Whats up in 2019

2019 is shaping up to be a very interesting year for the property and finance sector. Just like President Trump “State of the Nation Address” I will highlight some of the key influences but without the need to shut down the Government!

I believe this year will see the property market, particularly in Auckland, as ‘flat’. Not really rising, not really falling, interest rates stable, upwards pressure on rents, rental shortages developing in the lower end of the market. Tax once again will be a source of much debate amongst political parties and the media!

1. Interest Rates

The Reserve Bank of NZ has recently pushed out any interest rate changes until early 2021. The US Federal Reserve has also recently indicated it no longer expects to raise their cash rate this year or next, which is a reversal from previous forecasts. The international credit rating agency Standard and Poors has maintained the credit rating for New Zealand Government’s debt and they raised their outlook from neutral to positive.

New Zealand did see some small mortgage interest rates rises in November last year, I would expect that the current interest rates will be around for at least this year.

However, the big cloud on the interest rate horizon is the proposal late last year by The Reserve Bank that Trading Banks will have to hold between 20% and 60% more "high quality" capital. Any change will be introduced over a number of years. It has been predicted that banks will need to increase mortgage interest rates by up to 1% and reduce term deposit rates if banks are to maintain their current profit levels. This is one to watch!

1. Economy

New Zealand’s economy is in reasonable shape with our terms of trade trending up since the early 2000’s and our external debt position has improved over the last 10 years, but recently economic growth has slowed a little. Business confidence bounced back late last year from a nine-year low, whilst consumer confidence is slightly above average. The unemployment rate has moved to 4.3% and the labour market still looks very tight. The employment rate is currently the second highest on record.

1. Property Market

The latest QV House Price Index observed relatively minor fluctuations in quarterly values, and has predicted a stable 2019 with ‘modest’ growth across the board. Average sale prices and also the number of properties sold in Auckland are approximately the same as this time last year. However the Latest Reserve Bank monthly figures show first home buyers are getting a record high share of new mortgage money.

A change in the way Statistics NZ measures long term migration has resulted in a sharp decline in the estimates of how many migrants are settling in New Zealand. The new, lower migration figures suggest that Auckland's housing shortage may not be as severe as previously thought, but still likely to be substantial. It appears that the net gain from migration to New Zealand for the 4 years to 2018 is about 42,000 or 16% less than previous estimates. That would almost certainly have reduced the size of Auckland's housing shortage, but by how much?

The Foreign Buyer Ban started in Oct last year, whilst it is very early days yet, initial evidence does show it has had a small impact on the market, particularly in central Auckland, but time will tell.

1. Rental Market

With the introduction of The Healthy Homes Guarantee Act which sets minimum standards for rental housing including heating and insulation in late 2017. The banning of charging tenants letting fees late last year, the increase of the “Bright Line Test” to 5 years, plus proposals to limit rental increases and removing no-cause terminations one would have expected an exodus of property investors from the market!

Anecdotal evidence from property investors I help plus from other people in the industry I work with indicates that some, but not large numbers are selling up. There are signs of upwards pressure on rents and rental shortages have appeared in some areas and are likely to increase. The additional costs that landlords are now facing will get passed to some extent onto tenant in the long run!

One trend I have noticed is that investors are moving up the quality ladder, that is, buying new or near new properties that fully comply with the new standards and buying in better areas, particularly outside Auckland, where the rental returns are higher. These properties will attract a better class of tenant, who has a greater ability to pay increased rents.

The big unknown will be the effects of ‘Ring Fencing’ rental losses after the 1 April this year. This will bring to an end the ability for taxpayers to offset losses from a rental property against other sources of income. Note that any rental losses will not disappear, they can used to offset any tax from the “Bright Line” Test or a Capital Gains Tax, if one is ever implemented. Remember tax has always been a political football in NZ!