ANZ chief economist Sharon Zollner, senior economist Miles Workman and senior strategist David Croy say while they expect the Government’s policy changes to take the wind out of the market’s sails a little faster than otherwise, it’s possible that would-be investors only hit pause temporarily while they work out the implications of the change.
“However, interest rate rises are scarier because of the number of highly indebted households which would be vulnerable if they were to increase or incomes were to deteriorate,” says Zollner.
“For investors, interest rate increases will no longer bring a larger tax offset.
“There’s now a greater chance rises in interest rate increases could cause investors to sell up, meaning a faster braking impact on the housing market than previously.”
Zollner is anticipating the policy changes to have a muted impact in the near term, but it makes mortgage rate increases even “scarier” for the housing market.
That feeds into ANZ’s expectations the Reserve Bank will be cautious in raising interest rates, and possibly wait too long.
“The lesson from the 1990s was that tightening policy too late in the face of rising inflation pressures meant interest rates had to go higher for longer, as policy struggled to rein things in,” says Zollner.
As the saying goes, there is no such thing as a free lunch, and this is true when it comes to housing policy, says the report.
On the one hand, policy changes should slow the pace of house price inflation, making it easier for first home buyers who can muster up a deposit large enough to buy a home. But on the other hand, the increased costs and uncertainty for landlords is likely to see rents increase.
Zollner isn’t forecasting house prices to fall, but from these lofty heights she would not rule it out.
She and her colleagues say it is important for policy makers to attempt to engineer a soft landing for the housing market.
“If housing tanks, it’ll likely take confidence with it, and that could spark a negative feedback loop, resulting in economic momentum going the wrong way.
“Unfortunately for policy makers, there’s no getting away from the interconnectedness of housing from the broader economy.
“And a soft landing from a vertical take-off can be difficult to engineer, as Elon Musk recently found.”
Hole in demand
Zollner says it’s difficult to tell if the anecdotes she and her colleagues are hearing about investors throwing in the towel are representative or not.
“Investors have time to decide what they want to do, given the four-year phase-in.”
Underpinning this dynamic is the pullback taking place in higher loan-to-value ratio (LVR) lending to investors.
She says investors knew the LVR suspension was temporary, and anticipated the extension of the bright-line test, they rushed in and bought while the going was good.
This means there is going to be a corresponding hole in investor demand in coming months due to timing factors.
Another key consideration, says Zollner is what the Government’s policy changes do to investor incentives to buy new-build houses.
“Although the new policies include a carve-out, or investigation into it, for new builds, new investment and uncertainty have never been good friends, and the potential to lose money on property development only grows when construction costs are rising.
“Then there’s the possibility the changes deter conversions of commercial buildings, including office space, to apartments.
“With more people working from home, some businesses are reducing their physical office space.
“This is an opportunity for a higher housing density, but the increased cost of property investment and the uncertainty about whether these projects will qualify as new builds may delay or prevent some projects.”
If investors stop buying new-build houses – as some will surely threaten to do – and capacity opens up in the construction sector, there will be an opportunity for the Government to ramp up its plans to build houses.
But the construction sector is struggling with a shortage of building materials, and that doesn’t look like it will be resolved any time soon.
Housing still gold
For many investors, there are no close substitutes for residential property. Housing is simple, has a relatively low perceived risk (perhaps unjustified), and is easy to leverage.
So while the financial valuation framework throws up some pretty drastic potential impacts, so long as investors expect a solid capital gain over the long run, an expectation likely to linger until the Government fixes the housing undersupply problem, Zollner says property is going to remain a popular investment.
Housing rises in CPI figures
Statistics NZ’s latest CPI figures have thrown up some interesting housing numbers.
Rents rose 1% in the March quarter, the biggest quarterly increase in a year. Annual rent prices increased 2.7%.
The cost of building a new house also rose in the March quarter, up 1.2%. Shortages of many building products, such as timber, house fittings and furnishings, as well as higher labour costs contributed to the increase.
The price of building a new home increased 3.5% in the year to March 2021, the biggest annual increase since June 2019. However, this is less than half of what it was when it peaked at almost 9% in 2004.
Housing and household utilities rose 0.9%, influenced by actual rentals for housing and home ownership.