You make the call

As the property prices in the main centres of NZ starts their undeniable drop to levels seen in 2020 (1), we are all wondering if this is a blip or are we looking at a typical, or at least what used to be typical, NZ real estate cycle (7 to 10 years). One feels for the once respected economists when they receive wry looks when they report on where the market is heading.

Hindsight informs us that the property prices did the exact opposite of what the reserve and trading banks said would happen.

So, far be it for the author of this blog to be so bold and provide a prediction of the property prices when the economic experts are getting it wrong. The modus operandi of economists and valuers is to look at similar indicators in history and performance when the same indicators present themselves again. Throw in an externality such as covid and it turns out that everyone has gone bush without a compass. Confident forecasts are now taken with a pinch of salt as property investors decide to find their own way out of the forest.

So, let us look at the factors and indicators that are working on the market at the moment..

Immigration

Immigration needs to be split into types, the new immigrants and the ex-pats. The department of Labour in 2008 have found that a 1% increase in new immigrants will increase the housing prices by between 0.2 and 0.5%.  However, the same number of returning kiwis will increase the house prices by 6 to 9% (3).

The NZ government opened its borders in February 2022 and the labour market, currently starved of their niche manpower, is eagerly waiting for govt restrictions to fall away so the migrants can flow in (4). The government will be tempering the need for migrant workers against the need for our own people coming out of our tertiary institutions looking for jobs.

However, the same tempering should not be applied to returning kiwis and it should not be a surprise to read that when a new record for returning kiwis was set between Dec 2019 and March 2020 (5), that the house price boom followed. So let’s look at what is happening now. Immigration is showing that ex pats coming home tripled to 6800 in March 2022, a few weeks after the borders were opened (6).

Was this jump in Kiwi’s flocking home a knee-jerk reaction or is it a new trend that will continue? We have seen what ex-pats can do to house prices and if this is a new trend, the historical facts show that after a short lag there will be increased upward pressure on house prices.

Before we go off this subject, we need to look at whether we can actually sustain the increased housing that we will need to house the returning kiwis. Hickey (2021) states the immigration best when cited in the NZ Productivity Commission which wrote a report about Immigration in NZ:

“Both sides of politics have accidentally on purpose pursued a high population growth, high migration and low infrastructure approach to growing the economy over the last two decades. We never really debated this and the refusal by ratepayers and councils to help build infrastructure is a de facto rejection of the policy. It was the perfect match for bringing the Government’s own Budget back into surplus because all the benefits of higher wages and spending went straight to the bottom line with higher income and GST taxes, without the heavy cost of infrastructure investment. It also allowed Governments to say they were growing the economy, albeit by having more people working harder, rather than through productivity and growing real wages from work” (Hickey, 2021). (7)

The writer believes that the new Housing Policy for intensification written under the RMA Amendment Act (8) due to come out in August 2022, will be a hand brake to the supply of housing. The result of less supply and more demand from immigration may stabilise or increase housing prices.

Interest rates

Not unlike opposing locks in an All Black vs Lions scrum, the two giant forces of increased immigration meets the equally imposing force of increased interest rates. The scrum would temporarily remain stagnant until the rest of the forwards impose their less imposing strength to send the packs in a particular direction. Once momentum is gained, it will tend to increase in speed.

We all know that interest rates have a puppet master known as Inflation and given the amount of quantitative easing around the world economies due to covid, it was a no brainer that the extra disposable income in the consumer pocket was going to lead to more spending. More spending equals demand exceeding supply and this leads to higher inflation, which in turn leads to higher interest rates as a way to halt the runaway inflation.

With this extra pressure put on supply, covid didn’t help with workers either taking ‘sickies’ or being locked down plus no-one wanting to play with Putin anymore which has further exasperated supply of goods.

As of 21^st April 2002, inflation has hit a 30 year high of 6.9% (9), which is quite scary when the goal of the Reserve Bank is to keep it under 2%.

Mortgage Lab predict the rates wont go as high as 8% this year (10), Milford Asset Management said in April (as reported by Newshub) that interest rates would stabilise in April 2022 (rates have just gone up again in May), Kiwibank, ANZ and ASB economists all believe that the end of 2022 will see the floating rate somewhere between 5 and 6% (11). But…remember the covid predictions in 2019 and covid is still running amuck in the property market.

So, in summary, we know that there is a lot of pressure on interest rates to go up due to the record high inflation rate and the experts say the rates will go up not more than around 0.5% before the end of 2022. Believe that? Your call.

Government intervention

The Govt has gone quiet since the six strikes in 2020/21 (12) as they rested with heads in their hands as the property prices kept on rising. The major market forces were always eventually going to come into play (Inflation and migration) and these two players eventually put a brake on the market.

The Reserve Bank has rested on the following market restrictions:

Investor loans – 40% deposit / 5% limit for high LVR loans

Owner occupier loans – 20% deposit / 10% limit for high LVR loans

New building exemption

Loans to people building a new residence are exempt. The borrower must either commit to the purchase at an early stage of construction or be buying the residence (within six months of completion) from the developer. The exemption applies for both owner-occupiers and residential property investors. The LVR rules do not prescribe the size of a deposit for new residences.

Remediation exemption

Loans are exempt if used for remediation (e.g. weather-tightness issues), to bring a residence up to new building codes, or to comply with new rental property standards (for example, insulation). The exemption applies for both owner-occupiers and residential property investors.

Kāinga Ora First Home Loans

Low-deposit borrowers using the Kāinga Ora First Home Loan scheme to buy their first-home are exempt from the LVR rules.

Bridging loans

Short-term bridging loans where an owner occupier is purchasing a new property to live in before the sale of their current residence are exempt from the LVR rules.

Refinancing

Refinancing of existing residential mortgage loans (switching banks) is exempt from high LVR restrictions, as long as the loan balance does not increase.

These restrictions are designed to keep the property market in check while it navigates the unchartered trend driven by Covid-19. Note that the National party has stated that not all of the onerous restrictions on property investors will be reversed if they are given the opportunity to do so, but interest rate deductability will definitely be one of them (13).

 Summary

Arguably, Immigration and Interest rates represent the opposing forces of demand and government intervention represents the referee. There are many other smaller factors that influence the property market, however the big hitters as mentioned here are what will determine the direction of the property market.

With the ‘supply’ side currently undermined by covid restrictions and struggling developers, we can only determine at this point that it will wane in 2022.

The press is currently reporting that we are currently in a buyers market with more listings available than there are buyers. In other words, vendors will need to bring their prices down to meet the new market if they want to attract buyers in this banker-nervous environment (14).

However in the scenario where the banks are correct (Int rates to max at 6%) and immigration takes off (without any govt interference), then the property market will again be sparked into another climb.

Question: When is the right time to buy?

 Answer: NOW!

  Jeff Brill - Author of "The Sophisticated property Investor"