It’s been another fascinating year for NZ’s property market in 2018. With volumes low (but stable) and values generally showing consistent growth across the country (expect for Auckland and Christchurch), a lot of the market interest has focused on government policy and measures to stifle property speculation.
So, we’ve dusted off our data and analytics-driven crystal ball, and present to you our 2019 property and economic outlook. Here’s our top 10 list, summarised:
1. LVR changes:
The first milestone for 2019 will be the relaxation of the LVR restrictions on 1st January 2019. We’re cautious about the effects these changes may actually have on market activity because banks are likely to stick to tough lending criteria, so the pool of potential borrowers who can meet those requirements may not be that big.
2. Foreign Buyers:
The foreign buyer ban has already been in place for a few months (from 22nd October) and on 8th February 2019, we’ll get Statistics NZ’s data on their Q4 activity in the final three months of 2018. It’s probably too soon to decipher any flow on effects of the ban just yet, so we’ll be watching the figures closely as the New Year begins. In terms of how big the foreign buyer market actually is in New Zealand, it hovers at 1-2% of net ownership changes (buying less selling). We do however caution that this doesn’t factor in corporate transactions (where it’s hard to distinguish between domestic and foreign buying), which can be as much as 10% of activity. These figures are national by the way, they’re higher in Queenstown and central Auckland.
Getting back to that ban, if effective (and effectively policed), purchasing by foreign buyers should have fallen away towards zero.
Although it’s not often talked about, it’s important to note that there are loopholes. Foreign buyers can still buy into NZ if they are buying off the plans and holding apartments in bigger developments (20 apartments or more). This is important funding and commitment to buy can help kick off at a time when securing development finance from banks has become harder. Sure, the numbers won’t be massive, but ultimately, everything helps when it comes to increasing NZ’s housing stock. They can rent them out, just not to family or associates.
3. Capital Gains Tax:
The Tax Working Group will be submitting its final report to the government in February 2019 with a recommendation of whether or not to impose a capital gains tax, and in what form (if the recommendation is indeed for a tax, which seems likely). However, it’s important to note that the government would then have to accept that recommendation and also survive the next election (2020) before any tax would come into law, so it’s certainly not a short term impact.
4. Ring-fencing of rental property losses for tax relief.
Moving forward to April 2019, the intention is to ring-fence rental property losses for tax relief purposes. At the moment, if you’re a property investor and you make a loss, you can use that loss to reduce the amount you’re taxed on other income sources. The new approach is basically saying that any losses can still be applied for tax relief, but limited to the asset class of property. So, landlords can still use losses to reduce tax across their current property portfolio by applying losses from one property against profit from another property and/or from one year to the next. What is no longer permitted is applying that loss against other forms of income. It’s targeting the speculative end of the market who are in it for the capital gain.
It will be really interesting to see if this triggers some existing landlords to leave the sector. The bigger investors may restructure in advance, but on its own the ring-fence seems unlikely to cause a mass exodus.
Then there’s KiwiBuild. The programme has had its fair share of teething problems to date, but they’ll be hoping to really ramp up momentum in 2019, both in terms of construction volumes and buyer take-up of the houses actually built.
Their first headline target was that 1,000 KiwiBuild modest, affordable properties would be completed by mid-2019, and according to the dashboard tracker on their website, they look reasonably on-track to meet that. They’ve announced some developer partnerships, have sold 40 homes, completed another 33 homes, with another 77 under construction and a further 4,047 contracted to build.
An interesting aspect to all this is whether the homes do actually end up with First Home Buyers. If a property goes through ballot and doesn’t sell, it can be sold to other buyer types (e.g. investors) but still at the capped price. That’s part of the system and not a failure – KiwiBuild’s primary aim is to raise the stock of ‘starter’ homes available, and if they end up with FHBs then that’s a good secondary result.
Another related topic is the influence of KiwiBuild on the construction sector. In a year in which several major companies went bust, and development funding became a bit harder, could this means firms pivot their focus – perhaps towards smaller dwellings (independent of KiwiBuild, or pre-fabrication? One to watch.
6. Building Consents.
New Zealand is currently in the midst of one of the three biggest booms for building consents in the past 50-odd years, driven by Auckland and a gradual shift away from standalone houses and towards smaller dwellings (townhouses, apartments, flats). However, looking at Auckland specifically, we estimate that of the 12-13,000 consents per year, only about half are resulting in a genuine chance in the stock of housing: because there’s a lot of infill development going on, i.e. knocking down a property to build a replacement(s).
In short, consents and actual construction volumes need to stay high - or perhaps even rise further to make a real dent in the current shortfall of housing. That could be problematic in 2019 for an industry already running at full tilt.
At least the easing in the net migration balance, which is very likely to continue in 2019, will help to take some of the steam out of property demand and dampen the pressure on the construction sector. However, the effect may only be small and slow – after all, net migration is still very high and will take a fair while to diminish.
8. Interest rates.
The official cash rate will remain at 1.75% in 2019 (and probably most of 2020) and that should help interest rates to stay reasonably low and stable. However, the balance of risks around mortgage rates is to the upside. Flow through effects from higher offshore rates cannot be ruled out, and the signaling by the Reserve Bank that capital adequacy requirements will be raised over the next five years could also see mortgage rates rise. Any increases in 2019 will probably be small, but we’ll still be keeping a close watch.
9. Market volumes.
How all of these factors above interact with each other, and other macro factors such as GDP growth and the labour market, will go a long way to determining the path for sales volumes in 2019.
Our central forecast is that volumes will stay at around 80-85,000 in 2019 (similar to 2018), with the LVR relaxation likely to mean that the actual figure is more towards the top of that range than the bottom. But whether they’re 80,000 or 85,000, sales will still be well below previous peaks of more than 100,000.
10. Property values.
Now for the million dollar question that every property owner or buyer wants to know: will prices move up, down or stabilise? Generally speaking, we’d anticipate similar patterns to 2018, with average prices across the country rising by 3-5%. It would be no surprise to see Dunedin and Wellington outperforming that figure, and Christchurch and Auckland underperforming. Many regional centres that have fared well this year (e.g. Napier, Whanganui, Palmerston North, and Invercargill) may well do the same in 2019.
There’s a LOT going on. Our crystal ball prediction is another solid year, without any major upheavals. The local market is more stabilised, but there’s still the unknown risk of offshore dynamics.
Either way, it’ll be another busy year, with plenty to watch. Of course, if you’re thinking of buying or selling, do your research and you know where to go for that!
Happy holidays from the CoreLogic team, see you back in the New Year!