Housing market: New Government causing ripples not waves

Housing Market Written by Tony Alexander, Dec 6 2023
Guest Post by Tony Alexander

Guest Post by Tony Alexander

Now that the Coalition Agreements between the three governing parties in the new government have been signed, we have some solid details on a few things relevant to the NZ housing market. We don’t yet know when the brightline test will revert to two years from ten years, but investors regain 100% deductibility of interest expenses from April 1 2025. The 80% deduction before then is as good as 100% so we can ask ourselves whether the change will bring investors rapidly back into the market as buyers.

From my monthly survey of real estate agents sponsored by NZHL we can see some evidence not of higher investor demand but of supply. My most recent survey from just over a week ago shows a net 11% of agents saying that they are seeing more investors looking to sell. This is up from a net 0% immediately pre-election and the strongest result since the end of 2021.

Perhaps anticipation of extra demand is encouraging investors who have been holding off selling to now enter the market

Sustained high mortgage interest rates with some further increases recently may also be encouraging some selling. So too will rapidly rising costs for maintenance, insurance, and council rates.

With regard to the net proportion of agents seeing more investors looking to buy, the latest result of 22% is down from 26% a month ago but up from 14% pre-election and a net 44% at the end of April who were seeing fewer investor buyers.

Demand from investors has definitely lifted since the election

But confirmation of the earlier than expected restoration of interest expense deductibility has not produced an extra surge in demand. The demand seems to be steadily increasing rather than surging. But what lies ahead?

For now it doesn’t look like any extra boost to demand, and prices is going to come from falling interest rates. The Reserve Bank have made it clear that they do not feel the time is right as yet for mortgage rates to fall. But it is likely that net migration flows will remain strong.

In fact, the Coalition Agreement between National and ACT explicitly aims for higher migrant numbers through the Recognised Seasonal Employer Scheme, improved access for migrant parents, reduced requirements surrounding job income levels, and easier access for migrant family members.

Strong population growth in the end will dominate all other factors in the housing market and the restraint from high mortgage rates which is strong at the moment has to eventually pass. When that happens the odds are we will see something akin to what happens when an incoming tide overwhelms a river’s seaward flow — a tidal bore runs up the river.

When might we see this population-driven surge in demand overwhelm the restraining factors in play?

That is impossible to say because we cannot accurately predict when mortgage rates will decline by the percentage point or so which will be necessary to activate the many thousands of potential buyers currently doing nothing.

All around the world each week we learn new things about where inflation is going. Recently the news from offshore has been very positive with lower than expected inflation outcomes in the UK, EU, Australia, and United States.

We seem due for a surprise like that here. But we can’t know when.

The odds favour mortgage rates falling perhaps a year earlier than the mid-2025 timeframe pencilled into forecasts by the Reserve Bank. That means strengthening house demand and upward pressure on house prices perhaps from the middle of 2024 at the latest. We shall see. No-one has exactly covered themselves with glory when it comes to predicting interest rates since 2007.

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