NZ’s residential property market continues to negotiate a series of headwinds, but also has some supportive factors looking ahead.
In the macro-economy, GDP growth was strong in the second quarter, but is generally on a slowing trend, with falling net migration a factor. Both these things will dampen property market activity and values. However, the labour market is strong, wage growth is tipped to improve slightly, and the official cash rate doesn’t look likely to rise until mid-2020. This will help mortgage rates to stay low, and with people still able to pay the mortgage, a downturn in the property market remains less likely. Of course, there are always uncertain risks that can’t be ignored – e.g. another global financial shock (although this is definitely not our central assumption).
In the property market itself, high values, low affordability and restrictions on credit availability have been limiting activity levels. However, there are signs that sales volumes have found a floor and our expectation is that they’ll stay pretty steady into 2019. Indeed, gross lending flows to both investors and owner-occupiers have picked up in the past 3-6 months, suggesting that the worst for sales activity is now behind us. A potential relaxation of the LVR rules by the Reserve Bank later in the year (or next year) could provide some extra impetus too.
Values are holding up around the country, with stability in Auckland and Christchurch, continued growth in the other main centres (especially Dunedin and Wellington), as well as in many of the main regional towns and cities. This controlled “soft landing” for values seems set to continue. The latest figure for NZ-wide average values was $676,427, which is 4.6% ($30,049) higher than a year ago.
Our proprietary buyer classification data shows that first home buyers (FHBs) and multiple property owners (MPOs) with a mortgage continue to be the key players of interest in the market. In particular, FHBs accounted for 24% of residential property purchases across NZ in Q3 2018. Not only that, they now have the same share as mortgaged multiple property owners – something that’s not been seen before. Despite high prices, first home buyers are still managing to find a way to buy, with access to KiwiSaver deposits a key factor. Christchurch and Wellington are current favourites at present for FHBs.
Meanwhile also a 24%, the high share of purchases accounted for by mortgaged MPOs shows that investors still see value the market even despite extra pressures such as the looming removal of negative gearing and a potential long-term tax on capital gains/income. Although rents are rising, the historical evidence suggests that landlords don’t profiteer by raising rents at exorbitant rates, not least because a good tenant is too valuable to lose.
There are future risks to the market in both directions. For example, the foreign buyer ban is yet to play out to its full effect and could dent values in areas like Queenstown and Auckland. On the flipside, however, NZ is generally undersupplied for property (particularly in Auckland) and the current high levels of building consents need to continue for some time yet. In the meantime, shortages of property will support values.