1. What National's win means for house prices
The election went broadly as expected, although my novice reading of the political tea leaves suggests that NZ First might still have a role to play – meaning a bit of lingering uncertainty for a period of time yet.
However, it would appear that NZ First are more concerned about other aspects of policy than housing. As such, it still seems pretty likely that the Brightline Test will be shortened next year and mortgage interest deductibility will be slowly phased back in for property investors, regardless of new or existing, or property type/age. There may still be a bit more discussion about the softening of the foreign buyer rules, but chances are that will pass through as well.
The election result probably means higher house prices over the next year or two than otherwise would have been the case – but I’m not convinced the boost will be huge. After all, affordability is still a big problem, interest rates aren’t set to fall anytime soon, and caps on debt to income ratios for mortgage lending remain on the cards for 2024.
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For property investors looking at extra purchases, sure, a smaller tax bill helps. But given low rental yields and high mortgage rates, the top-ups from other income will still be significant.
Longer-term, there may also be an upwards effect on prices, if National scales back any reform of the RMA and perhaps even softens the push towards a more intensified housing stock in our big cities. But again, the impact may not be overwhelming – and hard to detect anyway, as it would take place slowly over a long period of time (e.g. more than one electoral cycle).
2. All eyes on the CPI
With the election over, the key highlight on the data calendar this week will Tuesday’s consumers price inflation release from Stats NZ (10.45am). This will be vital in terms of whether or not we see another official cash rate increase this cycle.
In its latest Monetary Policy Statement, the Reserve Bank projected a 2.1% quarterly rise in the CPI in Q3, for an annual rate of 6.0% – unchanged from the Q2 figure. So, in other words, if annual inflation stays the same or even drops a bit in Q3, the chances of another OCR rise on November 29 will diminish. But any increase in that annual CPI rate would be a larger concern, and we could well see market expectations tip more strongly towards another OCR rise.
That said, the importance for mortgage rates (whether the OCR rises again or not) is probably pretty limited. After all, the largest rate rises are already behind us, and have been managed pretty well by the households that have repriced their loans. In addition, the domestic OCR isn’t the only influence on key 1-2 year fixed mortgage rates anyway – offshore financing costs for banks play a key role too.
3. Construction cost growth has slowed
Encouragingly, last week’s Cordell Construction Cost Index at least showed that the inflation rate for building new houses has already slowed – back to 0.5% quarterly in Q3 and 3.4% annually (a sharp drop from the peak of 10.4% in late 2022). This measure relates to observed build prices – labour and materials – for a ‘standard’ three-bedroom, two-bathroom, single-storey, brick and tile standalone dwelling (over a normal construction duration).
The slowdown reflects reduced supply chain pressures and also less strain on the industry’s capacity as workloads just ease back a little. Of course, this is slower growth, not a fall in build costs – with wages (which don’t tend to drop) accounting for 40-50% of a total project’s bill, falls in build-costs seem fairly unlikely.
4. Migration is still soaring
Last week’s net migration data from Stats NZ showed the 12-month total rising to more than 110,000 in August, a new record high. Overall departures are running at high levels (driven by departing Kiwis), but it’s just that new arrivals of non-citizens are even stronger, pushing up the net balance. The effects on property are obvious – more demand, and upwards rent/price pressure. To be fair, these figures can be prone to substantial revisions. But they’ve reached such a high level, that even a reasonably large revision to the data in future would still leave the inflows high.
CoreLogic chief economist Kelvin Davidson: "Rental growth has accelerated pretty strongly in recent months, reflecting rising wages, and also a tighter supply/demand balance." Photo / Peter Meecham
5. Rents accelerate again
The latest Stats NZ figures showed that rents (flow/new tenancy measure) rose by 7.2% in the year to September, the second highest growth figure since 2008 – only surpassed by 7.8% in September 2021. That was when rents were able to be changed again after the Covid-related freeze. In other words, driven by continued high net migration flows and reduced property purchases by investors (hence not as many houses hitting the rental stock).
6. Recovery is still a bit patchy
And finally, the latest data on sales volumes and house prices was perhaps a bit more subdued than expected – albeit consistent with our long-held view that the downturn wasn’t suddenly about to give way to another sharp rebound. That view reflects still-stretched affordability and ‘higher for longer’ mortgage rates, as well as scope for caps on debt to income ratios for mortgage lending next year. These factors will apply whichever government we have and even if investors get their full mortgage interest deductions back in due course.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
