COMMENT: Sometime around 546 BC, King Croesus of Lydia, an enormously wealthy country within what is now modern-day Turkey, consulted the Delphic Oracles to decide whether or not he should go to war against the Medo-Persians, who were growing in power and stature in the region.
The response from the Oracle was simple and succinct: “If Croesus goes to war, he will destroy a great empire.”
On the basis of this prediction, Croesus did indeed go to war and he did destroy a great empire. His own.
The story is humorous, but its core message – that it’s easy to interpret information to mean what we want it to mean - is as relevant today as it was 2500 years ago.
Start your property search
These days, few of us consult so-called psychics and soothsayers. Instead, we listen to the views of our favourite commentators on all manner of topics and often place great stock in what these people tell us. The problem is that five different commentators will give you five different opinions based on their own presuppositions and interpretations of what the same set of data means – a phenomenon which is particularly pronounced within property market commentary.
Sometimes these predictions are right – but just as often they’re completely wrong as we saw in 2020 when pretty much every property commentator (myself included) failed to factor in a global pandemic which no one saw coming but which obliterated all previous market commentary.
Testing for Covid-19. No one could have predicted at the start of 2020 that a pandemic would strike. Photo / Getty Images
So it’s a brave man or woman who would step into the breach and have another crack at making predictions for the property market in 2021 – but I’m going to give it a try. For obvious reasons I’m taking a conservative approach with my predictions this year as market conditions and circumstances can change quickly. For example, if Covid re-emerges as a major factor or we have another lockdown – all bets are off. That said - here’s what I predict for the year ahead:
1. House prices will keep rising throughout the year
Despite another commentator recently predicting that house price increases will taper off in the middle of 2021, they won’t, and we’ll continue to see strong price growth right through the year. In the case of Auckland, this is part of a broader cycle in which house prices will broadly double over the next decade. In the case of the rest of the country house price growth is mostly being driven by low mortgage interest rates but is defying typical cyclic behaviour – so whether this regional price growth is sustainable into 2022 and beyond is yet to be seen. But for now, expect more price growth throughout the country. If you’re trying to get into your first home – don’t wait. Buy now.
2. The LVR settings will be reintroduced
Despite making absolutely no difference to house price inflation or market stability, the Reserve Bank will re-introduce the Loan-to-Value lending restrictions sometime after March and may even go as far as increasing the minimum deposit required from investors to 40 percent (although this one is a line call). This will further compound the already substantial obstacle to buying a first home but, sadly, the Reserve Bank and some commentators have convinced themselves that this step will make a difference and will continue not to notice that the Emperor is naked. If you’re an investor, get ready for larger deposit rules.
3. Mortgage interest rates will stay low
While the conditions which would have led to the Reserve Bank driving interest rates even lower have been largely offset by much stronger than expected economic growth the countervailing forces which would cause rates to start rising again are also largely absent. This means that mortgage interest rates will stay at their historically low levels for a long time and may even nudge down just a little further in response to initiatives, such as the Reserve Bank’s Funding for Lending program, which are already in train. If your mortgage interest rates are coming up for renewal, fixing for 12 months is probably your smartest choice. It will enable you to enjoy substantial savings while being in a position to capture any further drop in rates which happens over the coming year.
4. The Bright Line test will increase to 10 years
Despite no logical or sensible reason for doing so, the Government will confirm its intention to increase the Bright Line test, by which the taxability of the proceeds of selling investment property, is determined. This means that an affected property will be liable for Capital Gains Tax for up to ten years after the date of purchase. I’ll write more about the folly of this action in the coming weeks.
5. There will be no further major rental market reforms
After three years in which major changes were made to the rental housing market it is unlikely that the Government will make anything more than tweaks to the rental market in 2021 while it waits for previous initiatives like the Healthy Homes legislation and changes to the Residential Tenancies Act to bed down.
6. Help for first home buyers?
I’ll be very surprised if we don’t see a suite of announcements for initiatives to support first home buyers during 2021 – either as one package or as a series of measures. I fully support the intention of such measures – which will confirm that the Government has recognised that it can’t bring down house prices and should focus on what it can do for first home buyers – but I’ve put a question mark on this prediction because I don’t have confidence in this Government's ability to actually deliver on promises. For that reason, first home buyers shouldn’t wait for government action to help them. It may never come.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
