Source: MIL-OSI Submissions
Source: CoreLogic
The New Zealand property market has seen another fascinating year, with the CoreLogic Buyer Classification series confirming a shift in market share dynamics through 2021. In the first quarter, mortgaged investors pushed up towards a 30% share of property purchases amid a temporary respite from lending restrictions. But since the 40% deposit requirement kicked in, that share has dipped back to closer to 25%. Meanwhile, first home buyers have been more than keen to ‘fill the gap’, with FHBs’ market share helped along by factors such as KiwiSaver withdrawals and a willingness to look at cheaper properties, either townhouse/units or houses further from the city.
On the flipside, many would-be ‘movers’ (i.e. relocating owner-occupiers) have remained where they are due to finance restrictions or simply a lack of choice for their next property. This has created a renovation boom, adding to the already intense pressures on the country’s stretched construction industry.
Key data from the CoreLogic 2021 Best of the Best Report (current to November 2021)
Highest median value: Herne Bay (Auckland) $3,504,850 (a 30.7% increase on the previous year)
Lowest median value: Runanga (Grey) $193,700 ($3,311,150 less than the highest median value)
Highest 12-month change in median value: Woodville (Tararua) 47.7%
Lowest 12-month change in median value: Sunshine Bay (Queenstown) 6.7%
Highest five-year change in median value: Castlecliff (Whanganui) 207.9%
Lowest five-year change in median value: Long Bay (Auckland) 13.0%
Top sale price: 73 Argyle Street, Herne Bay (Auckland) $22,000,000
Highest median rent: Karaka Bays (Wellington) $875/week
Lowest median rent: Twizel (MacKenzie) $285/week
Highest gross rental yield: Runanga (Grey) 9.6%
Lowest gross rental yield: Herne Bay (Auckland) 1.0%
Shortest days on market: Port Waikato (Waikato) 4 days
Longest days on market: Athenree (Western Bay of Plenty) 74 days
Regulatory changes have influenced the market
In March 2021, the Government extended the Brightline Test for existing properties and announced the phased removal of interest deductibility unless investors were buying new-builds. The Reserve Bank of New Zealand (RBNZ) was granted powers to use other lending restrictions such as caps on debt-to- income ratios, which are now being consulted on and are already in force at some banks.
The RBNZ reinstated loan-to-value ratio rules on 1 March before ramping up investors’ required deposits to 40% on 1 May. From 1 November owner-occupiers have faced tighter limits, with the low- deposit lending threshold cut from 20% to 10%. In other words, no cohort has escaped the tightening credit environment, not least first home buyers, who are also facing additional pressures now in the form of limited (or no) pre-approvals.
Of course, the market has also had to deal with continued COVID-related disruptions, making the process to trade property more difficult. On the plus side, the economy has weathered the storm fairly well, and the unemployment rate falling back to a record low of 3.4% has been a key support for property demand.
How key measures have tracked
Sales activity got off to a very strong start in 2021, but from June/July was starting to show signs of fatigue. Some softening was caused by the simple lack of listings. Lockdowns from August have made recent data harder to interpret, but the underlying trend for sales volumes still appears to be downward.
Property value growth has also generally cooled since the middle of the year according to monthly/quarterly measures, though the annual rate is still high, reflecting a ‘lower base’ a year ago due to COVID’s first disruption of the market. In CoreLogic’s assessment that is consistent with the so-called headwinds that buyers are facing, not least the huge affordability challenges. Indeed, CoreLogic’s measure of years to save a deposit has now reached 11.0 for the first time, well above the long-term average of 7.8 and 8.8 from a year ago.
For investors, the mirror image of that stretched owner-occupier metric is gross rental yields, and the news here isn’t great either. On the back of sharp increases in property values, the average yield has now declined to just 2.7%, and that is before any costs (such as mortgage payments, rates, or insurance) are taken into account. The tables in the CoreLogic 2021 Best of the Best Report emphasise the low levels of yields in many areas.
