ANZ economists say the Government's forthcoming ban on foreign buyers of New Zealand houses is not expected to have much impact on either house price inflation or housing affordability

ANZ economists say the Government's forthcoming ban on foreign buyers of New Zealand houses is not expected to have much impact on either house price inflation or housing affordability

ANZ economists don't expect the upcoming foreign buyer ban being imposed by the Government to have much impact on house price inflation or housing affordability.

In their weekly Market Focus publication, however, the economists don't rule out the possiblity of the policy having a larger impact in future. And they also say it's possible the impact of it would have been greater had it been introduced earlier.

They also think the ban could indirectly lead to increases in rents.

The proposed ban is to be implemented through the Overseas Investment Amendment Bill, which is due to be reported back from Parliamentary select committee this week and Associate Finance Minister David Parker expects it to become law next month.

"We expect the policy may dampen house price inflation, but only temporarily and by a small amount, as foreign buyers currently comprise only a small part of the market," the ANZ economists said.

"However, a lack of historical data means we cannot draw firm conclusions about the impact that the policy may have had if it was introduced earlier, or the impact it may have on the next housing cycle.

"It is clear though that banning foreign buyers is not a quick fix on housing affordability. Housing demand is underpinned by still-low mortgage rates and still-strong net migration, and on the supply side, there are important issues around high construction costs, restricted supply of land, and provision of infrastructure. It is important that the restrictions are not permitted to signal that New Zealand is closed for business. The benefits of openness are large and accrue to all New Zealanders," they said. 

The economists said any estimates are subject to "considerable uncertainty", but making reasonable assumptions about the impact on house sales, they estimate that the restriction might reduce house prices by half a percentage point, relative to a counterfactual scenario where foreign buyers were still in the market. 

"It is possible that foreign investors will find ways to get around the policy, eg by purchasing via New Zealand residents. To the extent that there is policy avoidance, the effect will be muted."

So, with the impact on house price inflation likely small, the economists expect the policy will have a negligible immediate impact on housing affordability.

"However, importantly, this does not mean that the policy could not have a bigger impact in the future (or equally, that it would not have had a bigger impact if introduced earlier).

"Data produced by LINZ goes back to end-2015 and suggest the proportion of foreign buyers was flat between then and end-2017. However, we do not know the percentage of houses that were being bought by foreigners prior to this or during previous cycles – it could have been larger."

The economists said the "causality" between foreign purchases and house price inflation runs both ways, "of course", with foreign buyers likely to be attracted by capital gains just as domestic investors are.

"...And the new policy therefore may well contribute to a smaller peak in house price inflation next time round. Without complete data on their impact on sales over the last housing cycle, it is very hard to know. And as we have mentioned, non-residents could have been funding transactions through (or with) residents, so the true impact of foreign buyers could be larger than the data suggests."

Beware of unitended consequences

The economists caution that with any new policy it is important to be wary of unintended negative consequences.

"As currently drafted, the new legislation would have a carve out for foreign purchases of non-residential property – it will be important for this to operate smoothly, so that the restrictions do not impinge on business operations or reduce the desirability of New Zealand as an investment destination."

The economists say a key question is the degree to which foreign investors will be willing to participate in the development and construction of new homes under these new rules.

"We are told that foreign investors participate significantly in the Auckland apartment market, and given that finance for large development projects can be difficult to obtain, a restriction on foreign buyers could significantly curb supply by making pre-sale targets more difficult to achieve. Thus even if foreign investors are not heavily involved in new building directly, their contribution to demand could be playing an important role in contributing to confidence amongst property developers."

Rents may be increased

The economists also have a warning on rents. They say the foreign buyer restrictions, combined with other proposed policies that will (quite deliberately) make investment in property less attractive, can be expected to make capital gains look less assured, or property investment generally appear a more risky proposition.

"Investors may seek compensation by charging higher rents. Demand to live in a house is relatively inelastic compared to demand to purchase a house. This means that any increases in costs can flow through into rents relatively easily, as long as household income growth and the housing supply balance are amenable.

"Indeed it is possible that this is already happening in advance of policy changes, with rental inflation having increased through late 2017. The significant increase in rents in Auckland CBD suggests the current environment is conducive to rent increases."

The economists said that among the debate about foreign ownership it is important not to lose focus on other important issues pertaining to housing affordability, particularly on the supply side.

"Eliminating foreign buyers is certainly not a quick fix for the problem, though it will help at the margin."

Addressing housing affordability

To address housing affordability, the issue of constrained housing supply needs to be addressed, and land availability is crucial. Increasing the supply of residential land and relaxing restrictions on how land can be used would help. Lower levels of immigration could also help stem rising house prices, but this would make it more difficult for businesses to source labour, particularly in industries like construction, the economists said.

"It is not easy to solve the problem by simply building more houses because the construction industry is facing capacity and capital constraints, and infrastructure investment needs to occur at the same time.

"Policies aimed at expanding construction industry capacity and reducing costs would help. Construction costs are high by international standards, contributing to elevated house prices and housing supply that is slow to respond. This includes labour and materials costs, but also processes and red tape – with bureaucratic delays adding to uncertainty and contributing to cost escalation. Initiatives to boost construction industry productivity are a step in the right direction.

"On that front, some of the initiatives associated with KiwiBuild (such as prefabricated housing) could prove useful.

