Economists release market forecasts
With the increase in mortgage interest rates as the latest factor influencing New Zealand’s residential property investment market, CoreLogic economists predict that the market is close to – or at – a turning point.
The latest CoreLogic Property Market and Economic Update (Q2 2021) reported that sales volumes had eased a little, running at around the same levels as 2019, with 2020 not a fair comparison.
The lack of listings also continues to restrain achieved sales volumes. However, CoreLogic data on valuations ordered by banks – an early indicator of borrowers applying for loans – revealed that demand had eased too.
CoreLogic NZ chief property economist Kelvin Davidson said the decrease in demand was not surprising as many deals have already been pulled forward from later in the year to beat the tighter loan-to-value ratio (LVR) restrictions on March 01 and May 01.
“In the mortgage market, our analysis suggests activity has held up better than anticipated likely due to ‘other’ lending such as top-up loans, bank switches, and possibly early breaks of fixed loans,” Davidson said.
The monthly gains on the CoreLogic House Price Index have also eased slightly in recent months – from 3.1% in April to 2.2% in May and 1.8% in June.
“As sales activity dips over the months, it’s also likely that a slowdown for values will become more evident, although house price falls still seem unlikely in this cycle,” Davidson said.
CoreLogic economists stated that the effects of the recent tax changes were not overwhelming so far as they have not yet seen a mass sell-off by landlords or clear evidence of a spike in rents.
“It’s important to note that our Buyer Classification series does show a clear drop in market share for mortgaged investors since March, but we suspect most of that is due to the 40% deposit requirement rather than necessarily the extended bright-line test or removal of interest deductibility,” Davidson said.
However, CoreLogic economists expect the tax changes to have a significant effect in the near future – pushing investors towards new-builds rather than existing properties, especially if the ability to claim interest as a tax deduction applies indefinitely for the first owner (investor) of a new-build.
On the bright side, CoreLogic economists pointed to signs that first-home buyers have become more successful in accessing the housing market in the past few months after a struggle in the first quarter of the year. However, most of them have been interested in new-builds, so an influx of investors may not be ideal from a first-home buyer’s perspective.
“As the market cools over the coming months and into 2022, we should see ‘normality’ return for sales activity and price growth, and the strains on would-be FHBs in terms of trying to save enough for their deposit to keep pace with the market aren’t as intense,” Davidson said.
CoreLogic economists also noted the Reserve Bank of New Zealand’s decision to allow the design and implementation of a system for capping debt-to-income (DTI) ratios for mortgages, potentially at seven for owner-occupiers and six for investors.
“However, given the process required to get DTIs up and running, they seem unlikely to be introduced before November this year. And more importantly, the RBNZ wants to sit back and assess the effects of rule changes already made before taking further steps. We think the market will have slowed of its own accord by the end of the year; hence, DTIs won’t be required in this cycle,” Davidson said.
CoreLogic economists said the outlook for the New Zealand economy and inflation will also have a significant bearing on the housing market – with New Zealand’s GDP expanding (1.6%) in Q1 2021 and the employment rate now falling for two consecutive quarters (to 4.7%).
However, Davidson warned: “solid demand hitting up against supply/capacity pressures, such as due to COVID-related shipping delays, is starting to create higher inflation (3.3% in the year to Q2), which, in turn, will see the OCR and mortgage rates rise.
“Indeed, mortgage rates have already risen, and more increases are likely, and given that mortgages are larger than before in dollar terms, any rate rise will tend to have a greater impact on household finances.”