It’s a game of 2 halves

In the first half of this year we have seen a lot of things happening in the property market, most aimed at property investors. We have had the introduction of Healthy Homes Standards, ring fencing of rental losses, the scraping of the proposed capital gains tax, property prices and sales volumes easing back in Auckland and Christchurch. In addition, the Auckland Unitary plan seems be to finally affecting the mix of types of properties.

The second half of the year and into 2020 will be more about trends continuing or unfolding. This is what my crystal ball is showing for the second half of 2019 and beyond.

1. Interest rates: The official cash rate is currently at 1.50% after a drop from 1.75% in May. This was the first drop since November 2016. It is widely expected that we will see at least one more cut this year. How much of this will translate into lower mortgage interest rates is yet to be seen but will probably be small. The slowing United States economy should also help interest rates to stay reasonably low and stable in the medium term. However, the flow through effects from the Reserve Bank’s increase of capital adequacy requirements over the next five years could see mortgage rates rise over the longer term.

2. Rental yields to continue to rise: The June quarter has seen the highest rent rise in 11 years, supply is simply not keeping up with demand in most parts of the country. Recently landlords have had a lot of increased costs due to the healthy home’s requirements, prohibiting of charging letting fees, ring fencing of rental losses and many others. In a market where supply is not keeping up with demand landlords are able to pass some or all of these costs onto the tenants. I would think this trend will continue for the foreseeable future.

3. Building insurance to come into greater focus: With the move to risk-based pricing for some properties there are likely to be big increases in premiums. This will have implications for property values, especially apartments and those properties more susceptible to climate change events. This needs to be watched closely.

4. Opportunity for homeowners to trade up: In a subdued market there is an opportunity, especially in Auckland, to get a bigger or newer property in a better location / school zone. Those that purchased a property a few years ago have seen good capital growth and with current interest rates lower than historic rates affordability has increased. I would expect to see this trade up trend to increase over the 2019 / 2020 summer period.

5. Immigration: NZ is gaining just over 50,000 people a year, down 20% compared to three years ago. This easing in the net migration is likely to continue in 2019, it will help to take some of the steam out of property demand and will dampen the pressure on the construction sector. However, the effect will be small and slow as net migration is still very high and will take a fair while to diminish.

6. Further loosening of the LVR rules: I would expect the Reserve Bank to further loosen the LVR rules late this year to reflect the slower market conditions. Possible options include lowering the owner-occupier deposit requirement from 20% to 15% and/or easing the deposit requirement for investors.

7. Growth of the first home buyers: First home buyers now make up almost 20% of total purchasers and are equal with property investor purchasers. This growth in first home buyers has been rising over a number of years and has doubled since 2016 with half of all first home buyers now using KiwiSaver as part of, or all of their deposit. I would expect this trend to continue.

8. Auckland Unitary Plan: The much-criticized Unitary Plan finally seems to be affecting what we are building and where. Based on May figures published by the Auckland Council 62% of new consents were for denser housing types, with 28% of those consents for apartments. 94% of new dwellings consented were inside the rural urban boundary, 29% of new dwellings consented were within walking distance of rapid transport and only 35% were for standalone houses.

9. The Regions – hot or not? According to the latest ANZ Property Focus, regional divergence is a key feature of the New Zealand housing market. The Auckland and Canterbury regions have experienced the weakest house price inflation over the past year whilst the rest of New Zealand especially the more affordable towns and cities are continuing to show a steady increase. Stricter rules around foreign ownership and loan to value ratios have helped slow growth noticeably in central Auckland and Queenstown. New Zealand‘s smaller provincial towns are seeing solid increases in house prices. Regions such as Gisborne, Hawkes Bay, Otago and Taranaki are leading the charge. Region growth has been supported by strong local economies with good commodity prices and strong tourism numbers, low mortgage rates, population growth, and compared to Auckland better affordability. I would expect this regional catch-up dynamic to continue in the future but possibly at a slower pace.

10. Imposition of extra capital requirements on the banks: The Reserve Bank has proposed that banks need to increase the capital they hold by up to 60%. This means banks will have less money to lend, if they want to maintain their profitability and raise the additional capital required the banks have stated interest rates will rise. The reality maybe that the Reserve Bank will require a lower percentage and banks may just have to suck it up by paying a lower dividend to keep capital/profits within the business over the next few years. The Reserve Bank will finalise this in November with any increase in capital will be phased in over a number of years. This may prompt banks to consider offering different mortgage rates to borrowers with different abilities to service their debt, but at the very least it will put the brakes on further decreases in interest rates.