The year ahead – 2022 may be the year of the buyer’s market
CoreLogic’s analysis finds the forces are building for a significant housing slowdown next year, says Chief Property Economist Kelvin Davidson. “Sales volumes have already turned a corner and are likely to be much quieter in 2022, with the pace of annual value growth surely set to continue to ease from a figure of more than 25% for calendar-2021 to perhaps single digits, even low single digits, in 2022.”
For CoreLogic’s research team, there are perhaps four key issues or themes emerging for the property market in 2022, among a range of other considerations.
First, the effect of further lending regulation. Mr Davidson says, “It looks relatively likely that the RBNZ will impose a floor on serviceability interest rates from about the middle of 2022, before it potentially subs those out for formal caps on debt to income ratios, or DTIs, at the end of 2022. It’s up for grabs about where those caps are set – for example, they previously indicated it could be six for investors and seven for owner-occupiers, but the latest consultation documents hinted that a flat rate, perhaps seven, for all might be more likely. It’s also conceivable that any introduction of formal DTIs could also see the
LVR rules relaxed a bit. But whatever the final details, it seems certain that DTIs would hit investors the most.”
However, it is possible DTIs will not be required, Mr Davidson says. “The second key point is that mortgage rates have already risen sharply, and as the RBNZ continues to push through a series of cash rate increases next year, the upwards pressure on lending rates isn’t about to disappear. This is a factor that could easily slow the property market well before we get to the end of next year.
“Third, and on top of rising mortgage rates, we’ve got to consider the signs that the previously tight supply of listings has finally started to turn a corner. Indeed, this upwards trend for stock on the market is becoming clearer across most parts of New Zealand, but certainly in regions such as Hawke’s Bay, Wellington, Otago, and Southland, where total listings have risen back to levels last seen in 2019 or earlier. That’s not so much due to new listings taking off, but more to a slowdown in sales.”
In CoreLogic’s assessment it is also possible that in the near future, some investors may look to crystallise their previous capital gains and list property. More choice for buyers spells reduced pressure on house prices. Mr Davidson says, “It might take a while for vendors to respond to changed conditions, and some might pull their listing rather than accept a lower price than they were hoping for. However, that dynamic can only prevail for a finite period, and eventually 2022 looks set to tip towards a ‘buyer’s market’.
“Despite these headwinds, low unemployment means a more serious downturn in the property market seems unlikely – so it’s more a story about challenges than crisis. That’s further reinforced by our fourth key issue – the very real prospect that the currently hot construction sector eases off next year, as escalating costs deter some would-be demand for a new home. In turn, reduced volumes of new property output will tend to support existing values.”
In such an environment, it is worth assessing which areas might fare worse than the national average, perhaps seeing property values fall outright, Mr Davidson says, “If anything, our concerns tend to centre on parts of the lower North Island, e.g. Tararua, Horowhenua, Whanganui, Porirua, and Lower Hutt, as well as other areas such as Wairoa, Otorohanga, Kawerau, Westland and MacKenzie. At the same time, areas such as Ashburton, Timaru, Waimakariri, Selwyn and Tasman look a bit safer, although nowhere is ever immune to all market forces.
“No doubt there’ll be plenty more twists and turns for the housing market in 2022, and that’s before you consider any further COVID disruptions. But we’re certainly expecting a significant slowdown, and for 2022 to be a year where we see buyer’s choice increase even with intensified financing restrictions.”
About CoreLogic NZ
CoreLogic NZ is a leading, independent provider of property data and analytics. We help people build better lives by providing rich, up-to-the-minute property insights that inform the very best property decisions. Formed in 2014 following the merger of two companies that had strong foundations in New Zealand’s property industry – Terralink Ltd and PropertyIQ NZ Ltd – we have the most comprehensive property database with coverage of 99% of the NZ property market and more than 500 million decision points in our database.
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