By Nick Goodall*
If the NZ property market were a person, it will have dragged its heels back to work after a year of constant change, unrelenting pressure and left-field surprises.
Like all well intentioned self-improvers, it would have taken time over the summer break to reflect on the year that was, before embracing what’s coming next. And by all accounts, what a year 2017 was.
It started hot on the heels of a major milestone ticking over: the total value of all residential property in NZ passing the trillion dollar barrier. That’s a lot of value in one asset class and reinforces just how much property is an obsession here.
In early 2017 this was the lay of the land:
- The LVR restrictions had recently been tightened by the Reserve Bank of NZ. Heading into 2018, those restrictions have been loosened - albeit only marginally.
- NZ had not long sworn in a new Prime Minister after John Key surprisingly stepped down in December 2016. Fast forward a year and once again we have a new Prime Minister in Jacinda Ardern, plus a whole new Government too.
- The global audience was still getting its head around both the Brexit vote and Trump’s election victory and what it was all going to do for the world’s economy. Turns out that not too much impact was felt by NZ’s property market.
Moving from politics back to property - despite a slowing of property values leading into 2017 there remained concern about prices increasing and the level of debt being incurred, especially by investors. Of course this was the main driver for the Reserve Bank tightening the LVR restrictions in late 2016 - lifting the minimum deposit requirement for investors to 40%.
From this point onwards we saw a sustained impact on property values, especially in Auckland. While previous LVR restrictions had only impacted the market short term, this time their effect was felt long term. They weren’t the sole reason for the slowdown though.
Mortgage interest rates had moved up past their record lows and slowly inched higher. But perhaps more crucially the retail banks were beginning to tighten up the purse strings, with tougher lending criteria and more stringent stress testing around the serviceability of mortgages.
This lead to sales activity getting significantly dented across the country but as the area with the most expensive property in NZ*, Auckland was the hardest hit. After enjoying the biggest growth over the previous four years, from April 2017 onwards Auckland’s sales volumes were consistently down 30%.
An increase in total listings meant more choice for active buyers, who were actually diminishing in numbers. This combination meant lesser reason for prices to rise, which contributed to the slowdown too.
And then came winter.
All the factors mentioned above contributed to it being a particularly freezing one for NZ’s property market, influenced further by the impending General Election. From July we got bombarded with election advertising and endless policy debates - which added just a touch of uncertainty to the future. Initially National was very clearly in the lead, so the possibility of leadership change was minimal. But Jacinda Ardern quickly changed all that, with her promotion to the top job in August bringing Labour back into contention. Once again, people wondered about the property market’s future.
This was also when property investors started to struggle. Yield from investments had already significantly reduced, capital gains were drying up without sign of improvement, and securing funding was proving difficult. This trio of challenges meant mortgaged investors’ share of sales reduced to less than 25% (from a peak of 28%) nationwide. Remember that flow of Auckland investors into other regions as well? It soon began to taper off too.
While this was all going on, first home buyers were actually increasing their share of sales - although it’s worth noting that while all buyers were affected by the tightening of credit, it was investors affected the most. This meant the share of sales to first home buyers actually increased.
Property investors (or speculators to be more accurate) now find themselves under increased scrutiny from the new Government. The Healthy Homes Guarantee Bill passed in November, meaning improved standards for rental properties. About the same time foreign investors were also targeted, with foreign buyers soon to be effectively banned from buying existing property in NZ. So no respite in 2018 for some investors then, especially with expected tax changes to end the ability to negatively gear investment property and the extension of the Brightline test to five years to further ensure short term capital gains are taxed.
Before the year was out we did see a very late spring lift in both sales activity and values in Auckland but then the summer break meant things came to a grinding halt. The NZ property market was busy panic buying at Kmart and fretting over whether to My Food Bag the Christmas lunch or not. We now won’t see a decent level of activity return from the summer lull until later this month.
So after all this, where did we end up?