The economists said iIt is also important to view the issue of foreign ownership in a broader economic context.

"The fact is, New Zealand is reliant on foreign funds to do business. We have a poor saving record, and investment by foreigners is an important part of our economic landscape. It has been shown to have benefits for productivity, opportunities and wages.

Don't send the wrong signals

"Although the housing market represents only a small part of foreign investment, restrictions do move us in the direction of increased protectionism. In a global economy where trade and free flow of capital have large economic benefits, we need to be careful that we do not send a signal that New Zealand is closed for business, or that foreigners – and foreign capital – are not welcome here.

"The impact of foreign buyers on our housing market is relatively small. But the benefits of openness are broad and large – and they contribute to the living standards of all New Zealanders."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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18 Comments

"Foreign investors attracted by capital gains as are domestic" Yes true. They are also easily repelled when it stalls, then starts reversing.

Why does the ANZ even bother with the LVRs? They should just circumvent it and offer 100% home loans to any buyer anyway.

Yeah they should just lend 80% as a mortgage and 20% as a personal loan.

A bit of a self serving report.

It wont do anything positive for NZ home buyers but may make things worse......

Nothing for the spruikers to worry about then

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Its been a group that has payed way over the legacy market price with cheap overseas cash on a small localised market chasing speculation leverage, and taking that side dish of 13 years free schooling and healthcare for their kids to boot. Because its only 3%, removing that cant have much impact at all ....can it?

It's the 'visa' foreign residents who are making up 40% of the volume, as always the elephant in the room.

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Have I turned over to Stuff.co.nz and another bank sponsored article?

ANZ economists make me laugh, they change their position like the weather, it's like watching a load of Year13 students using all their worldly knowledge to predict the future. 'The foreign buyer ban will have little influence on the market.'. Do you think that John Key commissioned this report? or maybe he was the ANZ economist?

Yeah, a totally pointless puff piece by anz. It hardly qualifies as “research”

Great – the small fry are being dealt with apparently (however, a rather far too influential small fry I think).

In among some of this self-serving carry-on it would appear that “still-strong net migration” has much too large a part to play.

How @#E*^&%$& hard is it – do we really have to have some of the highest, if not the highest – net immigration rates in the world.

Careful now. Question immigration and you'll be labelled.

Brock, sage advice, but as I’m sure you will agree – Questioning the numerical and qualitative makeup of immigration policy is always a legitimate pursuit.

Interesting, so they would have us assume, that the unprecedented increases in property values over the last 10 years and the largest migration inflow in NZ history during the same period is only and purely coincidental and have nothing to do with each other. I heard the same arguments for cities like Toronto and Vancouver. And yet each and every time foreign purchases are stopped or taxed prices drop considerably.

Hogwash!! No fools here...and enough of this ridiculous brainwashing...

On a different note, while the government is announcing changes to foreign buyers has anyone noticed the change to investor Option categories for wealthy migrants? The cap has increased, the funds have increased, and upon maturity those funds will mostly likely find its way to housing and other assets.

https://www.immigration.govt.nz/about-us/media-centre/news-notifications...

Try telling someone in Queenstown it’s not going to have an impact.
Question? If it’s not going to do anything at all, why are the businesses operating within property making so much noise in the media about it. after all we are just updating our law to be the same as in Australia.

Just the same old ...yawn... rhetoric from economists.
I pay scant regard to bank economists given their vested interests.

FORGET EVER trying to stop foreigners buying land here , they are quire happy to use on-shore trusts or Companies as fronts for their investments .

Anyway why do we want to stop them ?

They are providing rental stock for tenants who would never afford a house anyway , so foreign buyers are in fact part of the solution ............ not the problem

The only thing that will work to bring down house prices is to )1 slow down the numbers of migrants and 2) make it easier to build homes

the tenants who would never afford a house anyway as you put it include doctors lawyers, scientists, and engineers who live and work in Auckland. The reason they cant afford a house is because of the foreign buyers.

Did you borrow too much Boatman? or promise endless riches to those that were brought in on Boats??? You sound worried? And it sounds to me like you should be.... Nothing but a credit crash happening in these parts.... 2 choices...

1. Stick your head in the sand and hope that the markets only eat the bottom half
2. Keep your head up and try and see if there is someone else who will pile the debt onto their boat? No one that silly ? - Best stick to choice number 1 then,,,,

Economists, don't you love their wilful blindness. See graph for Auckland and NZ above. Notice the more than DOUBLING in sales in Waitemata in past 6 months compared to previous 6 months, to foreign buyers? WHY might that be? This question is not asked, nor answered. Sales have accelerated in Auckland in last 6 months, but only in specific areas, for certain property types, at an accelerating are (i.e. especially in last 2 months) Especially apartment sales in Central Auckland. Is this because there are more apartments on sale? That does not make any difference overall. The types of property (not HOUSES as REINZ likes to refer to ALL sales, misleadingly) that are selling best are under $750k (affordability) esp in Waitakere; then sections in Rodney (esp Orewa) and then apartments in Central Auckland. In the last 2 categories, who is most fond of new property and land sales in Auckland?? Apartment sales and section sales will drop 20% in next 6 months in areas where have risen fastest in prev 6 months. Classic pulling of demand from future. So, when rule changes and future arrives, no demand. No demand means prices fall. This law of economics, we are told by our betters (in the industry) does not apply in Auckland. Watch....