Twists and Turns
House prices haven't dropped yet despite the Government’s efforts to dampen demand from investors for existing properties, Sally Lindsay writes.
1 June 2021
Records for house prices have been set yet again despite the lowest number of houses available for sale during an April month since records began.
The Real Estate Institute’s (REINZ) House Price Index, measuring the changing value of property in the market, rose 26.8% year-on-year to 3,775, the highest annual percentage increase since records began. It is the eleventh consecutive month it has risen to new highs.
Median house prices across the country, excluding Auckland, rose 33.5% from $517,000 in April last year to $690,000, a new record high.
Auckland prices shot up by 21.6% from $925,000 in April 2020 to $1,125,000 in April 2021 – another new record. In Auckland’s suburbs, Manukau City reached a new record median of $1,070,000 and Franklin District reached a record median of $838,000.
The latest REINZ data shows across the country as a whole, median prices increased by 19.1% to $810,000 in the year to April. This was down on last month’s record. While nine from 16 regions reached record median prices as did 21 districts – these figures are well down on 32 districts reaching record highs last month.
REINZ acting chief executive Wendy Alexander says some regions are starting to show signs of prices easing and the rate of growth slowing which might also be the first signs that the reintroduction of the loan-to-value ratios (LVRs) is starting to have the desired effect.
The number of properties sold last month was the highest in an April month for five years. More than 7,000 properties changed hands.
Stand-out regions included the West Coast where 46 properties sold – the strongest sales volumes for an April month in 15 years, Canterbury with 1,076 properties sold – the busiest April month in 14 years and Waikato with 700 properties sold – the most active April in five years.
Alexander says while the national picture represents the busiest April in five years, the reality is the number of sales dropped when compared to March.
“While in part this is what is expected when moving from March to April,
there is definitely a wait and see approach from a number of investors and also some first time buyers,” she says
“Some of these falls in sales volumes are likely to be early signs of the LVRs slowing the market, some will be attributed to the Government’s planned changes to tax deductibility and the bright-line test and some are likely to be the fact there was the lowest level of inventory for an April month since records began.”
Changes Just Starting
It may take another month or so for definite changes to house prices to flow through, says CoreLogic.
“We expect a downside impact on housing market growth to become evident over the coming months through 40% deposits required from investors by banks and the Government’s housing policy changes,” says Nick Goodall CoreLogic’s head of research.
“To better understand the extent of reportedly fewer people at open homes and auctions, other measures of market activity have become hugely important, especially monitoring mortgage related valuation activity across CoreLogic platforms.”
Recent valuation orders are down -11% compared to the previous six months, probably reflecting the reimplementation of the loan-to-value ratio (LVR) restrictions from March 1, with all buyers requiring a 30% deposit.
Goodall says it might also reflect the uncertainty caused by the interest deductibility changes, as property investors take the time to assess the broader market impact and their own financial situation.
Exiting The Market
Meanwhile, CoreLogic hasn’t seen any evidence of property owners looking to exit the market.
The total number of properties listed for sale on Trade Me dropped to 22,300 by the end of April, from 23,100 at the beginning of the month.
“Such tight advertised supply levels are likely to keep some sense of urgency in the market as buyers compete for a relatively small pool of advertised properties,” says Goodall.
Not The Answer
Pressure to introduce rent controls is growing, but all it will lead to is fewer rental homes on the market. Finance Minister Grant Robertson has asked his bureaucrats for advice on rent controls.
Think tank, The New Zealand Initiative has produced a paper concluding rent controls will only exacerbate problems in the rental market and are a recurring policy mistake.
Rent controls: The next mistake in housing policy, written by senior fellow Dr David Law points out rent controls vary from placing a cap on the rent that can be charged or, more commonly, the extent to which rent can increase throughout a tenancy. To be effective, they are usually paired with restrictions on eviction.
Unlike other forms of price ceilings, where resulting queues work on a firstcome- first-served basis, rent controls favour sitting tenants with rents below market rates on rent-controlled units.
For uncontrolled rental accommodation, such as with new builds or when a tenancy changes hands, rents can skyrocket as excess demand for rent-controlled accommodation spills over to uncontrolled accommodation.
“The problem may compound if new supply of rental accommodation is reduced. Developers may be less inclined to build new housing, even when new buildings are not subject to existing regulation, as the possibility of future profit-curbing legislation makes building new residences less appealing,” says Law.
A mismatch between tenants and rental accommodation as well as a drop in people’s ability to move, can also result from rent controls.
Tenants who have been able to secure rent-controlled accommodation may not want to move, even if their housing needs change, since they would potentially pay more. As a result, families may end up living in small apartments while empty nesters live in large homes they do not need and people do not move to take up better employment opportunities, says Law.
However, most economists highlight supply constraints as the major concern. For example, the Resource Management Act, urban planning rules, and the incentives faced by local councils constrain supply and increase the time and cost of housing development.
Rise In Construction Costs
Housing construction costs surged 1.3% during the first quarter of this year, according to CoreLogic’s Cordell Housing Index Price (CHIP).
The CHIP report measures the rate of change of construction costs within the residential market and covers freestanding and semi-detached single and two storey homes.
The March quarterly growth is the highest rate of construction cost inflation since Q1 2019, and far above the 0.6% and 0.4% increases throughout Q3 and Q4 2020 respectively.
CoreLogic’s chief property economist, Kelvin Davidson, says the clear impact of a busy construction sector is flowing through to faster cost rises. “Annual residential construction cost inflation is back on the rise, up to about 3.3% in the March quarter after falling to under 3% in Q4 2020 from a peak of 6.9% in Q4 2017.
He says there are increasing material and labour costs coming down the pipe as there are shortages and substitutions, and the expectation is for this to have a continuing impact on the cost of building.
“When combined with potential Covid-related shipping problems, and also shortages of structural timber domestically, the potential for faster and greater cost rises is accentuated,” says Davidson.
"The Government’s latest housing policy changes which incentivise investors to target new-build properties could add further demand to the sector and place more pressure on capacity and costs.”