But we still see the market cooling from the second half of 2021.
- Sales activity cooled in April according to REINZ, but house price growth increased further. Annual growth in the REINZ house price index hit a new high of almost 27% across Aotearoa. However, April data is distorted by the base effects of last year’s nationwide lockdown.
- The supply of listed property remains near multi-year lows, as are the median number of days to sell (30 days) and will underpin the housing market. A sharp correction seems unlikely.
- We still expect house price growth to cool from the second half of the year. Recent policy changes, such as tax changes aimed at property investors, will play a role. In addition, new housing supply is currently outstripping growth in demand while NZ’s borders are closed. Finally, mortgage rates are expected to rise as we get closer to the time the RBNZ is expected to begin tightening monetary policy – toward the end of next year.
- The RBNZ is concerned with the recent surge in housing prices and the increased vulnerability of a growing share of highly leveraged homeowners. While the RB is willing to tighten lending restrictions further, these aren’t warranted at present.
The latest data from REINZ for April provide limited evidence on the fallout from recent policy changes aimed at taking the heat out of the market. Sales activity looks to have cooled in April, but house prices expanded further. On an annual basis house price growth lifted to almost 27%, from 24% in March, a new high for the REINZ house price index. However, there is likely to be distortions in the data. First, annual comparison of sales activity is made absurd given the nationwide lock down experienced last April. Sales were up 420% compared to a year ago. However, seasonally adjusted sales in April cooled almost 6% across NZ. Some of the impact of the tightening of Loan-to-Value Ratio (LVR) lending restrictions may have been in play. Some investor activity was brough forward to the start of 2021. Second, April was a difficult month to monitor with two sets of national holidays (The Easter break and ANZAC day) and school holidays thrown into the month.
We think it will take a few months to see if recent policy changes, such as the extension of the bright-line test, have had a measurable impact on the market. Like a massive container ship, it can take time to slow the momentum of a runaway housing market. Moreover, the market is still underpinned by a notable lack of listed property. The median number of days to sell – at 30 days – remains low by historical standards. And with investor activity easing-up, first-home buyers seem happy to fill the void.
We continue to expect house price growth to cool from the second half of the year. Tighter LVR restrictions and tax changes targeting investors will play a part. Also, as mentioned in our recent housing market update, new housing supply is coming to market. The construction industry is currently building a surplus of homes for the first time in almost decade. A surplus of homes will likely be repeated this year and next. Building consents are at record highs and a closed border is restricting population growth. Looking ahead into 2022 we are forecasting a rise in mortgage rates as we get closer to the time the RBNZ starts tightening monetary policy. The market is now more sensitive to the risk of rising interest rates. And the RBNZ will be cautious in any attempt to lift interest rates as a result.
Like us, the RBNZ is monitoring developments in the housing market closely. We know from last week’s Financial Stability Report (FSR) the RBNZ is concerned with the recent surge in housing prices and the increased vulnerability of highly leveraged homeowners. As a result, the RBNZ will tighten macro-prudential policy further if needed starting with LVRs. There isn’t clear evidence to suggest tighter LVRs are needed at present. Data on high-risk LVR lending looks to be moving in the desired direction, particularly for property investors. However, the RBNZ also expressed a willingness to use Debt-to-Income (DTI) lending restrictions if given the go ahead. On measures of DTIs we see more of a worrying trend (see chart below). A large share of those new to the market have had to borrow at big multiples relative to income in the current market. A group particularly vulnerable to market downturns or rising mortgage rates. It seems that if the RB was to implement DTI restrictions, owner-occupiers would be a justified target. However, the Minister of Finance doesn’t appear keen to let the RB direct lending restrictions toward anything other than investors. A conundrum we hope the RBNZ won’t need to face.