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Residential demand surfs a wave of change to year-end

While New Zealanders continue to navigate the choppy waters of a global pandemic, this year we’re celebrating the wins – big or small, while looking forward to time spent with family and friends as we wrap up 365 days full of surprises.

Homeowners have been hit with a smorgasbord of legislative, financial and social disruption, much of which has been implemented to slow the freight train that is residential value growth.

Quarter one closed off with the Government’s sweeping changes to its housing policy, leaving many to wonder what’s next?

New rules saw the bright-line test extended from five to 10 years, while $3.8 billion in surplus funds contributed to a new Infrastructure Acceleration kitty, set to support the creation of new services and boost housing supply.

Most controversially, however, was the Government’s decision to ignore advice from the Inland Revenue Department (IRD) and persist with removing interest deductibility provisions for property investors that would end their ability to offset interest expenses against rental income.

While investors gave pause for thought, their market share dipping four percent in Auckland between quarter one and quarter two, an air of uncertainty settled over the market while we waited for clarification on the new rules not released until just before the October application date.

Despite change and the reintroduction of loan-to-value ratios (LVRs) for both owner-occupiers and property investors, data from the Real Estate Institute (REINZ) showed the national median sale price rose 13 percent in the first three months of the year.

This, off the back of 17 percent value growth in the last six months of 2020.

Record low interest rates, a supply-demand imbalance and the ‘wealth’ effect of a recovering economy and stimulatory monetary policy saw some Kiwis rush to spend their saved holiday funds on bricks and mortar investments.

Throughout quarter two, intensified chatter around rising interest rates and tightening credit conditions served to underpin residential sales activity, providing an impetus for buyers to enter the market before the housing winds changed.

While nationally, the median property value regressed some $10,000 between March and June 2021 reflecting ongoing uncertainty, the seasonal change and tight supply, year-on-year comparisons saw homeowners net gains nearing $200,000.

Better-than-expected economic performance, a tight labour market and messaging from the Reserve Bank (RBNZ) told us we could expect a raise to the Official Cash Rate (OCR) by August, however, the dangerous Delta-variant of COVID-19 put a halt to best-laid plans.

By August 18 the country had moved into restrictive Alert Level Four lockdown settings, and the immediate impact for businesses saw the central bank continue emergency monetary policy settings until we had greater clarity about the economic implications of the latest outbreak.

Throughout this time, Kiwis adjusted quickly, adopting the mantra ‘we’ve been here before’ – which for residential sales activity saw greater uptake in digital instruments and online auction attendance.

During the first several weeks of lockdown restrictions, the Bayleys auction team reported an excellent 90 percent clearance rate for live virtual auctions which took place across the country.

This, illustrating the old factors driving activity (record low interest rates, a supply-demand imbalance and the captive Kiwi audience) continue to have a huge impact on buyer decision-making.

October 6 saw the RBNZ raise the OCR for the first time in seven years, signalling the end of emergency monetary policy settings and the beginning of a credit tightening cycle that will see mortgage rates rise and more stringent stress testing implemented by financial institutions.

Widely expected, with many banks already pricing the change into their wholesale lending offerings, Kiwis weren’t caught off-guard here and continue to transact with the goal of wrapping up the year with an unconditional sale.

Weeks before the October implementation date property investors received some clarification about what constitutes a ‘new-build’ property, and their exemption from the March tax reforms.

By allowing investors to target new homes for their exemption from the rules removing interest deductibility provisions, we are starting to see a shift away from existing properties into the off-plan and new-build space.

Despite record building consent issuance and sweeping policy changes under the National Policy Statement on Urban Development (NPS-UD) showing promising signs for New Zealand’s ability to replenish its housing deficit, challenges for the sector persist.

Labour shortages, capacity constraints and the fact that 70 percent of all building materials arrive from offshore – impacted by global shortages and supply chain disruption continue to throw spanners into the mix, while demand for homes, new and existing, remains high.

Looking ahead, we continue to watch the pandemic response carefully, as any changes to current migration settings could impact housing market performance in a meaningful way.

Despite the pandemic landscape, Kiwis are largely positive about wrapping up the year.

Improving job prospects and wage growth alongside greater remote working abilities are the catalysts for a significant lifestyle shift, with more New Zealanders taking stock of what’s important – and this year, that’s health and happiness at home.

Bayleys thanks our national network of clients, customers, family and friends for their continued support and trust throughout this difficult year, and we wish you a wonderful holiday season.

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