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David Hargreaves ponders the possibilities in the housing market for next year

David Hargreaves ponders the possibilities in the housing market for next year

By David Hargreaves

So, just when the housing market is getting really interesting, the end of the year comes, leaving us with loads to ponder in terms of where the market goes from here.

We'll now have to wait past the summer 'silly season' – probably March-to-April - to get the next meaningful sets of information clarifying what's happening.

We know that following the October introduction of 40% deposit rules for investors there have been signs of a slow-down, particularly in Auckland.

It's worth remembering, however, that there was a slow down late last year as well after the Reserve Bank introduced Auckland-specific LVR rules for investors.

That bout of slowing was washed away by a torrent of New Year buying. Are we to expect the same thing again then come March/April next year?

Well, I still think there will be a resurgence of buying interest and prices in the late summer.

Crucial differences

Having said that, it is worth bearing in mind some crucial differences this year.

The RBNZ’s Auckland investor LVR moves introduced in October 2015 crimped the Auckland market for a while, but prompted Auckland investors to look further afield.

It can be argued that the spreading of the housing heat from Auckland to around the country this year was therefore at least in part caused by the RBNZ move.

Now that the whole country has investor LVRs there's no regional difference that would spark renewed New Year interest next year in the way that occurred this year.

Another different and less easily quantifiable factor this year is the extent to which banks are now rationing credit.

Banks’ funding struggles

Banks have been lending loads, but increasingly struggling to attract depositors’ funds. To some extent they’ve made up the shortfall with money borrowed offshore. But that’s now getting more expensive.

As well, new rules in Australia are requiring the New Zealand subsidiaries of the big banks to fund more on their own account rather than through their Australian parents.

It all makes for a squeeze.

So, just quietly, the banks here were probably relieved when the RBNZ put more LVR clamps on. The RBNZ rules provide a nice screen behind which the banks can quietly tighten up their own lending criteria.

The real interesting thing will be the extent to which that behaviour either continues or abates as we get into the New Year. That’s going to be more significant for the housing market in the short run than whatever the RBNZ does next.

What about the RBNZ?

And what does the RBNZ do next? It would have loved before the end of this year to get agreement in principle from the Government to add debt-to-income ratios to its macro-prudential toolkit.

The RBNZ's promised it wouldn't use the DTIs at the moment, but clearly it now sees them as a valuable weapon to have in the armoury for potential future use.

The Government's been delaying on this issue in any case and now, with the reshuffle at the top, has the perfect excuse for further delays.

I now rate the RBNZ's chances of getting approval for DTIs before the next election at somewhere between nought and zero.

If I’m right we likely would not even see DTIs sanctioned for use before 2018. And that's just sanctioned. If the RBNZ wants to use them it would require a consultation and notification period.

It could be a good two years before DTIs potentially see the light of day – assuming they might still even be necessary or wanted. A lot is likely to have happened by then.

Interest rate rises?

The mention in passing of income raises another potential issue.

House prices have gone up enormously. Wages have not.

While this Government's policy of pumping up immigration has helped to keep wages down, there are some signs that pressure is now building for more meaningful wage rises. This is one factor that could see New Zealand's apparently moribund inflation revive.

The ‘market’ expectation is that interest rates won't move at all next year.

Frankly though, if you look back over recent years at what various economists, Reserve Bank’s included, were forecasting would happen to interest rates a year or two ahead…well…they haven't been close. Nobody has.

It would not surprise me to see the RBNZ having to push interest rates up in the second half of next year.

With the amount of money some people have borrowed and are having to borrow, even small rises in interest rates will have an impact pretty quickly.

Pre-election blues

If all of these factors swirling around the house market were not enough, there's the not-small matter of next year's election itself.

The house market took a fairly significant pause ahead of the 2014 election. And remember, that was an election that never seemed likely to have a particularly close result.

Courtesy of John Key and his decision to walk away, next year's election suddenly promises to be a tight-run thing.

This means that the various policies unveiled by the political parties – even the ‘third tier’ parties – are likely to have the marketplace jumping around. The fact that housing itself is sure to attract a lot of policy promises will further fuel potential house market volatility.

What does this all add up to then?

I can still see renewed late summer early autumn activity with further price gains.

