With the holiday period well behind us and as we are now into the third year of Covid-19, it felt like an apt time to reflect upon another extraordinary 12 months of the New Zealand housing market and consider what 2022 may bring.
When Covid first hit New Zealand there were predictions of doom and gloom and indeed many sectors were adversely affected. But when it comes to the housing market, many of the pandemic responses have contributed to an economic environment that has accelerated the upward trajectory that was already occurring.
If we look to the facts including past market behaviour and market settings, we can paint a fairly accurate picture of what we could expect this year. 2021 was another extremely active year for the housing market with significant shifts in supply and demand, so today we’re going to take a deep dive into these two fundamentals.
Historically low interest rates in the first half of 2021 saw continued demand surges across New Zealand’s housing market. As Covid drove larger numbers of Kiwis home and into the property market, the fear of missing out, particularly for first home buyers, exacerbated the upward pressure on demand. People weren’t just panic buying toilet paper and household necesseties, they were also snapping up residential property as fast as they could. Anecdotally it appears that the rate of migration back into New Zealand is slowing (although this may change again with borders re-opening), however the same is not yet evident in the need for homes.
Policy changes introduced in March 2021 were an attempt to slow the upward trend. You could somewhat liken this to pouring water on the fire immediately after it was stoked with petrol given the massive surges in demand in response to Covid. The changes included a focus on demand and supply drivers to allow certain buyer groups (such as first home buyers) greater access to the market:
- Removal of the ability for investors to write off interest expenses for existing homes, new builds are exempt for twenty years
- Bright-line test extended from 5 to 10 years
- Price and income caps on first home grants and loans lifted
- $3.8 billion Housing Acceleration Fund to finance infrastructure
Commentary speculated as to the impact these policies may have; interestingly in the short-term the answer is that not a lot changed. Most likely because the low interest rates and extreme fear of missing out have continued to dominate people’s decisions.
In October, the government introduced an amendment to the Resource Management Act to bring forward and strengthen the national policy statement on urban development. This plan aims to diminish the power of ‘not in my backyard’ (NIMBY) in the consenting process and enable intensive residential developments. It is too soon to comment on the effectiveness of this approach, but we’ll be watching this space.
Reserve Bank OCR and retail interest rate increases
Just last month, the Reserve Bank increased the official cash rate (OCR) to 1 per cent, stating “The level of global economic activity is generating rising inflation pressures, exacerbated by ongoing supply disruptions. The pace of global economic growth has slowed however, due to the general elevated uncertainty created by the persistent impacts of COVID-19, and clear signals that monetary conditions will tighten over the course of 2022.”
The OCR, which has been increasing since last year has had an immediate impact on retail interest rates. After about a decade of steady decrease, retail interest rates have started to climb. No doubt we have not seen the end of these increases and there will be homeowners who have purchased throughout this property cycle that have never experienced interest rate levels of five per cent or more. While demand is still high, many would-be buyers and homeowners will be taking pause to consider what these increases mean for their overall levels of affordability.
Policy and regulator impact of lenders
There have been a series of recent lending-related changes that will impact the property market:
The Credit Contracts and Consumer Finance Act (CCCFA)
Enforced as of December 2021, under the CCCFA lenders must undertake a higher level of borrower scrutiny during the home loan process with a stronger than ever focus on debt servicing afforability. This impacts certain buyer types who sit at the fringe of approval and will be further impacted by the increasing interest rate environment.
Cut backs to interest-only lending
Signals of intent to cut back on interest-only lending may hamper some buyers who have used this facility to access the market, such as investors.
Some banks have signaled their intent to adopt debt-to-income ratios, which may begin to impact some segments of the market such as first home buyers where a quarter of lending in June 2021 had a nationwide debt-to-income ratio of over 6:1 (37 per cent of Auckland’s first home buyers had a debt-to-income ratio of over 6:1).
The overall impact of these changes is their potential to make it more difficult for some buyers to obtain mortgages, which may act as a deterrent to purchasing, cause the defer of purchase decisions or instigate a more cautious mindset. And this, of course, will impact demand.
It’s no secret that New Zealand has had a shortage of housing for a long time now. Yes, this is due to increasing demand, but a deeper dive into the data also tells us there are broader dynamics at play.
Shortages of houses at lower price levels and housing types at the locations where homes are critically needed are a challenge. Furthermore, supply drivers relate not just to the number of new houses being built but also the availability of existing homes – we have been seeing extremely low levels of existing property listings for sale.
There are reassuring signs though with many large and small construction companies introducing innovation in building styles, design and construction techniques, which will introduce greater time and space efficiencies and begin to produce the results the housing market needs. However, the construction industry is not without it’s own set of supply and demand challenges as noted further down, and these contribute to a slow down of progress.
An interesting trend to watch this year and into 2023 when it comes to supply is the potential risk of over-supply in certain locations, or of certain property types. For example, if policy settings are geared around enabling first home buyers and investors into new builds, will development of large pockets of high-end, high-value new builds drop away?
Investor targeting of new builds
Rising interest rates and the policy changes mentioned in the demand overview specifically relating to interest write-offs will likely cause investors to re-balance their portfolios towards new builds. Indeed, this trend appears to have begun, however settlement delays on new builds due to their time to build (caused by materials shortages) will be masking the complete picture here. Another space to watch.
The continued building boom
The construction industry will remain busy throughout 2022 and for the foreseeable future. It’s not just new builds that are contributing to the capacity pressures and material and labour shortages, many homeowners are looking to renovate to meet their changing needs as opposed to selling and buying – for many homeowners it is more cost effective to renovate than it would be to buy the same house (renovated) in today’s market! The construction industry will continue to be impacted by these materials and capacity challenges, of which the flow on effect on new builds will be delayed settlements and rising costs. That said, the demand for new builds is not slowing.
Listing availability numbers may lift from their current slump
As a result of an easing of Covid restrictions and the border re-opening, we could expect to see a lift in the number of properties being listed towards the second half of 2022. This will possibly be offset by overall affordability levels and a more cautious mindset given the points we have discussed above, however. The immediate slump in listings caused by Omicron is expected to pass relatively quickly once case numbers drop.
What does this all mean?
Well, so far in 2022 we’re starting to see the impacts of all the above points – a more cautious home buying mindset.
Interest rate increases combined with current house prices and the new affordability regulations are expected to have the most impact on market activity this year. Existing homeowners will be questioning their ability to afford their next purchase be it an investment or family home, and despite levels of equity accumulated many will be reluctant to sell. Though ironically, such a severe shortage of listings often eventuates in a highly buoyant market.
Overall, many of the drivers to support value levels and value growth remain in place. However, headwinds are beginning to form. Whilst they are not yet strong enough to push values down across the board, under the surface we expect to see very mixed performance across the country and within property and buyer types moving forward. While some may experience noted drops in value, overall, we expect the rates of value growth to continue to stall with headline value levels beginning to soften during the second half of the year.
With such uncertainty as to what’s around the corner it’s more important than ever that those seeking to make their next purchase are thinking about the longer term, utilising the data, professional advice and support that is available.
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