The statistics tell us that what it meant for Auckland was an overall value increase of 0.4% through 2017, but mixed results within the Super City; Auckland City finished up 2.2%, as did Papakura, but Waitakere ended the year down 1.9% and Manukau down 1.0% - easily the worst performing of our larger centres nationwide. Christchurch also finished the 2017 year below where it started, albeit by a very slim margin of 0.1%.
Of the stronger performers, it was Dunedin that outpaced the rest of the ‘big 6’, realising a touch over 10% growth throughout the year. Wider Wellington (including Porirua and the Hutt) wasn’t far behind - rebounding from its early year slowdown to finish the year with 9.4% growth in values, with Porirua the pick of the bunch at 13.2% growth.
Meanwhile, Hamilton fared only slightly better than Auckland with 1.6% growth. Tauranga tried to get momentum again after hitting the brakes in early 2017 but couldn’t sustain it, ending the year up only 3.2%.
Outside our main six centres the best and worst were Masterton (19.6%), Horowhenua (16.5%) and Wanganui (15.1%) on top and Selwyn (0.3%), Waimakariri (1.7%) and Timaru (5.1%) at the bottom.
Now for that trillion dollar question …what does 2018 have in store?
Scanning across a few of the big influencers, net migration turned properly mid-way through 2017 after throwing a few dummy passes earlier to keep us all on our toes. It’s likely to continue to drop in 2018 as the Government reduces the in-flow of low skilled migrants and we start to lose Kiwis to Australia again (after gaining for the better part of the last two years).
Consumer confidence held up quite well through 2017 but is looking like its feelings are little bit hurt as we move into 2018. The weakness in the property market will be affecting that, but the strength of the labour market is holding it up, and that should remain relatively strong in 2018.
A major influencer on property values is mortgage interest rates. As has been well covered, a key part of those is the official cash rate which is tipped to stay on hold for 2018, but many economists are picking some upward pressure on mortgage rates due to the cost of funding for the banks.
So, plenty of macro-economic factors pointing to property demand remaining relatively constrained in 2018, but of course significant constraints on the construction industry remain, so supply will still lag. While there are ambitious Government targets to improve overall supply, particularly in Auckland, it’s unlikely that things will happen fast enough to massively improve the current demand/supply imbalance.
And don’t forget the research we released in the middle of 2017 which exposed that the actual increase in stock (6,000 units in 2016) is far behind those being consented (9,000 units in 2016). This is partly because the demolition of old properties to clear space for new properties isn’t taken into account with the ‘building consents issued’ measure.
So while building consents provide a high level health check of the construction industry, and they are trending upwards, they’re not always telling the whole story.
In Auckland we’ll probably see values remain relatively flat for most of 2018, barring a local or global economic shock. With more properties available, the fear of missing out has been removed - taking with it the previous upwards price pressure. People can once again save faster than the growth in property values (so waiting can actually pay off), plus it’s harder to secure funding…all adding up to constrained demand.
Elsewhere we may see value growth continue a bit longer, particularly in Wellington and Dunedin where there remains a shortage of available listings and where the growth phase took a little longer to kick in than places like Hamilton and Tauranga. These centres will also likely see a period of consolidation as unaffordability starts to bite.
Christchurch is a city all on its own in terms of where it’s at in the property market cycle. It’s been more subdued throughout the last few years as it matures from the earthquake rebuild. There is still substantial development in the region, despite passing the residential construction peak. There are concerns of over-supply in some parts of the region but it doesn’t appear to be wide-spread, which should mean relative stability for 2018.
In our smaller centres, debate remains as to whether the strong growth of 2016/17 was actually warranted. Some areas have benefitted from being in close proximity to larger centres, while others had stronger local economies to justify growth. Local knowledge is unbeatable in every case. But on the whole, migration to these areas has slowed: jobs drying up and value growth made property less affordable. So with the upwards pressure on mortgage interest rates having the same effect as anywhere in the country, it’s unlikely the strong recent growth will be sustained.
So long story short, NZ’s property market may very well have concluded that it’s time to settle down for a year of re-evaluation and reflection, after a few spent living it up like a 20-something on their OE.
*Nick Goodall is Head of Research for CoreLogic NZ. This article was originally published here. It is reproduced by permission.