Given the lockdown-related decline in property sales volumes over August and September, we need to take care with market share figures. Even so, the downwards trend for mortgaged investors’ activity still remains pretty clear, as does the upturn for first home buyers (FHBs) – possibly given an extra push into buying by the signs that rental growth has accelerated sharply. We’ve been cautious about the ability of landlords to push through larger rent rises to try and recoup some of the extra costs imposed on them by the removal of interest deductibility, but it does now seem to be happening.

Similarly, FHBs have recently been showing an appetite for smaller dwellings. So today’s announcement of planning system reforms, which allow and encourage higher density housing, should also benefit FHBs. It’s hard to say if an extra (roughly) 50,000-100,000 dwellings as a result of the reforms would lower house prices, but it would certainly tend to restrain their growth. The major issue (at least for the next year or two) will be who’ll actually build them. After all, the construction industry is already at capacity.

The Buyer Classification figures for September are now available and they confirm that for Q3 as a whole the downwards trend for mortgaged investors’ (multiple property owner/MPO) market share simply rolled on. At 24.2% for July-September (see the chart below), the figure was back down at the same levels as Q2 2020, which was just before the removal of the loan to value ratio (LVR) rules really sparked investor demand back into life. But with LVRs now back in play and with the phased removal of interest deductibility now on the table too, there is a good chance that mortgaged investors’ market share continues to drop, potentially to an even lower level than the late 2017 trough (22%).

NZ % share of purchases (Source: CoreLogic)

Chart 1

If we dig a little deeper into the mortgaged investor category, it’s clear to see where the pullback has come from – as the second chart shows, the dip in market share is concentrated amongst smaller players, i.e. those who would have been making their first investment purchase (and would hence own two properties) and those who already have 1-2 rentals and would be purchasing another (to own a total of 3-4 properties). We suspect these ‘Mums and Dads’ would tend to have the greatest difficulty in raising a 40% deposit (unless buying a new-build) and/or be the most uncertain about the true effect of the interest deductibility changes, and hence have started to retreat a little.

Mortgaged investor % of activity by size of portfolio after latest purchase (Source: CoreLogic)

Chart 2

On the flipside, FHBs’ market share has picked up strongly, reaching 26.4% in Q3, which is a new record high. Clearly, although house prices have risen a lot in the past year or so (from an already high level), many FHBs are still finding ways to enter the market, such as using KiwiSaver or capitalising on the banks’ low deposit lending allowance (which is going to be reduced officially on 1st November, and is probably already being enforced by the banks themselves).

In addition, there still seem to be some pretty strong financial incentives to actually make the move into home ownership, given that paying a mortgage can often still be cheaper than renting, especially since rents themselves have started to rise more quickly too (see the third chart). Supply and demand is tight in the rental market, and landlords may well be trying to ‘get ahead’ of looming mortgage rate rises too. 
But we need to acknowledge that the interest deductibility changes do seem to be causing faster rent rises than we expected and otherwise might have been the case (although wages should still be an anchor for rental growth over the long run).

Rental index level and annual change (Source: Stats NZ)

Chart 3

Meanwhile, movers (i.e. existing owner occupiers who are shifting house) are still relatively quiet around the country, with Wellington a notable example – see the fourth chart (which covers Wellington City, Upper & Lower Hutt, Porirua). In some cases, already-large mortgages may be preventing them from actually making the next move, given the large gap in price to ‘trade up’. But for others, it’s likely due to the lack of listings and simply not being able to find the ideal next property.

Wellington % share of purchases (Source: CoreLogic)

Chart 4