NZ House Prices to Rise
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NZ House Prices to Rise

Property
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9.6.21
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Joseph Darby

New Zealand’s favourite investment, residential property, is about to resume its upward price trajectory

Several major forces could be about to drive New Zealand house prices up, according to one reputable source, independent economist Tony Alexander.

Alexander cites four major contributing factors for the increase.

Migrants Are Pouring In, Which Increases Demand for Housing. More Demand Means Higher House Prices

A key driver of housing demand is the record net migration surge of nearly 130,000 people into New Zealand over the past year. The challenges this will place on our country are significant. For starters, all these people need somewhere to live.

There are reports this 2.5% boost to our population has already increased the difficulties potential tenants are facing in securing accommodation and it is likely that rent growth will hold up even as overall inflation slows. In years gone by, there has been a clear linkage shown between large numbers of migrants and higher rents.

Rising rents will encourage people to consider purchasing houses as investments, and some people who were initially planning to rent for the year, may now be looking to make a purchase.

Price gains are likely to be greatest in the cities due to pressure from net migration flows. Most migrants settle in the larger cities. Even if the cities, or Auckland alone, leads the expected uptick in property values, the rest of the country eventually enjoys firmly rising prices as people, including investors, seek better purchase prices elsewhere.

Falling Building Consents Will Reduce Housing Supply, Increasing House Prices

There has been a reduction in the supply of new houses coming to the market.

The 12-month number of consents issued for the construction of new dwellings has fallen by about 29% over the past year. Overall, residential consent levels are now back to those we had in the 2017-2019 period.

The number of new dwellings consented per 1,000 residents is now running at just 7.3 for the most recent data available, the lowest rate since 2018.

The slowdown in the construction sector is embedding harder. Reportedly, we haven't seen a drop this quick or as long-running nationally since 2011.

Housing Building Consents, Beyond the Data

Despite the less-than-desirable numbers, Tony Alexander has suggested the actual increase in New Zealand house supply will be even less than expected. This is because nowadays, a smaller proportion of consents lead to actual construction than in the past. This seems mainly due to higher interest rates, which makes funding projects more challenging, along with shortages of skilled construction workers (noting the influx of migrants may help with construction).

It has also been observed that much new construction nowadays involves demolition of one or two existing houses, as an existing home or homes are replaced by smaller, more compact townhouses. Additionally, every year a certain number of houses become uninhabitable and fall into disrepair. The net gain to our housing stock might be only about 1%.

Mortgage Interest Rates Should Fall

Another major factor underpinning house growth is that interest rates are forecast to drop this year. While we cannot be sure about the magnitude of declines or even when they will properly start, we can observe that inflationary pressures are easing off. Tony Alexander suggests it is increasingly looking like the Reserve Bank has kept the Official Cash Rate (OCR) too high for too long. This follows a period when they were widely criticised for keeping it too low for too long.

As mortgage interest rates fall and mortgages become more affordable, new home buyers can be expected to enter the market, which should also increase the demand.

Property Investment Interest Deductibility

The final major factor is that, starting from 1 April 2024, investors will be able to deduct 80% of their interest costs from rental income when assessing tax obligations. The return of almost 100% deductibility a year later, is close enough to suggest that throughout 2024, we should anticipate a slow reversal of the withdrawal of investor buyers that occurred in 2021 after the rules were changed, and deductibility ceased for new purchases.

Supporting House Price Data

Despite all the best intentions and intellectual horsepower, nobody can predict the future. So, any forecast, including the well-researched comments made above, should be taken with a ‘grain of salt’.

In this case, the latest figures from the OneRoof-Valocity house value index seem to support the same view: every region, bar one, recorded quarterly value growth over the final three months of last year:

  • The nationwide average property value jumped by 2% ($19,000) in the three months to the end of November, reaching $968,000. This increase can be attributed to low stock levels and increased buyer demand, which puts upward pressure on prices.
  • The biggest quarterly rise was in Otago, up 2.8% over the last three months to $944,000. Also performing strongly were Auckland and Wellington regions, up 2.5% and 2% respectively.
  • There were strong increases in a diverse array of suburbs, with Herne Bay (usually the most expensive market in the country) up 7% however, so was Otara, in South Auckland.

As you might expect, real estate agents and property developers are already broadcasting this news loudly. This could have an impact on wider sentiment as much like inflation, if there is a widespread belief that prices are going up, then people bid more for housing, which really does drive up prices.

House Prices Do Have Headwinds, Too

2024 will bring winners and losers as the big forces buffeting the economy… play out” – ANZ Research

Caution about the next phase for the housing market is being urged by some. There are plenty of reasons for this:

  • Affordability is stretched, making it difficult for many to obtain a mortgage. Mortgage rates are yet to come down, which should keep prices down.
  • There is broad agreement a rise in the unemployment rate is likely, this reduces the ability for recently unemployed tenants to pay rent and may lead some people to sell their own houses to make ends meet. General discussion about rising joblessness may cause buyers to hold back from entering the property market.
  • Our agricultural sector props up much of the New Zealand economy. Our largest bank, ANZ, has cited weak demand in China for exports, causing some in our agricultural sector to struggle. This results in flow-on impacts on the whole New Zealand economy.

What Do the Latest Property Price Predictions Mean for You?

Despite whatever the latest forecast says, hardly anyone buys a piece of real estate hoping for the value to go up within a year or two. But, over longer timeframes, say 10-to-20 years, expecting an increase in value becomes a realistic belief. This, coupled with tax advantages and the ability to borrow to fund property investment with a mortgage (i.e., borrow to invest), means that property is likely to continue to be a favourite type of investment for Kiwi investors.

According to the billionaire industrialist Andrew Carnegie:

“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.”

For investors thinking many years ahead who have the ability to borrow, it’s nearly always a great time to invest in property for the long term – a sentiment that holds true for first-home buyers as well.

The Bottom Line: New Zealand House Prices to Lift

When looking across all data and expert opinion, it is likely that New Zealand house prices are set to resume their upward march. Additionally:

  • There’s still a great deal of uncertainty with any financial forecast, as the economy adjusts after the pandemic era of closed borders, money printing (quantitative easing), assorted taxpayer-funded stimulus, and lockdowns.
  • If there was another major issue such as a natural disaster, that could negatively impact the property market.
  • Over long enough timeframes, those who think ahead and take action will always do well.
  • Investors of all kinds, including property investors and first-home buyers, must always make decisions based on incomplete information. The future is always uncertain!

Well-positioned investors and first-home buyers can still get some great deals. If you get in touch, it would be our pleasure to discuss your situation and explore what opportunities might suit your unique circumstances.

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