Despite all the dampening measures deployed by policy-makers to control rapidly rising property prices, homes across Aotearoa have still risen some 40 percent in value since the start of the pandemic.

However, ongoing global pressures exacerbating pandemic disruption and the result of the free-flowing fiscal stimulus that was set to keep us afloat during the dark, early days of COVID uncertainty are coming home to roost, and commentators expect the factors driving housing market activity to look a lot different in 2022.

Investigating the impact of market dynamics by near, mid-and long-term realities, Bayleys examines the aspects influencing housing market activity for the year ahead.

**NEAR TERM **

The latest Consumer Price Index (CPI) data saw inflation hit a 31 year high at the close of December 2021, with the 5.9 percent figure well above our central bank’s target band of one-to-three percent.

Broad-based inflation pressures are likely to persist throughout 2022, meaning Kiwis will keep paying more for goods, services and assets owing to a variety of factors beyond domestic control.

International manufacturing disruption, fragmented supply chains and the rising price of oil and transport contrast against strong consumer demand; meaning businesses are easily passing cost increases on to their customers.

For housing, inflation is likely to impact the near-term market in several different ways.

Should the Reserve Bank of New Zealand (RBNZ) raise the Official Cash Rate (OCR) at its next Monetary Policy Statement (MPS) on February 23, as is widely expected, it would continue its tightening stance by raising interest rates to reduce demand.

This is necessary for an upward inflationary atmosphere to address the supply-demand imbalance causing rapidly increasing price rises.

While the OCR, and mortgage lending rates remain at historically very low levels (remember the 9.9 percent one year rate in 2008?) rising interest costs are expected to see more Kiwis reassess their finances.

An estimated 60 percent of existing home loans will need refinancing at higher rates throughout the year, and we expect Kiwi households to tighten the purse strings in reaction to a lower level of discretionary spending.

For property prices, this doesn’t detract from underlying demand dynamics, however, we expect to see value growth moderate from double-digit monthly gains to a more manageable level in the near term.

**MID TERM **

Enacted on 1 December 2021, new lending regulations have had a swift impact on borrowers’ ability to secure a loan, with commentators calling for a softening of the new legislation.

Originally intended to stop unmanageable high-interest rate debt, financial institutions have had an interesting interpretation of the Credit Contracts and Consumer Finance Act (CCCFA) which has been widely criticised by industry pundits as far too restrictive.

While banks comb through would-be borrowers’ spending history as they assess suitability for a loan, pressure mounts on Parliament to intervene in the new policy, criticised as disproportionately impacting first home buyers and those with unsecured income.

In the mid term, there is potential for these rules to be softened, in addition to an ongoing focus on getting first home buyers a foot in the door.

Despite record building consent issuance of some 48,522 in 2021, ongoing capacity and labour constraints mean New Zealand’s residential build rate is nowhere near as high as official numbers suggest.

Supply pressures pushing out construction timetables, material and labour shortages as well as rapidly rising land and building costs have been worsened by ongoing lockdown restrictions in 2021 and the arrival of Omicron in the new year.

The combination of these factors is expected to mean New Zealand’s issues with housing supply and demand are likely to persist for some time yet, underpinning property values in the mid-term.

LONG TERM

Looking ahead, all eyes and ears are on the hunt for any snippets of border information, with any relaxation of rules expected to increase demand for housing.

Despite population growth from migration turning positive in the three months to November 2021 for the first time in nine months, migration today remains at extremely low levels.

This means one of the key drivers of historical housing market activity has been conspicuously absent during the boom period of the last 18 months.

Looking to supply and demand, intensification rules under the Medium Density Residential Standards (MDRS) and National Policy Statement on Urban Development (NPS-UD) will significantly change the DNA of our cities over the next two decades.

Where taller and more populated residential buildings in metropolitan areas are expected to satiate ongoing demand in the long term, we similarly expect the buyer demographics of these types of properties will continue to evolve in line with financial and regulatory factors.

Coveted by entry-level purchasers for their relative affordability (compared to existing homes), and tax-exempt status from the policy that precludes investors from deducting interest from their investment property mortgage repayments, demand is expected to persist for quality residential projects.

Where property performance has bucked the pandemic trend, transcending intervention to note astronomical value growth, we expect a variety of social, financial and regulatory factors will continue to underpin a high level of demand through this new year.

Housing inflation will moderate from the some 30 percent per annum recorded in 2021, though we expect the appeal of residential property investment will endure, with values underpinned in 2022 by strong employment prospects, and the defining fact the majority of Kiwi household wealth is tied to residential assets.