the new year.”

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