Sales activity continued to underscore positive sentiment across the national housing market in June, and Kiwis are feeling more confident about the months ahead in spite of potential upheaval resulting from October’s general election.

In a year that’s been far from typical, the outlook for the residential market is for improvement over the cooler winter months, with Kiwis’ renewed optimism owing to various supportive factors, including greater economic certainty, strong employment prospects, higher wages, and an easing in policy that has improved borrowing power.

Despite raising the Official Cash Rate (OCR) to a post-Global Financial Crisis (GFC) high of 5.5 percent in May, the Reserve Bank of New Zealand (RBNZ) delivered a surprise sweet treat in its latest Monetary Policy Statement (MPS) by acknowledging that this rate rise would be the last for the tightening cycle.

Working alongside the recent easing in restrictive credit regulations (changes to the Credit Contracts and Consumer Finance Act 2003) and Loan-to-Value Ratio (LVR) restrictions which allow a more significant proportion of bank lending to owner-occupiers and investors with smaller deposits, buyers are feeling more decisive, and Bayleys salespeople across the network are seeing this manifest in an uplift in transaction volumes.

Conditions are also evolving for residential investors, as average weekly rental values continue to move upward, improving the yield proposition on residential assets.

While we are waiting to see measurable effects here, migration is another mighty pillar creating demand for homes. Suppose the lift in new entrants continues at the same time we see a change in Government (which has promised to reverse policy restricting the deductibility of interest costs on investment property), in that case, there could be a flurry of sales activity come quarter four.

Election speculation and spending announcements continue to shine a light on densification and the need to improve our national infrastructure network, with the issue of sustainable growth shaping up to be a key consideration for voters in the latter half of the year.

For homeowners and those in the market, communities earmarked for greater density as per zoning changes or that are adjacent to planned future infrastructure projects may provide the best chance at value uplift potential, and we are already seeing buyers – both large and small – start to look at development fundamentals to inform purchasing decisions once again.

For the months ahead, the outlook is positive, with affordability constraining any chance of runaway house price growth – and in turn, a lid on the RBNZ’s macroprudential toolkit. Sustainable, single-digit value growth will keep the residential market under the economic radar to year-end, and we are looking forward to continually welcoming buyers and sellers, previously hesitant about market conditions, off the sidelines once again.

In-depth reports:

• In its June Property Focus report, economists from ANZ Bank note Auckland’s property cycle has turned markedly, buoyed by strong migration and a widening housing deficit which continues to raise average weekly rental values. Property market performance in main centres generally precedes regions by several months, which could signify recovery. However, the bank says the RBNZ’s tolerance for inflation will temper value uplift potential. While the central bank downplayed the inflationary effects of migration, analysis shows that whether migrants rent or buy, they increase the physical demand for housing, which will certainly increase demand, with an effect on residential values.

• A news bulletin from property research firm CoreLogic shows that while property values were down year-on-year in May, they are $194,000 higher than they were before the global pandemic, helping homeowners to feel more positive about current economic conditions. The slowing rate of annual change continues to suggest that we are past peak pessimism in the residential property market. Kiwis are feeling more confident about the trajectory of the economy. This will underpin ongoing sales activity to year-end, particularly as first-home buyers and families moving house come off the bench after waiting for conditions to improve over the last two years.

• In its May data set, the Real Estate Institute of New Zealand (REINZ) says seasonally-adjusted house sales lifted 2.1 percent month-on-month in May, taking asset values back to where they were in May 2022. Properties are spending an average of 47 days on the market, almost a week less than the peak recorded in February. However, remain above the five year average of 36 days. Sale volumes across the country continue to increase at the same time new listings numbers remain relatively soft, which indicates a slow and steady market tightening that will see residential values rise incrementally by year-end.

Topical articles:

• In an interview with property portal OneRoof, Bayleys Head of Projects Suzie Wigglesworth says lower forecast construction activity, particularly in the apartment sector, could put pressure on housing supply over the next three years. Developers have been feeling the squeeze of market conditions which have made residential projects more challenging recently. However, high-end products are selling well to downsizers, expatriate Kiwis and new arrivals. Firms with good industry reputations continue to bring new projects to the market, though the ‘weeding out’ of inexperienced and under-capitalised building and construction firms is expected to contribute to a supply and demand imbalance and rising residential value growth in the future.

• In his daily news bulletin, journalist Bernard Hickey details the inflationary consequences for housing of recent government support to help first home buyers. By easing lending rules, risk weightings, and increasing price and income caps on First Home Grants, it’s estimated first home buyers have $4.75 billion more to play with when they enter the residential market. While supporting young buyers into home ownership has been a focal area for the Government, the magnitude of the aid works against the central bank’s own objectives of lowering consumer demand and bringing inflation back to within the target band. Recent data suggests first home buyers have propped up the residential market recently, accounting for nearly one quarter of all mortgage lending, with the boost to funding allowing them to pay higher prices for properties across the country.

• Analysis from property portal One Roof shows the asking price of residential property has been discounted in more than one in 10 homes brought to the market over the last seven months. Discounting the asking price on listings is often a strategy employed to attract new attention on stale listings – a particularly prominent feature of the residential market lately given low levels of new listings coming online. The average price drop was only 4.82 percent (or $43,000) of the average asking price, demonstrating that few sellers are under extreme pressure to sell under current market conditions.

• In an early June housing market bulletin, economists from Westpac Bank say the forces weighing against housing demand over the last few years have started to turn, with house sales rising almost 20 percent since bottoming out in December 2022. Recent data suggests the market has stabilised faster than expected, with the surge in migration a powerful factor. At the same time, Kiwi consumers have greater clarity around the implications of mortgage lending rates.

• David Hargreaves reports for interest.co.nz that while the RBNZ raised the OCR by 25 basis points to a post-GFC high of 5.5 percent at its May 24 MPS, it surprised markets with its acknowledgement that this rise could be the last in the tightening cycle. Mortgage lending rates all tracked higher on average in June following the news. However, it has been interesting to note Kiwis’ preference for more expensive short-term fixes over longer terms. This suggests borrowers have heeded the sentiment of the RBNZ and expect mortgage lending rates are going to fall over the next 12-24 months.