From October to December last year, there were more than 10,000 property sales each month – a run of strength that hadn’t been seen since the first half of 2016. And although activity cooled a bit in January this year, it was still 2.5% higher than a year ago. What might 2021 have in store for housing market activity levels?
Before we address that question, however, let’s break down the recent strength a bit more. Clearly, key drivers of the demand for property have been low mortgage rates, as well as weak returns on other asset classes (e.g. low term deposit rates). Indeed, our Buyer Classification figures show that a lot of the recent rise in property demand has come from mortgaged investors, who have been keen to get money out of bank savings accounts and to bolster that equity with cheap mortgage finance.
At the same time, there were also hints in the latest figures that first home buyers are starting to struggle a bit more. Their share of property purchases dipped to 22% in January, and given ever-rising house prices (and hence required deposits), it wouldn’t be a surprise if they faded a little.
It’s also crucial to note that ‘movers’ (or existing owner-occupiers who are looking to relocate) have been relatively quiet lately. In some cases, this is because debt levels will already be at their limits, but for others, it’s more a case of not being able to find their ideal next property – due to a lack of available listings on the market. Indeed, given that lack of choice for buyers (“you can’t buy what’s not for sale”), it’s actually pretty impressive that sales activity has been as high as it has.
A further cut of our data shows that for all residential properties resold in the fourth quarter of 2020 (i.e. existing properties that were changing hands for at least the second time in their life), the median hold period was a touch over seven years. Auckland was similar to that national figure, with Wellington, Christchurch and Dunedin all above the average (at 8-8.5 years), and Hamilton and Tauranga below, at less than six years.
So what does the rest of 2021 have in store for us? Clearly, COVID-19, moves up and down the alert levels, and the vaccination schedule are all sources of huge uncertainty, which could tip us off into a different direction at any stage. But that issue aside, our central assumption is that key drivers such as low mortgage rates and a lack of attractive alternatives for investment will contribute to property sales activity holding up relatively well this year – potentially again in the range of 95,000-100,000, after a figure of around 97,500 in 2020.
However, it might be a ‘year of two halves’. After all, the Reserve Bank must now give consideration to how its decisions around the official cash rate (stemming from inflation and employment) will affect house prices. In addition, the loan to value ratio speed limits are now back in force, while the Reserve Bank has also been asked by the Government to assess the possibility of debt to income caps for new investor mortgages and also restrictions on interest-only lending.
And then on top of all of that, of course, we’ve now also had the latest policy announcements from the Government, with the most notable change being the end to investors claiming interest as a deductible expense for tax purposes – unless they buy a new-build. We’ll just have to wait and see exactly how this plays out in terms of market effects, but it certainly provides a strong incentive for investors to target new properties rather than existing.
All in all, it should be another decent year for property market sales activity in 2021, but potentially weaker in the second half of the year than the first.