News at a glance: reviewing the first half of 2022

Latest CVs released, with local increases of up to 59%!

On 7 March, Auckland Council released its latest capital valuations (CVs).

The council’s previous CV release was on 1 July 2017, when median house values exceeded a million New Zealand dollars in 81 suburbs.

In this CV update, Aotea Great Barrier recorded the largest average increase, at 59%, although it remains one of the city’s lowest-value areas ($600,000). It was followed by Māngere-Ōtāhuhu (up 49%), Maungakiekie-Tāmaki (up 43%), Henderson-Massey (up 41%), Waiheke (up 41%), and Manurewa and Papakura (both up 39%).

Some areas have undergone ongoing intensification in recent years, resulting in more substantial CV increases.

The smallest increases were generally in expensive suburbs such as Herne Bay, Grey Lynn and Ponsonby, where values rose by just 15%.

The average increase across Auckland was 34%.

 

Latest QV figures reveal staggering construction cost increases

The CostBuilder platform operated by New Zealand’s largest property valuation agency, Quotable Value (QV), collected cost information for more than 60,000 buildings. In the year to month 4, prices for a range of materials and construction services recorded double-digit increases, with the average cost of building a three-bedroom home almost 21% higher than a year earlier.

“With inflation and interest rates also rising, supply chain issues remain widespread, and prices will rise further,” said QV CostBuilder spokesperson and estimator Martin Bisset.

With precast concrete and steel prices increasing, the cost of stairs and balustrades has risen 17.4% since QV’s last update at the end of 2021. Reinforcing steel (+29.2%), metalwork (+18.2%), external finishes (+11.3%) and piling (+10.5%) also recorded substantial price increases.

Bisset said it was worth remembering that these figures were averages across six cities, and the final cost of building a home would depend on other variables, such as finishes, the layout or the size of the garage.

The average cost of constructing non-residential buildings was 13.7% higher than a year earlier. The sharp rise in construction costs over the past year pushed annual inflation to its highest level in 30 years in the quarter ending in month 12.

ANZ economists recently said they believed the residential construction sector was heading for a slowdown because of weaker demand and shortages of building materials.

 

Building consents reach a record high, with annual approvals exceeding 50000 homes for the first time

Figures released by Stats NZ on 3 May showed that a record 50858 new homes were consented in the year to March 2022, up 24% from the year to March last year.

Stats NZ construction statistics manager Michael Heslop said this marked the first time the annual number of homes consented had exceeded 50000.

In the year to March 2022, 25475 multi-unit homes were consented, an increase of 40% year on year. The number of stand-alone homes consented rose 12% to 25383.

“The number of multi-unit homes consented has increased steadily over the past decade, but this is the first time their annual total has exceeded that of stand-alone homes,” Heslop said. Multi-unit homes include townhouses, apartments, retirement village units and granny flats.

Four regions recorded their highest numbers of new homes consented:

Auckland – 21477 (up 23% compared with the year to March 2021);

Wellington – 3836 (up 26%);

Canterbury – 8557 (up 41%);

Otago – 2506 (up 34%).

Canterbury had the highest number of new homes consented per 1000 residents, at 13.2. It was followed by Auckland at 12.5, Otago at 10.2 and Waikato at 10.1.

 

Budget 2022: more support for first-home buyers and renters

On 19 May, the Government announced that Budget 2022 would help more New Zealanders access First Home Grants and loan support, enabling them to own their first home.

Budget 2022 provides the following additional support for first-home buyers and renters:

• Higher house price caps for First Home Grants in many parts of the country;
• Complete removal of house price caps for First Home Loans;
• An increase in the Kāinga Whenua loan cap from NZ$200,000 to NZ$500,000;
• Initial support from the Affordable Housing Fund for not-for-profit rental providers;
• A substantial increase in funding to cover the costs of existing and planned public and transitional housing.

Housing Minister Megan Woods said: “We are raising the house price caps for First Home Grants to align with lower-quartile market values for new and existing homes. This recognises changes in house prices over the past year.

“We are also removing house price caps for First Home Loans entirely, giving prospective first-home buyers more housing options. Income caps and lender requirements are sufficient to ensure First Home Loans are used by buyers who need first-home support.”

She said these changes to help first-home buyers built on the Government’s NZ$3,000,000,000 housing package announced last year and could help overcome the housing crisis it had inherited.

The Government will also fund some not-for-profit organisations to provide affordable housing.

 

Chinese Academy of Social Sciences releases overseas investment country risk rankings: New Zealand makes the top ten

The China Overseas Investment Country Risk Rating Report (2022), released by the Chinese Academy of Social Sciences on 25 May, ranked Switzerland highest. The other countries in the top ten were New Zealand, Denmark, Qatar, South Korea, Norway, Sweden, the United Arab Emirates, Germany and Australia.

Overall, advanced economies had an average ranking of 22.1, far ahead of emerging economies’ average of 71.3. The report noted that advanced economies had stronger economic fundamentals, lower political risk, greater social resilience and stronger debt-servicing capacity, resulting in lower overall investment risk than emerging economies. Although Chinese direct investment in advanced economies has recently rebounded significantly, potential risks remain because their scores for relations with China are lower than those of emerging economies and remain subdued.

The China Overseas Investment Country Risk Rating Report (2022) was published for the ninth consecutive year by the International Investment Research Division of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. It covers 114 sample countries, excluding tax havens, accounting for nine-tenths of China’s overseas investment flows. From the perspective of overseas investment by Chinese businesses and sovereign wealth funds, it uses a quantitative framework comprising 42 sub-indicators across five categories: economic fundamentals, debt-servicing capacity, social resilience, political risk and relations with China. It provides a comprehensive assessment of the country risks facing Chinese businesses investing overseas.

