Growing confidence in the housing market will bring value lifts

When looking forward, it always pays to understand the road where you’ve come from, and a quick look back over the last year shows us that a lot has happened that is likely to shape the property market in the coming 12 to 18 months.

Low interest rates

After the Reserve Bank dropped the Official Cash Rate (OCR) by 50 basis points in August, most of the major retail banks followed suit and lowered their mortgage rates and offered cash incentives for switching banks. The cut has certainly provided some stimulus for the property market and was particularly good news for first time buyers as it meant that mortgage payments became more “affordable”.

For those already in the market, with a floating or variable mortgage, the cuts presented an opportunity to pay off the mortgage at a slightly quicker rate than previously – that is assuming people don’t decrease their mortgage payments. For families looking to upgrade their property it means that the step up to the next property is likely to be more affordable or With the warmer weather, so too usually comes an uplift in property prices. that they might even be able to afford a slightly larger home than initially anticipated for their budget.

With employment and inflation levels within acceptable ranges it’s not entirely surprising that the Reserve Bank has held the OCR at its current level. Many economists are predicting that there will be an additional drop in the first half of 2020 which could provide further stimulus.

Consumer confidence lifting

The latest ASB Housing Confidence survey has shown signs of an uplift. All three confidence measures the bank looks at showed respondents are feeling more positive about housing relative to the situation three months ago.

This confidence is starting to show through in terms of house prices, with increases in median house prices across the country. The national median house price rose 8.2 percent from $561,500 in October 2018 to $607,500 in October 2019. At the larger end of this scale, house prices in Gisborne have increased by 37.1 percent yearon-year from $310,000 to $425,000 and Southland has seen growth of 23.5 percent year-on-year from $255,000 to $315,000. Even Auckland saw the highest median price in October for 19 months, reaching $868,000.

Lending – mixed picture

The easing of LVR lending restrictions at the start of 2019 resulted in increased lending across the board. First time buyers appear to be entering the market with fewer problems - lending for this group in the first nine months of 2019 was 12.2 percent up on the same period the year before.

Lending to investors fell 16.4 percent over the same time period, and with all the regulatory changes facing investors there’s an argument that some easing of LVRs could encourage them to re-enter the market.

The Reserve Bank has decided to keep the current restrictions in place but REINZ has always argued that LVRs should be loosened for first time buyers as saving a 20 percent deposit can be very difficult. In Auckland this can be around $172,200; for buyers outside of Auckland, it’s around $121,500.

The current levels of lending outside the limit allows for up to 20 percent of borrowers to receive more than the 80 percent LVR, which seems to be supporting an increasing number of borrowers (up 35.7 percent for the year to September 19 compared to the year to September 18). On the flip side, banks have been tightening up their lending criteria which has made it more difficult for some people to get access to finance.

Building consents up

Building consents are up 14 percent for the nine months to September 2019 when compared to the nine months to September 2018, across the country. These building consents are showing a higher proportion of apartment consents, representing 18.3% of all dwelling consents in September 2019, compared to just 8.4 percent of all consents in September 2018.

This increase in building consents will contribute to a higher number of available properties and continued activity in the market. The increased level of apartments will likely mean more options for first home buyers and a continued move away from the traditional quarter-acre dream.

The number of new building consents in Auckland is now matching new demand, however, there is still a significant back log in terms of housing supply. Additionally, new models of building such as pre-fabrication and modular homes are helping to speed up the building process which is helping the overall picture.

Whilst many regions are considered “affordable” when compared to Auckland prices, there will continue to be pressure placed on house prices from outside influences such as people moving from larger cities to smaller areas, investment from the provincial growth fund, increased economic activity and wage growth pressure.

Economists are forecasting house price inflation will accelerate by between 5 percent and 7 percent in 2020. With the recent uplift in property prices and the underlying fundamentals looking as if they will continue in the short to medium term, it’s likely that we will continue to see the housing market continue on an upwards trajectory. As a country, we need to build more homes to meet demand and help improve affordability.