Latest May house price report released: national prices rise sharply year on year! This week’s key developments for property investors

 

1. Major changes to mortgage rules from 1 July

 

Last week, the Reserve Bank of New Zealand announced that its latest debt-to-income (DTI) lending restrictions would take effect on 1 July. For owner-occupiers, the DTI multiple is 6; for investors, it is 7. Although these rules impose no restrictions on buyers of new builds or borrowers using non-bank lenders, they will still affect mortgage applications from around 80% of bank borrowers.

 

 

Admittedly, as many reports have noted, the new DTI rules will not have a major immediate impact on mortgage lending, because current high mortgage rates already constrain borrowing to some extent. Nevertheless, their introduction marks a significant shift in the future lending landscape. As mortgage rates fall, DTI restrictions will become more apparent, linking house prices more closely to incomes over the medium term and slowing, to some extent, the pace at which investors expand their property portfolios.

 

Meanwhile, the Reserve Bank also announced that it would ease loan-to-value ratio (LVR) restrictions. From 1 July, banks will be allowed to allocate 20% of their mortgage lending to owner-occupiers with deposits below 20%, and no more than 5% to investors with deposits below 30%. CoreLogic chief economist Kelvin Davidson said property investors would benefit most from this change, as the current LVR settings have hit this group hardest. Even with lower deposit requirements, however, investors still face numerous obstacles when buying property. For example, in a high-interest-rate environment, investment property rental returns fall well short of monthly mortgage repayments.

 

 

2. First-home buyers’ market share slips slightly

 

The Reserve Bank released its latest mortgage data last week. Although lending volumes increased further, they remained low. First-home buyers remain a major force in the market: despite the scrapping of the First Home Grant, this group still accounts for around 80% of the low-LVR lending market.

 

The easing of loan-to-value ratio (LVR) restrictions is good news for first-home buyers, as banks will be able to issue more low-deposit loans. Meanwhile, the market also faces challenges. The Reserve Bank of New Zealand has warned that interest rates will remain high for longer than previously expected. In a sense, this could benefit first-home buyers: keeping interest rates high for longer would effectively delay the next rise in house prices and further reduce competition in the market.

 

 

Research data from Valocity shows that first-home buyers’ market share has declined slightly. In the first quarter of 2024, first-home buyers accounted for 42.8% of all mortgage registrations for property purchases, down from 43.9% in the previous quarter. Second-quarter data to date shows that their share has fallen again, to 42.4% (although this remains above the long-term averages seen in 2020 and 2021).

 

The data also shows that property investors have begun returning to the market, with their share of new mortgage registrations rising from 21.5% before the election to 24.2% in the first quarter of 2024. Although this figure slipped slightly in the second quarter, the government’s changes to the bright-line test from 1 July are likely to encourage more investor purchases and a surge in investment properties being listed for sale.

 

 

3. Will the Budget have a major impact on the housing market?

 

The Budget released last Thursday contained no direct support measures for the property market. The key question is whether personal income tax cuts will push inflation higher, keeping interest rates elevated for longer. Davidson believes only time may tell, but he observed that the government appears to have been very careful to offset the impact of tax cuts by reducing spending elsewhere. He acknowledged that, with New Zealand’s economy in recession, a Budget with no impact on the property market might be a fairly sensible decision.

 

 

 

4. Is the continuing economic slump

a reason to approach the property market cautiously?

 

New Zealand economic data released by authoritative agencies over the past week has been decidedly weak. Job numbers grew by just 0.1% in April, while annual growth slowed to 1.4%, its lowest level since March 2021. Meanwhile, ANZ’s business confidence survey shows that businesses remain pessimistic about the economic outlook over the coming months. We therefore have reason to believe that expectations for the property market will also remain subdued.

 

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5. New Zealand house prices rise sharply year on year

 

The latest OneRoof-Valocity house price index report shows that New Zealand’s average house price rose 3.33% year on year last month to NZ$975,000. However, the national average fell 0.2% over the past three months. Slower house price growth may not necessarily be a ‘bad thing’ for buyers keen to own a home.

 

Auckland’s average house price fell 1.1% over the past three months

 

The latest data shows that Auckland, Bay of Plenty and Gisborne recorded declines in average house prices compared with the previous quarter, while eight other regions saw only slight increases.

 

Changes in average house prices across New Zealand regions over the three months to the end of May (source: Valocity)

 

Notably, the regions with the strongest house price growth in New Zealand remain those with the lowest average prices, where first-home buyers dominate the market. Over the three months to the end of May, the West Coast’s average house price rose 4% (NZ$18,000) to NZ$468,000. Southland was close behind, with its average rising 3.4% to NZ$551,000.

 

Christchurch and Dunedin were the only main centres to record house price increases over the past three months, rising 0.5% and 1.8% respectively. Their relatively low average prices, and the fact that many homes for sale target first-home buyers, have eased selling pressure to some extent. As buyers withdraw from the middle of the market, prices in more expensive main centres are coming under pressure.

 

Listing numbers have climbed compared with a year ago, giving buyers more choice and bargaining power. At the end of May, the total number of homes for sale on OneRoof.co.nz was 19% higher than a year earlier, but 3.89% lower than in April. This indicates that although new listings declined over the past month, they remained substantially higher year on year, with Auckland recording growth of nearly 45.4%.