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Will relaxed border rules impact property values?

With the announcement New Zealand’s international borders are beginning their gradual reopening to the rest of the world, net migration figures are poised for a period of significant change, leaving many to ponder its effects on the national housing market.

Prolonged border closures, isolation requirements and ongoing pandemic disruption have ground migration to a virtual halt since the onset of the COVID-19 pandemic in February 2020, rendering the net inflow of New Zealanders into near negative territory.

Despite one of the key demand drivers – unnatural population growth – conspicuously absent over the last 24 months, the residential property market has ploughed ahead, with average property values exceeding an astonishing 30 percent in the year to December 2021.

By October this year, New Zealand’s border will be fully open to all visa categories; meaning students, workers, expatriate Kiwis and tourists from across the globe will return to Aotearoa. But, as New Zealand embarks on its journey reconnecting with the rest of the globe, Bayleys asks whether residential property values will rise or fall as a result?

EMPLOYMENT

Currently counteracting some of the rising cost of debt, record-low unemployment and strong job prospects are the results of a global skills shortage, a phenomenon set in equal parts to attract talent, and lure it away from New Zealand’s shores.

Recent estimates from Kiwibank economists note a net population outflow that could reach 20,000 by the end of the year – a loss akin only to the 2011 Australian mining boom which saw New Zealanders depart in droves as they sought higher wages and greater opportunities across the ditch.

Driving unemployment to record-low levels, New Zealand’s skills shortage is so acute economists warn of a drag on productivity that could touch the spectrum of sectors from building and construction to farming and horticulture. This continues to offer an incentive for Kiwi firms to create attractive employment packages and secure talent to keep the wheels of the economy moving.

So long as employment indicators remain extremely strong, Kiwis are feeling more confident to spend and invest in assets like residential property. However, a tight labour market can also impact the housing market on the other end – with a shortage of skilled labour making it difficult to deliver the 42,800 new homes consented in the year to November 2021. This has the potential to exacerbate housing supply shortages, and underpin value growth as obstacles to construction hold up delivery of valuable new homes.

REGIONAL DIASPORA

Where historically, new arrivals have sought a home in New Zealand’s larger cities, the rise of agile working environments, strong commodity prices and local infrastructure investment has shifted the focus of economic demand for incoming workers.

Record profits for farmers have spurred economic activity in the regions and the rural land market has reached new heights underpinning a strong outlook for the remainder of 2022.

Noting negative population growth for the first time on record, during the pandemic residents in Auckland and Christchurch made moves to areas including Whanganui, Kaipara and the Kapiti Coast as opportunities in our primary industries and the building and construction sectors provided prosperity and a solution to the rising cost of housing in our main centres.

As a result, we have seen residential value growth across the country, with every corner achieving record average sale values at some point within the last two years.

With a relaxation of border controls, the markets hit hardest by a lack of tourism over this time will continue to invite interest from these prospective house hunters, while the gradual flow of arrivals set to touch down in meaningful numbers from Q4 2022 offers policy-makers an opportunity to lean into challenges of sustainable migration, housing supply and ongoing infrastructure investment.

**ECONOMICS **

Expectations for a 3.25 percent Official Cash Rate (OCR) by 2024 have spurred negative projections for New Zealand’s housing market, with pundits saying the rising cost of servicing debt could see residential values regress some 10 percent by year-end.

Whether property values do a back-pedal this year remains to be seen; the national valuer’s report for the three months to February 2022 shows the average home increased 2.3 percent for instance. However, moderation of value growth will indeed ensure affordability looks a little better by the final quarter.

Against an inflationary backdrop where the cost of goods and services outpaces wage growth, it has become clear property prices that continue to rise at the same astronomical rate as seen over the last two years is simply less than ideal.

As the central bank works harder to tighten monetary policy and dampen the threat of embedded inflation, rising property values only serve as further impetus to continue raising interest rates and dampening consumer demand.

We expect the return of migration will indeed provide another pillar supporting the floor underneath the residential housing market, however, policy-makers with their eyes on the inflation-control prize will be careful to ensure prices do not run away again, prompting a surge in the OCR that would disproportionately impact the country’s most vulnerable residents.

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