 

CoreLogic: New Zealand’s housing market has already fallen more than 10%

New Zealand property research firm CoreLogic has released its latest Market Pulse, outlining several market trends that may suggest activity is declining faster than some people believe.

Chief property economist Kelvin Davidson said house prices had already fallen 5% or 6%. With inflation at around 7%, prices in real terms were now down 11% or 12%. He believed a 20% fall in real house prices, as forecast by Westpac and ASB, was a reasonable expectation. 

Davidson said he recognised that commentary on the property market could paint a worse picture than the reality. “I worry we are getting ahead of ourselves in predicting how bad this could be. Sentiment often overshoots.”

 He said that if unemployment remained low, people should be able to cope with higher interest rates. Loan-to-value ratio (LVR) restrictions were also a safeguard that had not existed during the global financial crisis.

 

Kiwibank forecasts mortgage rates could rise to between 6% and 7.5% over the next year

Kiwibank economists predict New Zealand mortgage rates could rise to between 6% and 7.5% over the next year, intensifying the cost-of-living crisis.

On 25 May, the Reserve Bank raised the official cash rate (OCR) by 50 basis points to 2% to combat inflation. Its statement forecast further OCR increases to at least 3.25% this year and committed to returning price inflation to the 1%–3% target range.

Mortgage rates at the major banks currently range from 4.4% to 6.9%. More than 60% of mortgages are either on flexible floating rates or have fixed terms expiring this year.

Kiwibank economists said rising interest rates would continue to increase pressure on household spending over the next year and “exacerbate the cost-of-living crisis for households with mortgages”. Kiwibank expects the OCR to reach 3% by November, with no further increases because of recession risks and pressures on people’s lives.

Interest rate rises will significantly affect the housing market and household spending, cooling housing and restraining consumption. Kiwibank also expects house prices to fall around 10% by the end of this year, with consumer spending declining too. “Falling house prices, resulting in declining household assets and wealth, combined with the ongoing cost-of-living crisis, will slow consumption growth.”

A higher OCR is good news for savers with substantial cash deposits. This morning, BNZ raised its term deposit rates to 3% for a one-year term, 3.3% for 18 months, 3.8% for three years and 3.85% for four years.

 

Experts predict the end of the myth that house prices double every 10 years

As the housing market moves through cycles of boom, downturn and recovery, a common belief holds that New Zealand house prices double every 7 to 10 years. Economists warn, however, that the next housing cycle could reverse this trend.

Kelvin Davidson, chief economist at financial and property data firm CoreLogic NZ, does not believe in the “property cycle myth”. He said there were always reasons why house prices rose and fell. “House prices do not rise automatically. They rise because interest rates fall, and vice versa.”

With interest rates having jumped from around 2% to 4% and potentially rising further, Davidson said the next upswing in house prices could take some time and might be “less impressive” than the boom following the first lockdown.

Davidson believes house prices could take a long time to return to last year’s highs, and even longer to exceed them, as higher interest rates, growing debt and deteriorating affordability weigh on buyers. “The upswing can be substantial. The downswing tends to be slower, but it can last for some time.”

He said signs that house prices might rise included property listings levelling off or declining, changes in interest rates and an easing of loan-to-value ratio (LVR) rules, alongside a harder-to-quantify measure: a shift in people’s attitudes towards believing the market was warming up again.

Gareth Kiernan, chief forecaster at economic data analysis firm Infometrics, believes that although history shows property cycles exist, the 7- to 10-year interval between troughs or peaks is “somewhat coincidental”, and he would not count on it happening again.

He said interest rates and population growth were the main drivers of house price rises and falls. “It is hard to see house prices being pushed back to a peak in the short term. My view is that this could be a little like the housing boom in the early 70s of the 20th century, when the market took a very long time to readjust and return to more reasonable price levels.”

Given the high level house prices reached at their peak in December 2021, Kiernan believes there appears to be little room for prices to rise over the next five years. They may not set a new record until after 2032.

 

CCCFA easing officially announced: is buying a home now easier?

On 20 June, the New Zealand Government announced the latest adjustments to the Credit Contracts and Consumer Finance Act (CCCFA) amendments that took effect on 1 December last year.

After the CCCFA amendments took effect on 1 December, banks became stricter when assessing loan applications, examining applicants’ income and spending in greater detail. This made borrowing significantly more difficult for first-home buyers, older borrowers and business owners.

The adjustments to the CCCFA amendments mainly cover the following:

1. Removing regular “savings” and “investments” as examples of expenses lenders must investigate when assessing a borrower’s future spending;
2. Clarifying that when borrowers provide a detailed breakdown of their future living expenses, benchmarked against reliable statistical data, lenders do not need to examine recent bank transactions to establish their current living expenses;
3. Clarifying that when lenders assess expenses using recent bank transactions, they may ask borrowers how their spending could change once the contract is entered into;
4. Clarifying that the requirement to obtain “sufficiently detailed” information applies only to information provided directly by borrowers, such as ensuring application forms have sufficiently detailed expense categories, rather than to information in bank transaction records;
5. Providing further guidance on when lenders need to consider a “reasonable surplus” — the amount remaining each month after borrowers’ estimated expenses are deducted from their income — and how lenders should set surplus requirements;
6. Providing additional guidance and examples of when a loan is “obviously” affordable, so a full assessment of income and expenses is unnecessary.

Many media outlets have described these adjustments to the CCCFA amendments as “loosening the reins” on the credit market and heralding “a new spring for borrowers”. The details above do suggest the credit market is beginning to ease, but these adjustments cannot reverse the broader trend towards tighter credit. Most earlier requirements remain in place, meaning customers must still provide detailed information about their spending.