2022 predictions

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Another fairly stable year for the market. The Reserve Bank loosens the LVR rules further (investor deposits go down to 30 per cent, while for owneroccupiers it goes up to 20 per cent) and first home buyers increase their share of the market.

Migration and dwelling consents surge while mortgage rates drop.

The Government rejects proposals for a capital gains tax but introduces a tax ring-fence for rental property losses.

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Covid-19 hits early in the year and major changes are made by the Government and Reserve Bank in response: the Official Cash rate is cut to 0.25 per cent, LVR restrictions are removed, mortgage payments can be deferred, a funding for lending programme is instigated and quantitative easing is reintroduced.

The country goes into lockdown at the end of March and restrictions stay until the start of June. The housing market slumps in April and May but starts to pick up from June onwards.

Investors take advantage of smaller deposit requirement (only the banks’ own rules, circa 20 per cent), although Healthy Homes legislation causes a stir and raises costs.

Net migration collapses but dwelling consent numbers are solid and shortages of housing stock finally start to decline.

Things don’t get much easier for first home buyers, however, with the number of years needed to save for a deposit back to previous peaks.

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The market is booming, but the support measures introduced in 2020 are slowly withdrawn.

The Reserve Bank reinstates and strengthens LVRs, raising investor deposits back to 40 per cent and dropping the owneroccupier requirement to 10 per cent.

It also raises the OCR for the first time in seven years, ends quantitative easing and signals new lending restrictions such debt-to-income ratios.

In March, the Government announces new housing policies designed to level the playing field. Investors are targeted again, with the Brightline test extended to 10 years for existing properties (still five for new-builds) and interest deductibility is removed on all new purchases and phased out on those bought before the announcement, although it still applies for newbuild purchases.

Net migration is almost non-existent and a larger dent is being made in housing shortages.

CONCLUSIONS

Low mortgage rates have been needed lately to support the economy, but the flipside is that the inequality driven by house price boom could have been mitigated if New Zealand had built more houses earlier.

The housing shortage was partly the result of the industry shake-out following the GFC but there are lingering issues of land use constraints and the Resource Management Act. The Auckland Unitary Plan seems to be driving a step change in that market, and the experience of post-quake Canterbury shows what can be done if decision-makers react quickly and open up land. The recent easing in the requirement to get resource consent (e.g. for up to three houses of three storeys on the same section) also seems to be a step in the right direction.

Would a capital gains tax have changed all of this? Maybe. But New Zealand already has a form of CGT anyway in the form of the Brightline test. Perhaps a land tax or wealth tax would be more effective, but equally important would be carrots for investing in other assets, rather than sticks to stop people buying property.

• Kelvin Davidson is the chief property economist of CoreLogic

W H Y T H E H O U S I N G M A R K E T C O U L D B E V E RY DI F F E R E N T I N 2 0 2 2

JAMES WILSON looks at the factors that will determine the course of the market over the next 12 months.

Construction on a new home. The rise in building costs are set to have a big impact on the housing

market. Photo / Getty Images THE HOUSING market has ended 2021 on an uncertain note, with substantial hikes in interest rates likely and new lending restrictions all but locked in. Rising building costs and inflationary pressures will also have an impact, as will house price rises that have left many first home buyers either carrying too much debt or shut out of the market. So what will 2022 bring? Valocity has looked at the key factors that could determine the course of the housing market over the next 12 months.

INFLATION

Inflation is creeping into many parts of the economy, but is this a short-term problem that can be dealt with or a serious issue that requires a more aggressive response in the form of rapid and sizeable increases in the Official Cash Rate? We know the Reserve Bank has already raised the OCR and has signalled a clear intent to continue to do so. This has already had an immediate impact on bank interest rates and market behaviour, with many homeowners and potential buyers pausing to take stock of what this means for them personally.

INTEREST RATES

Going hand in hand with increases in the OCR are increases in bank interest rates. Most banks pushed up their own interest rates ahead of the Reserve Bank’s decision to raise the OCR in October and they are likely to continue taking the lead well into 2022 and beyond. Many Kiwis who bought property in the last seven years will be unaccustomed to rising rates, and those who bought in the last 18 months may be shocked when interest rates move beyond five per cent. This will have an impact on spending habits as belts are tightened and may see some mortgage-holders who bought holiday homes or investment properties radically rethink their assets.

LENDING RESTRICTIONS

This time last year, the Reserve Bank announced it was considering reintroducing the loan-to-value ratio rules it removed at the start of the Covid crisis. Since bringing them back in March this year, a slew of additional lending restrictions came into force, all of which will have an impact on the market in 2022. Two additional potential upsets are the Credit Contracts & Consumer Finance Act (CCCFA) and Debt-to-Income (DTI) ratios, which may further restrict access to credit for some buyers.

The CCCFA will see banks increase scrutiny on borrowers’ spending habits, a stronger focus than ever on their ability to service the debt they wish to take on. This may have an impact on certain buyer types who were already on the margins, more so when combined with an increasing interest rate environment.

At the time of publication, the Reserve Bank was still weighing up whether or not to enforce Debt-to-Income ratios but some banks have already adopted the tool and more will follow.

DTI ratios restrict the amount buyers can borrow to a set multiple of their household income (the banks have for now se led on six) and they are likely to have a significant impact, if Reserve Bank figures are anything to go by. In the six months to September this year, 25% of lending to first-home buyers had a DTI of above six. A third of lending to owneroccupiers was above a DTI of six, while for investors the proportion was 51%.

Signals of intent to cut back on interest-only lending may also dampen buying activity by property investors, who typically use such facilities to access the market.

NEW BUILDS

There have several policy announcements made this year that will have an impact on New Zealand’s new-build sector. The Government’s decision to exempt new build purchases from its tax deduction rules for 20 years will likely see more investors direct their a ention to new homes, which have typically been the preserve of first home buyers. Expect to see increased competition and increased pressure on new build prices.

The Government’s intention to speed up the resource consent process may have the unintended consequence of accelerating house prices in affordable suburbs, giving extra incentive to developers to grab as much developable land as they can.

Rising construction costs are also likely to put pressure on the market, with residential build costs going up 5.5% in the year to September. Covidrelated supply chain challenges and labour shortages are unlikely to ease in the short term. Those looking to purchase a new build should prepare for delayed se lements and higher costs. • James Wilson is director of valuation at Valocity.

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