26 April 2018

With so much happening with NZ’s property market, sometimes it’s hard to keep up.

With so much happening with NZ’s property market, sometimes it’s hard to keep up. TVNZ’s Corin Dann recently hosted CoreLogic New Zealand’s Head of Research Nick Goodall in a quick pace Business Q+A Session, with the pair discussing every corner of the NZ property market; from how a new mortgage test is changing everything, to where property investors are at and what First Home/Foreign buyers are doing.

It’s a thorough (but speedy) review of what’s going with NZ property from every angle, and you can watch it here (starts about 05.40) or if you prefer – a written overview is below.

After a slight bounce from Christmas/New Year, there are signs of constraint in NZ’s property market. Property values nationwide grew at just over one per cent in the last three months and at a rate of 7.3 per cent over the past year.

What banks are doing.

Goodall explained that banks are tightening their lending, with conservative serviceability tests on prospective borrowers. At a time when actual interest rates are hovering around 5%, banks are testing the ability of prospective borrower’s to pay at a higher 7% interest rate. Goodall commented “there has been a period of significant growth. Reserve Bank data shows that 82% of all investor loans are on fixed loans and 88% of those are due within two years. The banks will be cautiously focusing on ability of borrowers to repay loans if they need to be restructured at higher interest rates”.

The source of this serviceability concern isn’t the OCR (the OCR is tipped by many to stay at 1.75% for at least the rest of 2018 if not most of 2019). Offshore borrowing costs could be the driver, however Goodall did note general uncertainty from economists as to whether that pressure would be as strong as previously thought.

First Home Buyers.

First Home Buyers have increased their market share. Of course, all buyer types have been impacted over the last few years by LVR restrictions and tightening credit, but First Home Buyers aren’t impacted as much, so their share has increased. A dynamic unique to First Home Buyers is that they have the strong incentive to purchase in the face of spiralling rental costs, plus the ability to pull their KiwiSaver funds for deposits. In 2017, over $700M was withdrawn for First Home Buyers at an average of over $18K per account. This is enabling First Home Buyers to remain relatively active in the market but they’re adjusting their expectations: they’re more likely to go for townhouses/shared wall properties than standalone homes.

Strong market fundamentals.

Goodall noted that NZ’s property market is experiencing strong market fundamentals with low interest rates, high net migration plus a major shortfall in available housing stock. All that should be resulting in price increases, but the key defender to that price pressure is the ability of borrowers to secure credit.

Property Investors

Also relevant to keeping that pressure off price rises is investor response. Wellington’s 8% growth in rental prices is the exception to the rule (Auckland for example only has 2% rental growth). Investors  just aren’t seeing the same yields (currently it’s below 4% in all major centres) and capital gains as previously enjoyed, plus they face uncertainty on actual impact of tax changes and the new Healthy Homes Guarantee Bill.

LVR review.

Dann questioned whether the Reserve Banks’s LVR policy changes have made any impact. Goodall explained that two did: the first original change in 2013 (when 20% deposits were required for all). That saw 2-4% of FHB’s initially drop out of the market. The other major change was the requirement at the end of 2016 for investors to have 40% deposits. At that point, investors with mortgages were responsible for 28% of all sales. That pretty quickly reduced down to 24%, which has continued over the last 6 quarters until now. Overall sales volumes have trended downwards (in the number of sales) over last 2 years, and investor response has played a definite role in that.

Affordability and KiwiBuild.

Consent figures are definitely tracking upwards, especially in Auckland – but the industry is genuinely pressured and close to capacity. The reality of KiwiBuild actually achieving its goal of 100,000 affordable kiwi homes over the next 10 years has many asking how. The goal of market manipulation to provide a set of affordable housing lead to a discussion on what ‘affordable’ really is. “Although a figure of $500,000 – $650,000 is often talked about, the median price paid by Auckland’s First Home Buyer’s in last12 months was actually $750,000”.

Christchurch.

Many expected residential consents in Post-Earthquake Christchurch to drop further. The reality is that while they’ve reduced from their peak, they’ve now levelled out at a far higher rate than pre-Earthquake. Considering Christchurch’s current flat price growth, the increasing supply from all this building activity plus reducing population growth means we’d be surprised to see a values lift happening in Christchurch any time soon

Provincial performance.

When you rank the country by annual house price growth, it’s mostly the provincial areas that come out on top. For example, Napier has just had a strong period of growth at 15%. Wage growth however isn’t being sustained and population growth is starting to slow, so affordability of these value lifts will be impacted – we’re expecting Napier’s 15% to fall back to around 8%. Dann questioned whether there was a link between net migration and house prices (as many previous Governments have debated). Goodall agreed there was a link “but the bigger question is whether it’s the strongest link. Currently, the stronger link (and the one we’re focused on) is interest rates and serviceability tests”.

Vulnerability of housing market to global shocks:

Dann questioned Goodall’s take on whether our property market risked exposure to worrying global politics. Goodall referred to wisdom of wider economic commentary, but did note that if NZ’s currently strong labour market was impacted, the repercussions could be strong, especially for owner occupiers. Goodall also noted the huge potential impact of changes in net migration: “Net migration is currently at 70,000, but some years we can lose up to 30,000 to Australia. If, for any reason Australia becomes a far more attractive proposition for New Zealanders or foreigners, that would have a far greater impact on our migration than any policies would, which in turn would influence market price pressures due to reduced demand”

Foreign buyer’s rule: no noticeable impact in advance of it being

Dann and Goodall discussed the LINZ measure (whether the property buyer was registered for tax in NZ). It’s not a perfect measure, but what it does show is that over the last 9 quarters (just over two years), there’s been no change nationwide: just 3% of property buyers remain not registered for tax in NZ. Auckland is slightly different: moving from 4-5% 9 quarters ago, to 6% in the last quarter. A sign of a potential rush in buyers ahead of the Overseas Investment Office changes becoming law perhaps.