‘Certain Property Slowdown’ Data Confirms

Despite a ‘strange and distorted period for the NZ economy and property market’, the latest CoreLogic Property Market and Economic Update for Q3 2021 confirms a cooling property market.

Sales activity and property value growth have been cooling for a few months now, with stretched affordability likely to have been one factor subduing demand and leading to a few would-be buyers holding back.

The pace of growth in average property values has slowed from a quarterly rate of 8.1% in April to 4.8% by September which is still pretty strong. But even so, the slowdown is genuine, and has further to run. Some parts of the country have actually seen average values go backwards in the past couple of months.

It wouldn’t be a surprise to see single digit gains in property values next year, perhaps around the 5% mark.

The lockdowns over August and September have muddied the waters, and when Auckland frees up a bit more the national figures for sales and prices could see a mini-bounce, however it should be short lived.

Last month’s uplift in the official cash rate is the latest in a long list of headwinds designed by the Government and the Reserve Bank of New Zealand (RBNZ) to put the brakes on Aotearoa’s red hot property market.

My hope is that borrowers don’t get complacent about mortgage rate rises given a typical one or two year fixed rate could be above 4% next year. Although that’s low by past standards, it’s a big jump from where they have been and hence a large rise in mortgage repayments too which could have a more significant impact on household expenses than some might be expecting.

Certainly, the combination of higher mortgage rates, low gross rental yields and tighter regulation such as 40% deposits and the phased removal of interest deductibility is having a strong effect on mortgaged investors’ appetite and activity.

Investor market share of property purchases across NZ has dipped from 29% in Q1 this year to just 24% now, the lowest figure since Q2 last year. Given the pressures they’ve facing, it wouldn’t be a surprise to see this market share figure drop towards 20% in the coming months.

On the plus side for investors, at least there is now clarity about what a new-build property is and how long it will be classed as new, as well as the continued ability to claim mortgage interest as a deductible expense for investors within the first 20 years of the property’s life. The exemption from the LVR rules also makes new-builds attractive for investors.

Meanwhile, first home buyers have remained pretty active in the market in the past few months, often using KiwiSaver for the deposit and also taking advantage of the owner-occupier lending speed limit to buy properties with less than a 20% deposit. However, that’s about to get a little harder with the low deposit allowance being cut by the Reserve Bank from 20% of lending to only 10% from 1st November.

Looking ahead, the themes for 2022 are shaping up to include sharply rising construction costs and higher mortgage rates, with further regulation unable to be ruled out either.

Additional macro-prudential measures in the form of debt to income ratio limits and/or minimum serviceability testing rates could still be on the cards. Even so, we still have low unemployment and, although large numbers of new houses are currently being built, cost pressures in the construction industry could dampen that momentum soon – meaning shortages could persist. Therefore, a slowdown in value growth still looks more likely than outright falls in prices.

And just possibly, 2022 could be the year we finally see the tight listings situation ease as more sellers come forward to ‘lock in’ their recent gains.

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