House prices continue to soar, but is the boom nearing its peak? Will the Reserve Bank’s moves stabilise the market? Newsroom asked Kiwibank economist Jeremy Couchman to analyse what’s driving house prices higher and what factors will influence the market in 2021.  

The New Zealand housing market truly epitomises the astounding year 2020 has been.

As we went into lockdown in March, and the Covid-19 pandemic was spreading rapidly around the globe, the prognosis for the New Zealand economy looked dire. Jobs were being lost at a rapid pace, the unemployment rate was forecast to take off, and the housing market was surely about to share some of the pain.

At Kiwibank we were, for instance, forecasting an annual correction in house prices of 9-10 percent across New Zealand by the end of the year. And Kiwibank’s economists were far from the most pessimistic.

Fast-forward only several months and lines of people are snaking out of open homes. House prices are surging, and sales activity has hit multi-year highs. For instance, the Real Estate Institute’s house price index was 13.5 percent up in October from a year ago.

Calls for the Government to cool the housing market and address the lack of housing affordability are growing louder by the day. And what’s most surprising of all, this remarkable turn of events in the housing market has occurred in the shadow of the sharpest recession seen in the last 100 years. So how has this happened? And what is in store for the market in 2021?

New Zealand’s ability to ward off severe outbreaks of Covid-19, and the astonishing economic rebound out of lockdown, has likely supported the housing market to some extent. However, a runaway housing market during the global pandemic is not unique to New Zealand. Housing markets have been on a tear in several developed countries, including countries that have suffered far worse from Covid-19 than New Zealand.

Some common factors around the world are helping to fuel the current housing market boom. And policy stimulus is at the top of the list.

Since March, the RBNZ has pushed through significant stimulus to fight the fallout of Covid, including cutting the OCR to a record low of just 0.25 percent. Mortgage rates are at record lows, and suddenly the cost to service a mortgage has become much cheaper. House prices have adjusted upward in response. Moreover, deposit rates are at record lows too, and represent the opportunity cost of investing.

Record low interest rates have forced investors to go on the hunt for yield. And housing is an attractive option for many. Property is very familiar to Kiwi and loved for its seemingly steady capital gains. While rental yields have generally trended lower over the last 10 years across New Zealand, at 4-6 percent, rental yields are still far more attractive than current term deposit rates (less than 1 percent p.a. in some instances).

Adding to investor appetite, the RBNZ removed Loan to Value Ratio (LVR) restrictions on residential property lending back in May. Higher risk investors – those with little equity behind them and at an increased risk of flight if things turned sour – were given the green light to jump back into the market.

Here the RBNZ’s reason for removing LVRs was more pragmatic than recession busting. Lending restrictions such as LVRs could have blocked some stressed borrowers, during the depths of the crisis, from accessing mortgage payment deferral schemes.

A factor more specific to New Zealand is our ongoing and significant housing shortage – a shortage that we carried over into the current crisis.

With such limited supply in places such as Wellington, house price increases have been exaggerated by the exuberance of buyers racked with ‘FOMO’. As an indirect indicator, the stock of listed property for sale continues to hover at recorded lows in several regions according to the online property listing site

The building sector is gathering the momentum needed to address the housing shortage. In Auckland, residential building consents are being issued at levels last seen in the 1970s, enough to meet current demand, which has slowed due to New Zealand’s closed border.

However, the shortage has built up over several years, and we will need to build at current rates for years to come to ameliorate the situation. And the housing shortage is not just an Auckland issue, with other parts of the country facing similar pressures.

On an interesting note, there is also an element of changing preferences in the market too. The pandemic accelerated the growing acceptance of working from home by forcing many to work away from the workplace during lockdown. Lockdown made properties that can accommodate both work and living far more attractive. For example, an extra room that can be used as office. Spending more time at home meant people were looking for additional creature comforts. A larger outdoor space, or even a pool, for example. Whether a recent change in preference will continue beyond Covid-19 remains to be seen.

Looking ahead we no longer expect house prices to fall either this year or next, and double-digit price gains are predicted well into 2021. However, house price growth is expected to slow from around the middle of next year. The RBNZ has announced that LVR restrictions will return from March. But in reality, restrictions are already being applied to new lending. Partly because banks’ LVR lending speed limits are measured on a three or six-month rolling average basis. And because banks give pre-approval for loans for up to 90 days. The use of LVRs have been effective at slowing house price growth in the past, and this time is unlikely to be an exception.

The reinstatement of LVRs will fall heaviest on property investors. In part because LVRs are more onerous for investors, and in part because high-LVR investors have been very aggressive in getting back in the market since May (see chart below).

The settings that were in play prior to May’s relaxation required those borrowing to purchase an investment property needing a 30 percent deposit – or equity equivalent. For owner-occupiers, in contrast, banks could lend up to 20 percent of new owner-occupier lending to those with less than a 20 percent deposit. But the RBNZ may choose to reinstate more restrictive LVRs, such as a requirement for investors to have a at least a 40 percent deposit – as was the case when investor-related LVRs were rolled out across New Zealand in 2016.

Facing increased pressure from the housing situation, the Government is likely to act to rein in the housing market too. We’re not sure what form this will take. The Minister of Finance, Grant Robertson, has already requested the RBNZ provide a helping hand.

The return of LVRs should take enough heat out of the market to take some pressure off the RBNZ. Enough at least for the RBNZ to take the OCR into negative territory next year to ensure the Bank’s inflation and employment mandates are met.
Other factors expected to weigh on the housing market next year include a deteriorating labour market. Borders remain closed. As a result, we are entering what will likely be a lost summer for firms that rely on international visitor arrivals such as firms in tourism and education. The coming months will be a test for the labour and housing markets. We are forecasting the unemployment rate will peak at around 6.5 percent early next year. Not great, but far less than the potential double-digit rates thought possible during the depth of lockdown.

Moreover, New Zealand’s borders are expected to remain closed for many months ahead. Net migration, a key driver of housing demand over the last decade, is forecast to remain well below New Zealand’s long-run average over 2021 as a result. We saw annual net migration peak at around 90k at the start of 2020 as a rush of New Zealanders came home just prior to lockdown. Since the March quarter, net migration has fallen fast.

The news that Covid-19 vaccines are showing remarkable efficacy in trials is heartening. But the procurement and complete rollout of a vaccine to provide nationwide coverage may not be achieved until sometime in 2022 at the earliest. Until then, it’s unlikely that the Government would contemplate reopening the border.

The year 2020 probably has a trick or two left up its sleeve in the final month. But for the housing market the tide of rapidly rising prices may be about to turn. The reinstatement of LVRs will take the froth off the top of the market over 2021. Summer will be challenging for many firms and population growth has slowed dramatically.

But we are not suggesting anything near a correction in the market next year. We are merely talking about the slowdown in house price growth to more modest levels. From mid-2021 the fundamentals, such as New Zealand’s housing shortage, will underpin the rising cost of housing for years to come.

The issues surrounding housing are deep seated and there is no silver bullet available to solve these problems.

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