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Market Development

No capital gains tax and an OCR cut make the prospect of a market crash even less likely, but not everyone thinks they will have a major stimulatory impact, writes Miriam Bell.

By: Miriam Bell

1 June 2019

Oh, what a month! After a long period of uncertainty, in recent weeks the country has seen some significant developments that are positive for the property market.

First up, there was the Government’s announcement that a capital gains tax is no longer on the cards. Then the Reserve Bank cut the OCR to an all-time low of 1.5% which is prompting banks to drop mortgage rates further.

These developments come hot on the heels of new data showing overseas buyer activity has fallen significantly in the wake of the Government’s “foreign buyer ban”. This data reflects the much slower market nationwide. So will the latest developments counteract that trend and reignite New Zealand’s property market?

Trends Remain The Same

Taking a look at the latest data released at the time of writing, the market trends remain the same as they have been for some time.

In Auckland, prices continue to drift downwards. The latest QV House Price Index has Auckland values down by 1.2% over the three months ending April and by 1.5% year-on-year across the region. That leaves the region’s average value at $1,033,583, as compared to $1,051,687 in April last year.

Likewise, Realestate.co.nz’s April data shows that the Auckland region’s average asking price slipped to $899,916. That’s a 4.5% fall from March and a 5.8% fall on April last year. It’s also the first time it has dropped below $900,000 since 2016.

In other markets around the rest of the country there is still a bit more heat but, overall, the times are changing. According to QV, there are pockets of solid growth in smaller regional markets like Gisborne, Horowhenua and Rotorua, but national value growth continues to slow.

In the three months to April, the country’s average value grew by just 0.4% to $686,975. Annual value growth was 2.7% in April, as compared to 7.6% in April last year. Of the larger centres, Dunedin is still turning in the best results. The region saw quarterly value growth of 4.9% and year-on-year growth of 13%.

Realestate.co.nz’s data tells a similar story. It has the national average asking price at $649,662 in April. That was a 4.1% decrease on March and was largely driven by a drop in asking prices in the major centres. Besides Auckland, the average asking price in the Wellington region dipped by 0.2% to $656,799 while the Canterbury region’s average asking price was down by 3.7% to $490,477. Markets around the rest of the country provided a mixed bag of results, although the Hawke’s Bay, Coromandel and Manawatu/Whanganui regions hit all-time asking price highs.

While the REINZ sales data for April had not been released at the time of writing, sales activity in recent months has been noticeably subdued around the country. Again, this is particularly the case in Auckland.

Barfoot & Thompson’s April data provides further evidence of this. The agency saw 667 sales in April, which was a 30.7% decline on the 963 sales recorded in March and an 8.8% drop from 731 sales in April last year. However, Barfoot & Thompson director Kiri Barfoot says prices remain steady and there are no signals suggesting prices might make a major retreat.

Ban Hits Home

While April’s data is a clear continuance of ongoing market trends, the release of Statistics NZ’s latest property transfer statistics adds another dimension to the picture. It reveals that property transfers, or sales, to overseas buyers fell by 81% in the March 2019 quarter, as compared to the same quarter a year ago. For CoreLogic senior property economist Kelvin Davidson, it shows the foreign buyer ban has now taken full effect, with some dramatic shifts in areas like Central Auckland and Queenstown. “For example, a year ago, 18.7% of purchases in Waitemata were made by overseas buyers, but now that’s just 3.2%. The same figure for Queenstown has dropped from 9.7% to 2.7%.”
He says it’s no coincidence that sales activity and property values have recently softened in these “prime” markets. “Low affordability and tighter credit availability are still playing a key role, but the foreign buyer ban is clearly having an effect too. For would-be local buyers, there’ll be more opportunities to access the market at a lower price.”

BNZ chief economist Tony Alexander agrees the ban has been effective in lowering sales to overseas buyers. But he says the absence of foreign buyers hasn’t had a noticeably negative impact on the housing market.

“Sales have remained strong outside Auckland, with rising prices. In Auckland during the March quarter average house prices fell 1.1% after falling by 0.9% during the December quarter. One could run an argument of some impact there but, if so, then the depressing impact on prices of foreign buyers being largely absent has been a fairly minor one and the impact may now have ended.”

Revised Outlooks

The trends evident in this data clearly point to the ongoing cooling of the market. But the data all comes from the period before the capital gains tax was ditched and the OCR was cut. This begs the question of what these new developments will mean for the market going forward.

CoreLogic head of research Nick Goodall says the Government’s capital gains call will have caused a collective sigh of relief among landlords. But he is not certain it will have a significant impact on the market.

Investors are already dealing with a number of policy changes that are impacting on their profits, he says. These include the proposed new ring-fencing rules, the Healthy Homes minimum standards and limited wage growth restraining their ability to increase rents in line with their costs.

Further, property speculation has already reduced over recent years, Goodall says. “The extension of the bright-line test ensures there is some form of a capital gains tax for short term capital gains, and the natural property cycle slowdown means gains are reduced anyway.”
When it comes to the OCR cut, Alexander thinks that, although there may technically be some stimulatory impact on the housing market, it won’t be much. “Lower mortgage rates are likely simply to help cushion Auckland’s easing market while allowing the regions to slow down in a gradual manner.”
However, Westpac chief economist Dominick Stephens disagrees. He says that combined with the cancellation of a capital gains tax, the OCR cut is very stimulatory for the housing market. “There is no longer any reason to think the housing market is going to slow in 2020. Far from it.
“We now expect house price inflation to accelerate to 7% by mid-2020, due to the recent sharp drop in mortgage rates. Our revised view that the housing market will accelerate over the coming year, rather than decelerate, has removed the rationale for forecasting an OCR cut in 2020.”

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