May has marked a turning point for the residential real estate sector, with the sentiment more positive, activity rising, and a host of supportive factors turning in favour of demand.

While all eyes were firmly on Budget announcements at the beginning of the month, as pundits noted the inflationary effects of spending on critical infrastructure, health and services, the Reserve Bank of New Zealand (RBNZ) bucked expectations at its May 24th Monetary Policy Statement (MPS).

Many expected that spending in the Budget required a longer and harder monetary policy tightening cycle to achieve the central bank’s annual inflation goal of between one and three percent. Yet, after raising the OCR by a predictable 25 basis points (to 5.5 percent), it noted this increase would likely be the last. Satisfied that monetary policy has significantly dampened consumer demand, the bank has also greenlit an easing in the proportion of high Loan-to-Value Ratio (LVR) lending committed by banks.

This comes at the same time credit conditions are easing for borrowers, and housing demand appears to be rising, with an influx of migrants, lower projections for house building, and fewer new residential property listings available for sale.

These demand factors have been absent across markets nationwide for the last 18 months and have been exacerbated by rapidly rising mortgage lending rates and broad market uncertainty.

Now, with the tide appearing to be turning, it is challenging to imagine how residential property prices will not benefit from some value uplift in the months ahead. Affordability, however, remains a key constraint for many. Despite property prices falling nearly 18 percent from their 2021 peaks, they are well ahead of values noted at the start of the pandemic.

At the same time, wages have risen but failed to keep pace with Consumer Price Inflation (CPI), and many Kiwis are paying more to get less.

Despite this, Bayleys salespeople from markets across the country continue to note improving market sentiment, buoyed by an intensifying shortage of new listings. Where property platform realestate.co.nz reports new listings were down 20 percent year-on-year in April, buyers are becoming more agitated at the prospect of rising competition, which is poised to place upward pressure on values.

This is further evidenced by better auction activity, with clearance rates and participation improving nationwide.

As we look to the months ahead, only time will tell how demand dynamics play out. It remains unlikely value growth will return to the double-digit momentum witnessed at the last cyclical peak. However, the fundamental need to buy and sell property persists, supported by a backlog of buyers waiting for greater clarity around market conditions before making their move.

In-depth reports:

• In its mid-month economic bulletin, Westpac Bank says the stabilisation of house prices continued over the month, supported by an increasing volume of property transactions and the annual net inflow of migrants. Big news from the month also included the Government’s allocation of spending as part of its 2023 Budget, which has been roundly criticised for failing to address substantial under-investment in housing that caused prices to run away beyond affordable levels prior to and during the global pandemic. While surging migration is a good news story for the economy, Kiwi businesses and house sellers, the current level is now running well ahead of forecasts assumed by infrastructure planners, placing increased pressure on supply and services.

• A recent report from property news and research firm CoreLogic explored the implications of Debt-to-Income (DTI) ratios, which are set to be introduced next year. It found that while DTI rules are more about restraining the next market upswing and improving long-term financial stability, investors may well bring purchasing decisions forward as they plan for the future. Demand drivers over the last month, including stabilising mortgage lending rates, rising sentiment, and increasing migration placing pressure on housing supply, have combined to create a more attractive picture for residential investors, who are becoming more active with improving market conditions.

• In its April data press release, Real Estate Institute of New Zealand’s (REINZ) Housing Price Index (HPI) was unchanged on a seasonally-adjusted basis after falling just 0.1 percent in March. At the same time, there was a 7.1 percent increase in the number of transactions, which is consistent with a housing market that’s at or near a turn. Kiwis are starting to feel more confident about future market performance, with anecdotal evidence suggesting fewer expected house prices will continue to fall. That being said, it is still too early to tell what the inflationary impacts of immigration policy will be. This could translate to upside demand pressure, requiring the RBNZ to continue tightening monetary policy. Alternatively, we could see the surge in migrant inflows offset other areas of weakness in the months ahead.

Topical articles:

• New data shows immigrants now make up nearly 13 percent of New Zealand’s home buyers, with their market share rising steadily over the last four years. More than one in 10 homes sold in New Zealand during the first quarter of the year were purchased by migrants, data from Statistics New Zealand shows. This comes at the same time the Government continues to step up efforts to attract more high-net-worth investors to New Zealand, increasing competitiveness for the limited supply of high-value residential properties.

• In his May Mortgage Advisor’s Survey, independent economist Tony Alexander finds increasing signs residential buyers feel we have reached the pit for property prices. This is supported by an increased willingness to lend from banks and other financial institutions, an easing in credit rules, and the relaxation of LVR settings which take effect June 1st. While affordability remains a key consideration for buyers, many of the settings that have worked to constrain demand are shifting, boding well for sales activity to year-end.

• New data from Statistics New Zealand shows average weekly rental values have risen 3.8 percent year-on-year in April, and 0.4 percent month-on-month, driven largely by landlords which are expecting an influx of new migrants, placing pressure on existing rental supply. CPI metrics show rental pricing remains a primary contributor to homegrown inflation and demand continues to outstrip supply, making the value proposition on rental investments more attractive at the same time affordability has improved with lower sale values.

• In an opinion piece for Newsroom, chief economist for thinktank The New Zealand Initiative, Eric Crampton says bad zoning policy in New Zealand continues to create some of the least affordable housing in the world. Using data collected by the Infrastructure Commission, he shows that a square metre of land at Auckland’s fringe is worth $1,274 more if it has urban zoning, and this designation has an inflationary impact on land prices across cities. The information raises an important question about funding mechanisms for new infrastructure, which remain a key barrier to creating more affordable housing at scale and pace, particularly as councils remain limited by debt ceilings.

• A rental gradient analysis by the University of Auckland Business School indicates that the work-from-home trend which took hold during the pandemic has reshaped the urban rental market. The study found rental values in lower-density, city-fringe suburbs have experienced the greatest inflation, bucking the traditional expectation that rental values closer to the CBD are usually the most expensive. The research has broad implications for urban planning and policy, with residential investors likely to seek new properties in city-fringe areas as a preferable investment vehicle.