Squirrel: Lockdown May Boost House Prices

Squirrel guest commentator and economist Tony Alexander discusses the impact the last month has had on house prices here in NZ.

Logo of Squirrel, a mortgage broking and investment firm

In my last column looking at the property market around New Zealand, I wrote about the end-game being underway for the three-decade period of high average house price rises. I remain of that view but, for now, the market retains considerable strength.

Stories abound of shortages of listings (stock numbers down 33% from a year ago), shortages of rental properties, and rising construction costs. More importantly, in July, average house prices around the country rose by 2.4%. This rise was well above the 1% gain in June, 0.8% rise in May, and 0.5% rise in April.

Back in the government’s annual budget in May, Treasury predicted that house prices would rise by 0.9% in the year ending June 30, 2022. In fact, they rose 0.9% in about the first ten days of that 365-day period, according to REINZ data.

Is the housing market taking off again?

I’d like to say no, in light of the many restraining factors I’ve noted before. But we were delivered an extra stimulus: the nationwide lockdown to fight the Delta strain outbreak in Auckland.

The Reserve Bank was widely expected by all of us analysts to raise their official cash rate 0.25% or 0.5% on August 18. But because of understandable concern about the economic impact of the new lockdown, they decided to leave the rate on hold.

They do, however, continue to predict that it will go up. But whereas back in May they had pencilled in 1.5% worth of rate rises, now they are allowing for at least 1.75%, and for those rises to start, probably, from October 6, rather than their earlier timing of the second half of next year.

How does the outlook for higher interest rates risk additional housing market stimulus?

Because of what we know now, that we didn’t know in March last year, when the country was last in full lockdown. During a lockdown, we save up money. We go online looking at property. We make decisions about our lives and want to make them better.

Basically, we emerge from lockdown determined to spend and determined to buy more property. We didn’t have that behavioural knowledge 17 months ago.

Logo of Squirrel, a mortgage broking and investment firm

Will the slightly longer low-interest rates stimulus be large?

Probably not. We have to remember that the Reserve Bank has just made it harder for first home buyers to access the market, by announcing plans to reduce the proportion of bank lending that can be done with less than a 20% deposit to 10% of all such lending rather than 20%.

We can also see from my various monthly surveys that while investors are not selling up in droves, they have stepped back from buying. There is also increasing discussion regarding the loss of people to Australia once they open up again (let’s say early 2022).

So, the housing market is probably still on an easing path but, for now, the continuing low level of interest rates, talk of shortages, etc, will keep the pace of house price inflation well above general inflation, which is currently 3.3%.

The danger in all of this, however, is that we could enter 2022 with house prices still rising above 10% per annum. If that is the case, then the government is highly likely to once again look to further discourage investors from buying existing property and encourage them to sell, with some extra moves to reduce returns that landlords can make.

My pick is the removal of some more traditionally deductible expenses when calculating taxable profit. But what and when is anyone’s guess this far out from the anniversary of tax announcements made this year on March 23.

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