28 June 2018

Shortage Underpins Stability

As the Auckland property market steers a more subdued course, gone are the heady days of astronomical leaps in housing values.


But, what of the future in the light of policies designed to suppress prices, supply challenges, financial risks and other factors?

Credit Constraints

Among the most significant factors to restrain Auckland’s housing market were the Reserve Bank’s changes to macro policy that put the brakes on new lending – to close the funding gap because of slower bank deposit growth.

Bank economists argue their cautious approach in rolling back the LVR restrictions was the right thing to do. Now that the Auckland market has cooled, and the rest of the country is playing catching up, they say, further easing is unlikely in the near term.

ANZ senior economist Sharon Zollner sums it up. “With the steam taken out of the Auckland market and affordability at its limits, we expect the housing market to remain stable with prices rising at a modest pace. Low interest mortgage rates and pent-up demand for housing are still likely to keep the pressure on prices in Auckland.”

Ashley Church (Property Institute), Michael Gordon (Westpac), & Nick Goodall (Core Logic)

Ashley Church (Property Institute), Michael Gordon (Westpac), & Nick Goodall (Core Logic)

Interest Rates

With no evidence of a lift in domestic pricing pressures, interest rates are stable and it’s unlikely the OCR will move upwards any time soon.

But, most people are asking, how long can these ‘historic lows’ last?

Ashley Church, chief executive of the Property Institute, comments that “there’s a sense interest rates have become structural and locked in – that low interest rates are the ‘new normal’.

“They’re back at a level that was common until the mid-70s. It’s only over the past 40 years that interest rates above five percent have become the norm. The Reserve Bank and central banks believe that even a small movement would upturn their economies. There’s a real sensitivity around anything that raises rates too much.”

Core Logic’s Nick Goodall also believes the OCR will stay at the same level for around the next 18 months. However, he adds, that’s only a part of what drives interest rates.

“The cost of overseas funding is likely to increase. That must be passed on through interest rates. The key question is, how great might that increase be?”

New Zealand is in a unique situation, he says, where around 80 percent of people are on fixed term rates rather than floating. “Eighty-eight percent of all fixed loans for investors are due to come up for renewal in the next two years. If rates start to increase, that may be something to look out for in the future. People may have to spend more than they can afford to and they might have to restructure their loans. That might be risky if people are sitting there at 88 percent LVR and they’re faced with significantly higher interest rates. It may affect their affordability.”

On top of that, investors may also have to deal with the cost of having to improve the quality of their property through the Government’s healthy homes guarantee.

“A greater finance cost will affect the overall profitability of the property. Some may have to sell to reduce their exposure.”

Coupled with things like extending the Brightline test and removal of the level of negative gearing, it could result in some investors having to sell properties, which, he says, could affect the market.


Government Policies

Westpac senior economist Michael Gordon is even more concerned about the four Government policies aimed at cooling the housing market: tighter limits on immigration; extending the Brightline test for tax on capital gains from two to five years; phasing out negative gearing; and barring non-residents from buying residential property.

Gordon says, “While each of these policies in its own might only have a small impact on house prices, together the impact will be more meaningful. We’re forecasting that house prices will fall slightly over the next few years.”

Church points out that the rhetoric on slowing immigration has already softened.

“Prior to the election, Labour was cutting 30,000 foreigners from entering the country. Now they’ve backed away from those numbers and they’re tightening up on the ‘types of work’ allowed. They’re pragmatic on what they’re prepared to do.”

According to Goodall, we need those numbers to support our expanding economy.

One thing to look out for that might have a negative effect on New Zealand, he says, is Australia’s improving economy. “The net migration headed our way could soon start heading to Australia instead. That could well have an influence here. We need to keep an eye on that. The Government can’t do much about that.”

Church adds that there will also be amendments to the foreign buyer ban. “But the essence of only allowing residential buyers will remain. They’re being pragmatic between the reality and their policy. It’s interesting watching because it’s changing relatively predictably. They’re backing away fairly quickly.”

"We need to look at other ways to build property faster" says Goodall.

"We need to look at other ways to build property faster" says Goodall.

Supply Challenges

The Unitary Plan has been massively positive, enabling more intensive construction along transport lines as the Government tries to make better use of Auckland’s limited land resources. But it only became operative in October 2017, so as yet there has not been any major activity.

