Housing market shake-up: Bright-line test, LVRs, DTIs - what you need to know

1. All change

July 1, 2024 is a big day for the housing market. The bright-line test has been scaled back from 10 years to two years, the loan-to-value ratio (LVR) rules have been loosened, and the debt-to-income ratio (DTI) caps come into force. Watch for:

- Any rise in listings from investors struggling to meet the mortgage payments. If they bought two years ago, they are now off the hook for capital gains tax (i.e. outside their bright-line period). That would simply add to the already-high levels of stock on the market.

- A possible increase in lending to investors with a 30-35% deposit. Of course, even for an investor with say 33% equity who suddenly finds themselves now able to satisfy the LVR rules, there’s still the matter of high mortgage rates (and relatively low rental yields) to contend with.

Don’t expect any immediate shifts in the market due to DTIs, though. Higher interest rates are already curbing appetites for larger loans But DTIs will certainly play an important role in the market over the longer term when rates start to drop.

2. Are credit conditions easing early?

Looking at actual mortgage activity, there was $6.9 billion of gross new lending in May, across house purchases, bank switches, and loan top-ups. That’s $1.1bn up on May 2023 but in line with the May average since 2016 (excluding 2020). In other words, the recovery is continuing, but it’s not racing away either. The breakdown of the figures by LVR was interesting, with an upward trend starting to emerge for the share of lending going out to owner-occupiers with a deposit of less than 20%. It’s hard to know if this is driven by the banks easing up a bit or by borrowers applying for more of these loans (or both) – but either way, it will be interesting to watch over the coming months, with the LVR rules looser.

CoreLogic chief economist Kelvin Davidson: "Outright job cuts in some industries would be an added headwind for the housing market." Photo / Peter Meecham

3. Consumer and business confidence: good and bad

Last week’s consumer confidence survey from ANZ showed a small fall in sentiment, albeit from an already low level. The results of the bank’s business survey were similar. On a more positive note, the flipside of a soft economy tends to be lower inflation, and that’s what we’re seeing. Consumers’ inflation expectations remain a little sticky, but businesses’ inflation expectations eased in June, as did measures relating to input costs and output prices. That’s good because interest rates won’t fall until inflation drops to the Reserve Bank’s target rate of between 1% and 3% (it’s currently sitting at 4%, with the inflation figures for Q2 2024 due on July 17).

4. A drop in filled jobs?

Stats NZ will this week publish employment figures for May 2024. Don’t be surprised to see a drop in filled jobs. After all, the pace of employment growth has petered out in the past few months, with businesses taking a cautious approach to hiring. Outright job cuts in some industries would be an added headwind for the housing market.

5. But a glimmer of hope for the construction sector?

Employment figures might only be at the start of a downturn, but there have been snippets of slightly better news for the house-building industry. It’s early days and only anecdotal, but still very welcome! That said, it seems fairly likely that Stats NZ’s latest figures on dwelling consents (covering May; due Tuesday) won’t quite have reached a floor yet.

- Kelvin Davidson is chief economist at property insights firm CoreLogic