Peaks and valleys for residential property in 2023

Untroubled by projections for the property and construction sectors in 2023, CoreLogic New Zealand’s Head of Research Nick Goodall says Kiwis are likely to see a soft recession, with managed falls in residential values given the strength of the economy and labour market.

“The economy is in a transitionary phase, where higher debt servicing costs are expected to reduce consumer spend and cool demand, ultimately taming inflation. This has been well-signposted by the central bank, and Kiwi households are in reasonable shape to adjust household budgets accordingly.

“All eyes will remain on interest rates, and their inverse relationship with property values as affordability bites and Kiwis spend more servicing debt as they roll over onto higher mortgage lending rates,” he says.

ADJUSTED EXPECTATIONS

While a cool breeze is expected to blow over the housing market into 2023, Goodall says there’s a decent chance the Reserve Bank of New Zealand (RBNZ) mightn’t have to take the Official Cash Rate (OCR) to its projected 5.5 percent peak - with the tough talk and the record-rise in November’s Monetary Policy Statement (MPS) an effective strategy in scaring down inflationary pressures.

“When we look at our global counterparts, the Reserve Bank of Australia (RBA), for instance, have slowed their monetary policy’s tightening program and now projects an OCR peak of 3.8 percent.

“This highlights the divergence of strategy, and early indications from recent transaction data are that aggressive rate rises from the RBNZ have been effectively easing demand pressures across the economy.”

Similarly, business intention surveys show more firms are planning to lay off staff than hire, which is the first indication of negative net hiring intentions since late 2020. Again, this could be a reflection that the dampening measures introduced by the central bank are working effectively to ease demand, giving further weight to the notion that we will not need to see an OCR rise as high or as fast as predicted at last year’s MPS.

While the next general election scheduled for late 2023 is shaping up to be a key event for the property sector, Goodall says Kiwis will have to wait to see what housing initiatives will make up the critical components of the major party campaigns.

“Traditionally, elections slow the market given uncertainty until results are revealed and policies are firmed. However, recent polling which suggests a change in leadership could be more favourable for property investment, adding a potential level of demand into 2024.”

“Traditionally, elections slow the market given uncertainty until results are revealed and policies are firmed. However, recent polling which suggests a change in leadership could be more favourable for property investment, adding a potential level of demand into 2024.”

ROOM FOR OPTIMISM

In terms of bright spots for the sector, Goodall says buyers with equity are well-positioned to maximise current conditions so long as they are prepared to manage increased mortgage lending rates.

“First home buyers are searching for opportunities, and sellers’ willingness to negotiate is a good news story. Likewise, there is potential in regional markets, and as affordability metrics improve along with employment prospects and lifestyle opportunities, areas including Canterbury become more attractive compared to other main centres.”

“Investors aren’t selling en masse, but they’re not purchasing either, reflecting a wait-and-see approach to current market conditions.

“The introduction of the Bright-Line Test minimum hold period for residential properties, which increased from five to ten years in March 2021, has slowed speculative activity, and we have seen investors hold onto their assets for longer to avoid paying income tax on sale gains.

“This has had a significant impact on market fundamentals, and with election year upon us, could prove easier to amend rather than reversing the removal of interest deductibility for property investors, which the National Party has suggested,” he says.

Significantly, for the house building sector, business confidence results show that a net 90 percent of firms expect lower residential construction volumes over the coming 12 months, reflecting a broad-based belief across the industry that demand for new homes has indeed cooled.

Despite this, the pipeline of planned residential developments looks set to underpin a consistent level of activity for the residential building sector, and Goodall warns of overstated pessimism for construction firms.

Liquidations increase in more volatile market conditions, and firms need to be cash positive as we head into an era where development pre-sales (an essential feature of loan agreements for funding mechanisms) are less appealing to purchasers.

Instead, Goodall points to government initiatives like the Build-Ready Development Pathway - a funding mechanism that underwrites residential developments - as providing a level of certainty for the year ahead.

“While challenges exist for the residential developers – labour availability, material costs and cashflow as interest rates rise – a government emphasis on adding supply in the right places will continue to buoy the market.”

“While challenges exist for the residential developers – labour availability, material costs and cashflow as interest rates rise – a government emphasis on adding supply in the right places will continue to buoy the market.”

“Kiwis still need well-located homes that serve communities, and the fundamentals of buying and selling will continue to be a market feature in 2023. It won’t be free-riding, but the residential picture isn’t as dire as some observers predict,” he says.

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