And, as Church points out, there are still real issues around developers getting funding from banks for apartments. 

New Zealand’s construction industry generally faces a major challenge to create enough affordable housing at the speed required to keep up with our continually strong population growth. Despite the Labour-led coalition Government’s policies, migration figures, particularly for Auckland, haven’t slowed much and the figures remain near all-time highs.

KiwiBuild promised to build 100,000 affordable homes across the country – 50 percent in Auckland. Finding a way to do this is turning into a massive challenge for the Government and Auckland Council.

Repeating what we’ve done in the past is not achievable, says Goodall.

“We need to look at other ways to build property faster. One of the challenges with banks is that if we start to build in different ways – prefab and offsite, for example – how are they going to structure mortgages for those properties? They need to change their own processes on how they provide mortgages. The whole industry, from banks to the construction industry to the council and the Government need to enable this to happen relatively quickly. It’s a challenge all over the show.”

Church is sceptical about Mayor Phil Goff’s commitment to making it happen. “The biggest concern is that prior to his election, he was talking about housing being the central government’s problem. He abdicated responsibility for some time.”

But, Church concedes, there’s work underway as the council has dusted off the old Housing Taskforce, which is working with the Government to increase the pace and scale of house building in Auckland.

Goff says the right people from across the housing supply chain, council and Government all share the view the regulatory regime for building products is not fit for purpose and is holding development back.

The Housing Taskforce will work with the Government to review building regulations to support innovation in construction and land use, most notably modular, offsite and prefab construction for medium-density housing.

Says Goff: “A key focus of our work will be to develop new revenue sources such as targeted rates and infrastructure bonds. There is a clear link between the development of transport infrastructure and intensive housing, which could help the Government’s Kiwibuild programme.”

Global events have a tendency to influence markets.

Global events have a tendency to influence markets.

Global Events
Potential global events have a tendency to influence investor and consumer confidence and drag the housing market down.

Since Donald Trump came into power, he has upped the ante around protectionism, implementing trade tariffs on goods imported into the US. While he toned it down, more recently he announced the potential to put tariffs on Chinese goods entering the US. The Chinese responded by implementing their own.

Jeremy Couchman of Kiwibank says there are risks that the Trump administration might become more aggressive and look to other markets, which may respond. “That might have a negative impact on global trade and growth. We are very reliant on trade so indirectly our trade could take a hit. That’s a risk we’re keeping an eye on. These things could escalate quickly. But for now, they’re isolated between the US and China.”

There are also geopolitical risks in the background, like tensions around North Korean nuclear advancement. Then there are risks around the financial markets which have an impact around funding costs and potential interest rate rises in the future.

Couchman points to central banks withdrawing policy stimulus, or hinting they are going to in the future.

“Withdrawing stimulatory policy means financial markets might react badly. In the last few years, lots of money has been put into the system. If that’s taken out, markets might go into reverse. That would normally be a gradual process. But it’s always a risk.”

The final global risk, says Couchman, is partly due to the US Government running large fiscal deficits and partly because of big tax cuts. “They’re ramping up bonds to fund that growing deficit, adding supply which starts to see interest rates pick up a bit. That has had a limited effect here so far. But our sources of funding might become more expensive.”

Jeremy Couchman, Kiwibank.

Jeremy Couchman, Kiwibank.

He adds that a significant demand for property as the underlying backstop is helping to support ongoing demand. “The market is likely to remain stable for some time.”

As population growth continues to moderate, mortgage interest rates rise slowly, and investors navigate a more complex environment, reducing potential profitability, Goodall believes the risk of significant growth in property values will be reduced over that time. 

“But with significantly improved supply inevitably taking a while to come to market (especially in Auckland) then I would say there’s also a reduced likelihood of values dropping too far. In general, it’s likely we’re in for a period of low to moderate growth over that period.”

The shortage of 100,000 homes seems to underscore a consensus for most property experts.

Church says house prices are static and will remain so for the next three to four years.

“But in 10 years, we’ll be having the same conversation. There will be the big boom then filter off. We’ll have about three-and-a-half more years of flat market, then in about 2021 we’ll start to see it pick up again. Then it will go up for five to six years of steady growth. In 2028, properties will have more than doubled what they are now."

"A crash is very unlikely because there are still 100,000 homes less than we need.”


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