31 days that changed the outlook for house prices in 2019

In the first 31 days of 2019 there have been some interesting predictions made about the real estate market for the remainder of the year. Some commentators are saying New Zealand house prices are going to fall just like we’re seeing across the Tasman, others are suggesting house prices will remain flat and some are talking about house prices rising.

With the most complete and accurate real estate data in New Zealand, the Real Estate Institute (REINZ) is well positioned to voice what it thinks will happen in 2019. While it would be lovely to have a crystal ball and be able to accurately predict exactly what will happen, what we can say with some certainty is that it’s not going to be plain sailing. There are a number of factors that are likely to impact on the industry this year including:

The global economy

As much as we like to think that New Zealand’s economy can stand on its own two feet and isn’t impacted by what happens globally, unfortunately, that’s just not the case. With global attention from a property perspective strongly focused on what’s happening internationally, it’s highly likely that New Zealand will follow so we will be keeping a close eye on what happens with Brexit in the UK and the wider European market and what happens in the US. We’ll also be watching closely what happens with the economic slowdown in China and how that might impact markets here in New Zealand.

However, right now, most of the focus is much closer to home, with significant comparisons being made between the Australian housing market and whether New Zealand is likely to follow suit. Historically, there has been a correlation between Australia and New Zealand’s house prices so yes, prospects are for Auckland to follow Australia and Sydney’s lead - the key is to what extent and how correlated the two countries are over the next 12 months.

However, it’s also worth bearing in mind that there are differences between the two markets – Australia’s debt levels are lower than New Zealand’s and credit has become increasingly difficult to get following the significant changes occurring in the banking sector. However, on the flip side, New Zealand has much more of a supply issue than Australia and our foreign buyer restrictions are really just starting to impact sales volumes, whereas Australia has had a foreign buyer ban for a number of years now. Australian banks are putting up interest rates due to rising funding costs and that may occur in New Zealand too, although with KiwiBank just dropping rates the jury is out on this one. Unemployment is far lower in New Zealand and migration numbers (on a population adjusted basis) are stronger in New Zealand. The stability the Auckland market over the past 18 months has been a good thing for Auckland.

People point to Auckland’s housing shortage as a reason Auckland won’t follow Sydney. While, having a shortage is certainly different to having excess supply (which can make for stronger price corrections) we need to be careful placing too much weight on housing shortage arguments. Auckland has the biggest housing shortage in New Zealand but is also the region showing the weakest growth a sign that the supply-demand issue is not the only factor impacting house prices.

Affordability

The most expensive and inflated markets should be eyed the closest. Too much weight is often placed on the housing shortage in Auckland and not enough on affordability or valuations. While strong migration numbers will support a continuation of shortage figures, affordability is the bigger picture issue. Part of the reason we have a housing shortage is because of affordability; people are being priced out of the market and it costs a lot to buy land and build a home and these costs are only increasing.

Whilst there are many factors at play here, addressing the structural issues around the building process such as consenting and being open to new innovative building solutions, such as pre-fabs, to help achieve more efficiencies may help improve the situation here.

Regulation

There are a number of regulatory changes that will impact the property market this year including ring fencing of residential investment property losses and a potential capital gains tax (CGT). REINZ is concerned about the impact the proposed loss ring-fencing rules may have on New Zealand’s rental market, particularly in high-density residential areas that already attract high rent prices. Restricting the use of rental losses for investors could negatively influence the rental market, either by investment property owners passing on the cost of the reduced benefits to renters through increased rental prices or making rental ownership a less appealing investment choice.

The details of the CGT are still to be announced, but initially the Government indicated that the changes wouldn’t come into effect until after the 2020 election. It’s unlikely the CGT would have a significant impact on the industry in the next 12-18 months, but until the Tax Working Group has announced exactly what its proposals are, then it’s hard to gauge what the short to medium term impacts will be.

When you add into the mix the ban on letting fees at the end of 2018, the insulation requirements and the upcoming Healthy Homes legislation, feedback from across the industry is that these changes are causing investors to re-consider the costs of owning an investment property. Many are now seeking to exit the industry placing further pressure on the supply of rental properties and placing upwards pressure on rental prices. With median rents already at peaks in cities such as Auckland and Wellington and stories of ‘rental bidding’ a dime a dozen, these regulatory changes are going to do little to help renters in the long term.

The other issue impacting the industry right now is the introduction of the Anti Money Laundering requirements. From 1 January real estate agents are required to verify the identity of their vendors in and in some situations, agents will also be required to verify the identity of purchasers. If a real estate agent cannot verify an individual in line with the legislation, they will not be able to act for individual. Identity verification can take days and sometimes weeks if a Trust or company is involved, or where parties reside overseas. Agents are reporting considerable push back from consumers in regards to identity verification, which is leading to delays in properties being brought to market and properties being sold. We expect this to iron out as the year progresses, but currently it is causing significant headaches for agents, vendors and purchasers.

Interest rates and credit

Interest rates look set to remain low providing inflation remains in check, which is a plus for the housing market. A slight relaxing of loan-to-value restrictions from the Reserve Bank will help too. There may be pressure for banks to lift interest rates given signs of pressure on bank funding costs though. The Reserve Bank is also consulting about banks holding more capital, which may mean more pressure for lending rates to move up too, though this could be offset by the Reserve Bank cutting the Official Cash Rate.

Credit availability is likely to be an issue over the coming years. While banks will still be lending, the message is that we’re likely to see shifts in bank lending behaviour particularly in relation to over leveraging with interest rates due to rise in the next few years. Additionally, everyone will be expected to jump through a few more hoops than is usual in order to access finance.

So, what does this mean for house prices?

Going forward, we expect to see 2019 presenting a relatively similar picture to 2018 in that the ongoing supply issues are expected to continue the upward trajectory of prices across the regions.

However, the Auckland picture is likely to be slightly different. Initially we expect a continuation of the flat market, but as the year progresses with the changes in the underlying fundamentals (as outlined above), there is a chance that prices may start to cool in the short to medium term.

To put this in perspective, however, prices in Auckland have increased by more than 100 percent over the last 10 years.

- Bindi Norwell is the chief executive of the Real Estate Institute of New Zealand