CoreLogic: Property market slows down amid "strange and distorted" quarter

Economists release forecasts

CoreLogic: Property market slows down amid "strange and distorted" quarter

The New Zealand property market showed signs of slowing down during the third quarter of 2021 (Q3 2021) amid a “strange and distorted period” for both the market and the economy, according to the latest CoreLogic NZ Quarterly Market Update.

CoreLogic NZ chief property economist Kelvin Davidson noted that sales activity and property value growth in the country have been cooling down for a few months now, with stretched affordability most likely subduing demand and leading to a few would-be buyers holding back.

Specifically, average property value growth slowed from a quarterly rate of 8.1% in April 2021 to 4.8% in September.

“But even so, the slowdown is genuine and has further to run. Some parts of the country have actually seen average values go backwards in the past couple of months,” Davidson said.

“It wouldn’t be a surprise to see single-digit gains in property values next year, perhaps around the 5% mark.”

Davidson explained that higher mortgage rates, low gross rental yields, and tighter regulation (such as 40% deposits and the removal of interest deductibility) impacted mortgage investors’ appetite and activity.

Therefore, it is not surprising that CoreLogic saw investor market share of property purchases across New Zealand drop from 29% in Q1 2021 to only 24% in Q3, the lowest since Q2 2020.

“Given the pressures [investors are] facing, it wouldn’t be a surprise to see this market share figure drop towards 20% in the coming months,” Davidson added.

Read more: CoreLogic delivers the latest on New Zealand’s property market

On the bright side, for investors, Davidson highlighted that there is now clarity about what a new-build property is and how long it will be classed as new, as well as the continued ability to claim mortgage interest as a deductible expense for investors within the first 20 years of the property’s life. The exemption from the loan-to-value ratio (LVR) rules also makes new-builds attractive for investors.

Meanwhile, first-home buyers (FHBs) have remained active in the market in the past few months, with some using KiwiSaver for the deposit and taking advantage of the owner-occupier lending speed limit to buy properties with less than a 20% deposit.

“However, that’s about to get a little harder with the low deposit allowance being cut by the Reserve Bank from 20% of lending to only 10% from November 01,” Davidson warned.

CoreLogic economists expect the property market to see sharply rising construction costs and higher mortgage rates next year, with further regulation impossible to rule out.

“Additional macro-prudential measures in the form of debt to income ratio limits and/or minimum serviceability testing rates could still be on the cards. Even so, we still have low unemployment and, although large numbers of new houses are currently being built, cost pressures in the construction industry could dampen that momentum soon – meaning shortages could persist. Therefore, a slowdown in value growth still looks more likely than an outright falls in prices,” Davidson said.