Beyond that though things definitely look cloudy.

A renewed surge in house price rises will likely see more RBNZ intervention. And if the central bank can’t use DTIs then it will probably ratchet up the minimum deposit requirements for investors even further.

The attitude of the banks and their willingness, or otherwise, to keep freely lending, will be key.

Once the halfway point of the year has been reached the other factors such as possible signs of interest rate rises and, most critically, the uncertainty of the election outcome, will start to kick in.

In such an environment a ‘stalling’ of the market in the second half of next year would be no surprise.

See what 2018 brings

The big thing then would be to see what sort of Government is in place when 2018 comes, where interest rates are, and what the housing supply situation is looking like.

And of course, I’ve focused on New Zealand issues. There’s a big wide world out there containing probably more potential fishhooks and nasties than we’ve seen for a few years.

And I haven’t even mentioned President Trump.

Yes, there’s plenty to digest this Christmas.

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12 Comments

National must be praying for some house price softening prior to the Election. The more prices weaken the more likely they will be re-elected.

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Do you really think so? I would have thought that National was relying on the feel-good factor of ever-increasing house prices among the voting population, & the associated wealth effect. My observation was that was why Key, English & co have always been cheerleaders for the residential property boom, & reluctant to do anything that might stem it.

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Agreed. I think the government won't want any change (i.e. rising bank rates, house prices falling etc.) that reduce consumer spending or gets people thinking about anaemic income growth over the last decade.

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Why would that be ? I don't understand your logic ?

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Four Nat MPs to leave politics at the end of this term.
Todays cartoon in the Herald brings to mind the suggestion of rats leaving a sinking ship.

The first Kiwi business mogul I met was the step father of a friend in London. He told me he had been tasked by the govt of the day with setting up a task force to sort out the NZ building industry in the late 80's. When he saw all the figures when they came over his desk he realised it was all over red rover and promptly sold his own building business before it became public knowledge. Is this happening with the Nats?

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No chance of interest rate rises next year until wages move up with it. RBNZ needs to maintain financial stability, and increasing rates will do the opposite.

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I don't think interest rates will be the main concern in 2017/18, more likely the lack of liquidity when the Italian or German Banks default.

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Attended Harcourts Kapiti Coast auction today, and sold a brick and tile property at Waikanae Beach. The property we sold had one bidder, negotiated under hammer sale at 650K. 4-6mths previously would have sold for 600K, a month ago maybe 700K. Noted definitely cooling, frenzy has gone, 1 to 2 bidders per property and not getting carried away. Many sales similar to ours, bidding stops under reserve vendor lowers price and purchaser ups bid. People seem to be stand offish, I suspect they sense a change in the air. Combo JK resignation, raising rates, Auckland market stalling, less free finance available. Market may lift again, but I suspect not given 2017 is election year. Good to lighten the load though with the sale.

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Plenty of foreign(non citizen) buyers facing stamp duty taxes in Canada, Singapore and Australia that may look at NZ which has the lowest purchase tax in the world. ZERO %.

http://www.bbc.com/capital/story/20161215-chinese-retirees-could-fuel-t…

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What happens to the NZ housing market will have nothing to do with our domestic policies. Despite this National Government's policy of an open door immigration policy to lower wages and push up house prices, the market will be driven by overseas events pushing up interest rates.
Stand by for a major house correction next year with investors being badly hit and dumping their investment properties.

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In what way, exactly, does this government's policy on immigration differ from the last government's policy on immigration? How is the door any more open now than it was before?

I've been through the immigration system under this Government and I can assure you that the hurdles were high, and expensive.

Yes, net immigration is a lot higher now. That is not in itself proof that the government's policy on immigration has changed. It could equally be proof that a lot more people want to come here, and a lot fewer people want to leave. That cannot possibly be said to reflect badly on the government's performance.

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I think the only difference is the relaxation of rules around working on a student visa.
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Which seems to have had the effect of a lot more students applying for student visas. Immigration numbers have doubled, since National changed their policy.
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The numbers 'allowed', i.e. the target of 100k immigrants a year, is the sae under National as it is under Labour.
In real terms, the difference is that the economic in Australia has changed, so a lot more NZ'ers are either returning, or deferring their leave.
Which also adds to the pressure.

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