Propertyscouts New Plymouth

Property Market Update - 5th Jan 2018

Property Market Update

By Tony Alexander.

Fixed interest rates increased last year in line with our expectations, and we still hold the view that the Reserve Bank will make its first tightening of monetary policy in 2018. But this is where things get interesting.

It is always easy to run a negative scenario about anything – we humans seem hard-wired to see downsides in everything around us. But what if we tilted instead toward an upside scenario for the housing market? If we did then factors we would seize on would include the following.

Although the annual net migration inflow peaked at 72,000 three months ago the pullback is very slow and the government has notably stopped all reference to pre-election Labour policy of reducing gross migrant inflows by up to 30,000 people. It seems that feedback from sectors including hospitality, horticulture, healthcare, aged care, construction has given new
ministers food for thought regarding the negative economic and social impact of stopping businesses getting the staff they need.

The Reserve Bank has just eased loan to value (LVR) rules slightly so investors only need a 35% deposit while banks can lend to other buyers with less than a 20% deposit for up to 15% of new lending as opposed to only 10%.

Some fixed interest rates have recently been cut to reflect reduced expectations of tighter monetary policy in the United States and other countries as inflation globally continues to surprise on the low side.

Drought New Zealand is drying out. If this continues, forecasters including Treasury and the Reserve Bank will start to reduce their expectations for growth. That will lead to reduced inflation forecasts and could cause our central bank to cut interest rates next year. We don’t think they will at the moment. But pricing in the market may start moving in that direction
which will mean further falls in fixed interest rates.

Now lets throw in a very strong labour market, still only weak growth in new house supply, and one could start to generate an argument for the housing market rising anew next year. But it won’t happen. Why?

Because the upward leg of this cycle has ended. FOMO (fear of missing out) has gone. Foreign buyers of existing property are about to be banned. Being a landlord is about to become more burdensome with less net cash flow and eventually lower net wealth gains after tax. Some investors are switching to commercial property or going bank to bank deposits.

2018 is likely to be a year in which in simple terms, the NZ housing market cools down in a traditional multiyear process of getting itself ready for the next cyclical lift upward. When might that come? History tells us picking such periods of fast price gain can be hard. But for want of anything better at this stage, lets assume Auckland kicks up again leading into the 2021 Americas Cup races and APEC meeting. Then the rest of the country will follow with a lag.

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