1. Impact of election promises on house prices
National has promised to shorten the Brightline Test from 10 years to two from July 2024, reinstate full mortgage interest deductibility for all property over a phased period (100% from 2026/27), and to allow foreign buyers for properties sold at $2 million-plus but with a 15% tax.
So what do we make of this? Overall, these changes would likely add some extra impetus to house prices, but perhaps only modestly in aggregate. On one hand, the shorter Brightline Test would add to the appeal for foreigners buying New Zealand property, but there’s also no real way of knowing how many of them may actually target New Zealand – and it’s worth keeping in mind they were low even prior to 2018’s ban. For context, there are currently around 50,000 properties valued at $2 million-plus, or around 3% of the stock – although that figure is 10% in Queenstown, so the impacts there could be greater.
In addition, a shorter Brightline Test would no doubt bring back a few investors, but it may also drive some selling (as some existing owners would then be off the hook for capital gains tax). And finally, there’d likely be a boost to investor sentiment from the deductibility changes, but the hard sums might not be altered too much – many purchases would still make big cashflow losses for a start, because rental yields would still be low and mortgage rates high. That said, existing investors would no doubt welcome a lower tax bill.
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2. Prices rising and falling
The CoreLogic House Price Index for August showed a modest drop in national average property values, of 0.2%. But as was also the case in July, Auckland’s North Shore and Manukau areas recorded increases, as did Upper Hutt and Wellington City, as well as Christchurch. To be fair, other areas of course continued to drop (e.g. Gisborne, Whanganui, Nelson), with stretched affordability and elevated mortgage rates still significant challenges.
Taking a step back, the market's turning point can be somewhat hidden when you look at a national average, and even though that nationwide figure has continued to drop, it’s fair to say that the downturn is essentially over. As I’ve noted many times before, however, the recovery could well prove to be slow and drawn out, especially if we see caps on debt to income ratios for mortgage lending at some stage in 2024.
3. Employment just keeps on rising
Last week Stats NZ reported another 0.3% rise in filled jobs in July, the 15th increase in the past 16 months, with the total now 3.4% higher than the same month last year. This is absorbing many of the new entrants to the labour market (e.g. from high net migration) and helping to keep the unemployment rate low – also giving support to the property market. Of course, this good news could actually be bad for people with large mortgages, if it keeps interest rates higher for longer. On balance, though, I think it’s fair to suggest that most people would prefer the combination of a job and high mortgage rates, rather than no job and slightly lower rates!
CoreLogic chief economist Kelvin Davidson: "The recovery could well prove to be slow and drawn out." Photo / Peter Meecham
4. Recession not quite guaranteed yet
The NZ Activity Index for July was up by 0.4% from a year earlier, and based on that result alone, GDP could potentially yet sneak some growth for the third quarter of the year (which we’re in now). Of course, it’s very early days – we still need to get August and September’s NZAC results yet – and other economic measures have been more concerning, such as Chinese weakness and lower dairy price expectations. Indeed, the latest NZAC is far from enough to bring into doubt the fairly widespread belief that we’ll see a double-dip recession (albeit modest) in the second half of 2023. On the plus side, this suggests to me that the official cash rate has already peaked and that mortgage rates are all but as high as they’re going to go (albeit small tweaks could still occur, especially if offshore wholesale financing rates went up).
5. Still fixing longer?
This week, the Reserve Bank will publish July’s mortgage lending data broken down by the terms at origination (for new loans, not those repricing existing debt) – which has recently shown more people fixing for about three years, which have been cheaper, rather than the shorter fixed rates. That preference may well have continued in July, but August’s figures will be really interesting this time next month, given that longer fixed rates have recently risen again. Obviously, they still offer certainty, but also a risk that people ‘over pay’ towards the end of their term if market rates drop.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
