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Tilting the Balance of Home Ownership

Tilting the Balance of Home Ownership

Apr 08 2021

While the demand for housing and real estate has grown rapidly over the past year, New Zealand’s supply hasn’t kept up. This is due to a range of factors, such as the Reserve Bank’s slashing of the cash rate, global economic factors, and insufficient new construction.  Property research firm CoreLogic's house price index shows a stunning 12.8% rise in median house prices across the country.

While this may be changed by the new housing legislation with home prices climbing, homebuyers increasingly fear that they’ll either miss out on low-interest rates or that they’ll be priced out of the market. First-time buyers, for their part, may worry that they’ll never own a home at all. The result is an increased urgency to buy as soon as possible, driving even higher demand.

Homebuyers are rushing to close

As competition increases, prospective homebuyers are engaging in increasingly desperate behaviour to close sales. Real estate agents report homes being sold for prices well above their rating valuations as buyers try to outbid one another. The urgency is, in part, due to low mortgage rates caused by New Zealand’s temporary record-low official cash rate of 0.25%, accompanied by the return of Loan-to-Value (LVR) restrictions at 20 and 30% for homeowners and investors respectively.

Market momentum threatens first time buyers and renters

High real estate prices ultimately favour existing homeowners and investors, but they also come at a cost. With the average home price now at $800,000, the current market is much less accessible for first time home buyers, who tend to be younger and have fewer resources and less access to credit than investors and better-established prior homeowners.

At the same time, high home prices will drive up rental costs, making it more difficult for those same people to save for a future home purchase. Wages, of course, are not responsive to home prices. First-time buyers are aware of this, driving a greater fear of missing out on one of the hallmarks of a middle class existence: homeownership.

Government Response

The potential loss of the social mobility offered by homeownership is an issue for the Government to address. While rising home prices are generally seen as a positive, sharp rises are likely to be met with increasing regulatory resistance.

The reintroduction of LVRs is one step in this direction and the Government’s recently announced housing plan has been aimed at increasing the supply of houses and curbing demand by investors.

Of note the changes include:

-     Bright-line test extended from five to ten years
-     Investors are no longer able to write off their interest expenses
-     Price and income limits on First Home grants increased
-     Further RBNZ restrictions on bank lending still being considered

Our View

Dramatic shifts in the housing market can have significant impacts on investors and business owners. Small business owners often use home equity to finance their operations, meaning that increased home prices may offer them additional liquidity to drive growth or manage cash flow issues. Investors benefit directly from the rising value of their properties.

It’s important to understand the drivers of the housing market as homeownership has such significant monetary and emotional implications. A house is generally the largest asset most New Zealanders will own but even more importantly owning a home provides a feeling of security and wellbeing.

 

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