2022 — a year of recovery

House prices are a constant hot topic amongst kiwis, and this year is no different. Prices have continually risen, and lower finance costs have been a factor as interest rates were lowered to mitigate risks to the economy from COVID-19. These factors along with stricter lending conditions, housing supply increases, and uncertainty around COVID-19 will pave the way for an interesting 2022.

Affordability challenges, worsening wealth inequality

Auckland’s median sale price hit an all-time high of $1.3 million in December 2021 — leaving many baffled by the strength of the market during a pandemic.

While owners may welcome record prices and increasing property values, 40% of Auckland households do not own their homes and, therefore, may be less ecstatic about the current rate of price growth. The dream of purchasing a home is moving further out of reach for some people — including those who rent or live with family and those yet to form a household.

Affordability has worsened as house price growth now exceeds income growth, increasing the difficulty of accumulating a deposit. First-time buyers who make a purchase will likely be devoting more of their working years to servicing a larger mortgage. Overall, a rapid and sustained rise in house prices represents a large transfer of wealth from non-owners to owners, thereby increasing inequality and presenting risks to social cohesion.

How long can this go on?

Perhaps not for much longer. Higher interest rates are looming, with the Reserve Bank signalling further rises to the Official Cash Rate throughout 2022. Although interest rates remain at relatively low levels, the impact of mortgage rate rises will weigh on some buyers at the margin. First home buyers may find the amount they can borrow is reduced, while some investors may face pressures from increasing interest costs.

Approximately 60% of residential mortgages are fixed for a 12-months or less term, of which half are fixed for six-months or less. Thus, most mortgage holders will feel the impact of higher interest rates this year.

Additionally, tougher lending conditions are in place to protect a financial system that is heavily exposed to housing assets and mortgages — for example, higher capital requirements for banks, debt-to-income ratios, and amendments to the Credit Contracts and Consumer Financing Act 2003.

Housing supply set to increase

There are signs that Auckland’s housing supply is responding to demand, with a large pipeline of dwellings consented. Over 20,000 dwellings were consented in the year to November 2021, setting a 12-month record — an increase of 26% year-on-year. In part, this is a response to higher prices with the commercial feasibility of some developments being improved. While there are construction lags, this is welcome, as Auckland has had a substantial and persistent shortfall that will take time to address.

This year, Government housing policies will be implemented, namely, the National Policy Statement on Urban Development and Medium Density Residential Standards.

These policies aim to enable greater density in areas where people want to live, providing more choice to buyers and encouraging a more compact urban form. The cumulative effects will be visible in the medium term, with more housing options in the areas near jobs, amenities, and good public transport — particularly frequent and rapid services.

Uncertainty arising from the pandemic

COVID-19 may impact the ability of the construction sector to deliver new housing in the near term, contributing to a labour shortage and supply chain constraints that lead to delays and cost escalation. Nevertheless, construction sector activity is expected to play a key role in post-pandemic recovery.

Lockdowns and community outbreaks have had short-term dampening effects on sale volumes. Associated with this, online property traffic is reportedly surging. While some people rely heavily on open homes, it appears that selling and buying property online is becoming easier.

Flexible working may not change demand

The pandemic has forced people to work from home, where possible, intensifying a trend enabled by technology. Some households have the capacity for a home office, but many struggle with space. While more floor area for a home office may be

welcome, there is a space-cost trade-off, particularly given elevated prices and affordability challenges.

Working from home may allow some people the freedom to live further away from their jobs. Balancing this, most people will still go to a workplace, depending on the industry and value gained from the interaction. The trade-off of location with travel time may count against changes in demand for housing location, particularly if the behavioural effects of the pandemic are short-lived.

2022 should see prices ease

On balance, the prospect of higher interest rates and an increasingly responsive housing supply should contribute to house prices easing in 2022.

Alongside this, there are potential counterbalancing factors, such as the constraints and uncertainty arising from the pandemic. Nevertheless, housing affordability is likely to remain a pressing issue.

ALTHOUGH INTEREST RATES REMAIN AT RELATIVELY LOW LEVELS, THE IMPACT OF MORTGAGE RATE RISES WILL WEIGH ON SOME BUYERS AT THE MARGIN.

Gary Blick

Chief Economist, Auckland Council

Shyamal Maharaj

Economist, Auckland Council