Changes at home, abroad push market back onto familiar ground
As we approach the end of the first quarter of 2019, it’s time to re-evaluate the outlook for the New Zealand housing market.
The two key drivers of any market are supply and demand, and there have been significant factors impacting both.
At a global level, questions around the strength of the Chinese economy, the countdown to Brexit, Australia’s house price plunge, Donald Trump’s foreign and domestic policies and increased focus on climate change have all knocked investor confidence.
But the cautious or subdued behavior that is evident among many housing market participants in New Zealand, lower expectations of value growth and an overall plateauing of market conditions is being mostly driven by domestic events:
● The foreign buyer ban, the impact of which now appears to be flowing into some sub markets;
● The Tax Working Group’s recommendation that New Zealand adopt a capital gains tax and remove some of the tax advantages from residential property and other assets, however the full impact of this won’t be known until the government announces which recommendations they will adopt.
● The proposed changes to the Healthy Homes Guarantee Act and potential requirements for investors to upgrade their housing stock.
The upcoming census results could also result in further policy changes that will have an impact on the market as we gain an understanding as to population flows and other relevant demographic statistics.
On the plus side, there are factors at play that support current levels of demand, including:
● The loosening of the Loan to Value Ratio constraints at the start of the year;
● The Reserve Bank keeping the Official Cash Rate at 1.75 percent;
● A historically low interest rate environment; and
● Net migration still at healthy numbers (Despite the recent change in count methodology).
The dominant issue in the supply side of the equation is the shortage of available housing stock. Despite building consent numbers trending upwards, the residential construction sector is still plagued by capacity constraints. Recent announcements from KiwiBank around estimated build numbers over the next few years validate this. The existing consent, build and construction process is not able to provide the necessary ramp up in volume.
How can the Government facilitate larger scale and more efficient residential building? The answer may be incentives for large, off-shore pre-fab construction companies and an overhaul of the consent process and the restrictions imposed through resource management requirements.
What does this all mean for
the property market? Everyone wants to know what they should do next - should they buy or should they sell, should they hold off? Whilst crystal ball gazing should be generally avoided, the facts show that capital gains are slowing but that does not mean the market is doomed. The housing market is, and should always be, considered a long game. After years of rapid growth and inflated market conditions, New Zealand’s property market appears to be returning to what could be considered a normal playing field, which requires a change in mindset for most market participants.
The days of big profits from property speculation are behind us. For first-home buyers, that means not over-extending on a loan, factoring in possible interest rate rises, and giving consideration to more affordable locations.
For investors, the focus should be on yield not short-term capital gain. They should also budget for increased capital expenditure over the coming years as legislation may change.
All buyers should try and maximise the amount of their deposit as it both lowers your mortgage amount and ensures that there is enough equity in your property to ride out potential value dips over the next few years.
● James Wilson is director of valuation innovation at Valocity