ANALYSIS: House prices in New Zealand have risen on average by just over 6.5% per year since 1992, with Auckland gaining 7% and the rest of the country 6.2%. Going forward, average gains will not be as high for a wide variety of reasons, and here are some of them.
Between the early 1990s and 2020-21, interest rates, both international and domestic, were on a downwards oscillating path to record low levels. This decline will not be repeated over the next three decades. That is, having fallen from 9.9% in 1992 to a low near 2.2% in 2021, the likes of the one-year fixed rate won’t fall away to -5%.
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The rules regarding how many houses can be built on a given patch of land have been altered so more can be constructed. While this doesn’t change construction costs for the better, it does suggest potential for more dwelling supply as evidenced by the production lift in Auckland following the implementation of the Unitary Plan in 2016.
It looks like rules regarding greenfields residential land availability are set to change and this increase in land supply will help suppress the land cost component of construction. The experience of Christchurch following the 2011 earthquake tells us that sharply increasing the amount of land zoned as residential does suppress section prices.
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Being a landlord has been made less onerous following the election of the new coalition government. But it remains the case that the rules and regulations landlords must follow and the costs they must bear are higher now than they were previously. The implied reduction in property demand from investors suggests less upward pressure on prices.
In recent years a proportion of the housing stock has been withdrawn from availability to long-term tenants and owner-occupiers by transition to use for short-stay tourist rental – Airbnb etc. A repeat of this specific reduction in property availability is unlikely to occur again.
The ability of investors to follow the old model of rapid debt-funded growth in a property portfolio will now be constrained by the introduction of debt-to-income rules.
Baby Boomer investors will be looking to slowly offload their stock over time to fund their retirement as they have long planned.
Independent economist Tony Alexander: "Expecting house prices to rise as they have done through the cycles of the past three decades would not be reasonable." Photo / Fiona Goodall
These and other factors tell us that expecting house prices to rise as they have done through the cycles of the past three decades would not be reasonable. That is good news for future (not current) first-home buyers, who may feel that the market is not acting in their favour.
Investors are backing off anew in the face of soaring costs and developers have excess stock they need to move because financing pressures on them are deepening. But as one commentator wisely noted recently, for investors it is not all bad news. Apart from the bright-line test and some tenancy rule changes, the opportunities to buy a property and do it up for better gain will grow as the older investors sell their holdings.
The assumption is that many of these properties to be placed on the market will not have been upgraded or modernised as the older investor owners have experienced cash flow constraints. For those with capital to spare, this may be a new route towards achieving long-term gains close to what they used to be.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
