Despite nearly two years of economic, social and global disruption, the Bank for International Settlements (BIS) recently found New Zealand to have the ‘hottest housing market in the world’ with prices rising some 15 percent higher than comparable advanced economies.
However, the tide is turning on favourable credit conditions and the huge programme of financial support that has carried our economy through the most uncertain pandemic times.
We’re building more houses and banks are more cautious to lend to us, why then, has the housing market value nationwide risen more than seven percent since August?
ONGOING SUGAR RUSH
From the arrival of the COVID virus in New Zealand, the Government and our central bank were swift to act, dropping the Official Cash Rate (OCR) to a record low level while enacting a financial support package that has seen us print more money per capita than any other developed country.
Quantitative Easing (QE) measures like the Large-Scale Asset Purchase Programme (LSAP) and the Funding for Lending Programme (FLP) lowered borrowing costs and encouraged Kiwis to spend, while slushing money through the economy that found its way to the residential property market.
Reduced borrowing costs are estimated to have added more than $2.5 trillion to household balance sheets since March 2020, with the wealth effect created by a 30 percent rise in property values over the last year alone further stoking an already critically undersupplied fire.
Thus far, record-low interest rates, a persistent supply and demand imbalance and a pipeline of easy money have turbocharged residential housing markets across the country, resulting in a spectacular surge in the price of bricks and mortar.
But as lending criteria tightens and inflation impacts our desire to buy, Kiwis could be nearing the end of their sugar high.
BEGINNING OF THE TIGHTENING CYCLE
Lifting the cash rate by 50 basis points since October, the Reserve Bank of New Zealand (RBNZ) has signalled the end of emergency monetary policy and the beginning of a tightening cycle that will see the OCR peak around 2.6 percent by the end of 2023.
Mortgage advisors and lenders across the country have already noted a shifting attitude by way of tighter prudential requirements, most recently introduced as tougher restrictions on high loan-to-value (LVR) ratios for owner-occupiers on November 1.
While the average Kiwi household is starting to spend more on servicing debt, the difference between tightening monetary policy and a slowdown in household spending is estimated to take some time, as Kiwi consumers adjust their habits to new financial conditions.
The lag time between higher costs and spending behaviour is likely to run over 2022, with residential property values continuing upward before noting slower and more sustained growth as Kiwis look harder at their finances.
Despite finding ourselves amid a very exciting building boom, with residential building consents at record high levels, Kiwis are yet to see this translate to real supply, with fervent competition for quality properties continuing.
The post-lockdown surge in new listings is expected to replenish an unsatiated marketplace, however, salespeople across the country are noting new listings are yet to catch up with demand.
Tougher lending conditions are on the horizon including consultation about the use of new debt-to-income (DTI) tools that could cap borrowing abilities at six or seven times household income. With this, increased competition is evident across the marketplace as buyers move to act now before the housing winds change.
Anecdotal evidence shows the ongoing threat of policy intervention is having a supportive effect on residential value growth, as both buyers and sellers make their move quickly and decisively under current market conditions.