House prices and rents on the cusp of lifting

While there are still plenty of headwinds facing the housing market, the bank expect the tailwinds will blow a little more strongly across the second half of the year.

However, it says the risks are tilted towards this pick-up being too conservative.

Mortgage rates are higher, but household incomes are looking resilient, and net migration, while easing, is still startling.

REINZ data for May confirmed ANZ’s assessment that the housing market is strengthening.

House sales lifted again, rising 2.1% month-on-month, returning to May 2022 levels. Days to sell also declined to 47, well off the peak of 53 in February but still much slower than the average of about 36 days on market in the second half of the last decade.

Increased sales and still-soft new listings saw inventories continue to decline in May, consistent with a market on a tightening trajectory. A tightening in the market is particularly clear in Auckland, where prices rose 0.2% month-on-month in May.

The national REINZ House Price Index was flat for the second month in a row. ANZ chief economist Sharon Zollner says May, in fact, technically marked the first month of positive growth since November 2021, albeit to two decimal places of spurious accuracy at 0.05% month-on-month.

“A quick look over the neighbour’s (Australia’s) fence suggests upward pressure on rents could result from the migration surge.”

While higher rents will boost property yields, investors are likely to remain on the side-lines until the future of the tax deductibility policy and bright line tests is clearer.

Macroprudential LVR restrictions also remain tight for investors, and ANZ’s modelling suggests these are powerful.

“For now, a re-run of the 2020/21 property investor vs. first home buyer bun fight is looking exceedingly unlikely.

Zollner says there are many parallels to draw to the New Zealand rental market. “With a rapid surge in migration occurring at a time new housing supply is easing, we expect to see rent inflation remain elevated next year.” Strong household income growth is also likely underpinning the pickup in rents, enabling landlords to pass on higher costs.

In the New Zealand CPI, rent inflation is measured using tenancy data from across the past eight years, which means the measure can take some time to reflect changes in conditions. Compared to Australia, where the lags appear to be only around six months, increases in migration appear to take as long as 12-18 months to be evident in rent price increases in New Zealand.

While the official measure of rent prices in the CPI attempts to capture the average rent people are actually paying, and therefore, takes into account long lags, a sharp acceleration in rents is evident in higher- frequency measures. The monthly flow measure of rents, which captures changes in rents for new tenancies signed within the given month, has accelerated sharply from late last year, Zollner says. 

In Auckland, notably, rents for new tenancies are rising at 6.8% year-on-year, although some of that pickup may reflect the impacts of Cyclone Gabrielle. “That will take some time to flow through to the stock measure, however, which tracks the CPI measure more closely. We expect to see pressure on rents build into next year, which is one factor underpinning our expectation of more persistent non-tradable inflation than the RBNZ is anticipating.”

Will higher rents feed back into higher house price inflation? There are two channels by which this could happen:

• more renters decide they may as well pay down a mortgage than pay sky-high rents;
• property investors are enticed by higher yields. On the first-home buyer front, as noted, affordability is still challenging, but anecdotal evidence from mortgage advisers is that there is some pent-up demand evident now that:
• LVR restrictions for owner-occupiers have been eased, with 15% rather than 10% of new lending now allowed to be at a loan-to-value ratio of more than 80%;
• the RBNZ has called time on OCR hikes; and
• most pundits are now forecasting house prices to start lifting again.

Overall, Zollner says the bank expects a brief flurry, driving its expectation of a 3% lift in house prices in the second half of the year, before things peter out again.