ANZ Property Focus

ANZ Property Focus assesses the state of the property market in New Zealand, providing investors and prospective homeowners with an independent appraisal of recent developments.

December 2016: Last call (PDF 432kB)

It’s midnight at the bar. We’ve had a good time. Do we go home or stay out until 4am? History says the New Zealand economy (housing market) stays out and binges. The end result is an economic hangover as a bust follows the boom. Warning signs are starting to flash with regard to leverage (credit expansion relative to incomes) and asset valuations. The term “this time is different” is a phrase that can come back to haunt an economist but there are some key differences now. We have a housing boom but not a consumption equivalent as households show more restraint, which in combination with the high NZD and other deflationary forces is keeping inflation (and the RBNZ) at bay. Housing supply is still not keeping pace with demand so we don’t have a surfeit of stock that could pressure prices. We don’t have a shadow banking sector. The regulator (RBNZ) is playing bouncer at the door through loan-to-value restrictions and banks the responsible bar-tender tightening up the availability of credit. This will help dampen the extent of excesses built up at the top, which will lessen the pressure for an adjustment on the other side.

November 2016: The lowdown (PDF 492kB)

In the absence of a global downturn (a non-trivial risk), the lows in interest rates look behind us. The economy is strong, inflation signals are pointing more conclusively higher, global deflation risks have eased, the US Federal Reserve is set to hike rates, and attention is turning away from monetary policy keeping rates low towards expansionary fiscal policy adding to debt and yields. This does not mean a trend higher in interest rates is set to follow; there are too many vulnerabilities around the globe for that. Locally, a sizeable funding gap means credit growth needs to slow and deposit growth rise; that’s incongruous with borrowing (and deposit) rates falling.

October 2016: Great expectations (PDF 440kB)

Confidence about buying property remains high. The proportion of investors planning to buy more properties rose to the highest since 2009, and investors are optimistic over returns (both capital gains and rental income) for both the year ahead and longer term. In terms of what is keeping property investors up at night, LVR restrictions and other regulatory changes are up there, but are trumped by the risk of damage to property, especially from methamphetamine. While the RBNZ’s tightening of the LVR restrictions is certainly causing concern amongst property investors that it will cramp their style, there appears to be little concern that the restrictions could topple the housing market. Cyclical risks such as lower returns barely warranted a mention.

September 2016: Help wanted (PDF 484kB)

Amongst all the commentary about housing affordability, it is the house price that gets all the attention, with little focus on earnings and income. Prospects for the income side of the equation remain sound: GDP growth is strong, the labour market is tightening, and wage growth is expected to lift. We’re not talking “knock the ball out of the park” rises, but steady improvements. There are the usual suspects that could upset the apple cart (the global scene and too much borrowing demanding a shakeout) but New Zealand looks reasonably well placed. We see annual income growth settling around 4-5%. That’s highly respectable and a solid backbone, but won’t improve housing affordability if we remain in an environment of double-digit house price gains!

August 2016: Lies, damned lies and migration (PDF 496kB)

Migration is booming, with a net inflow of over 69,000 migrants (125,000 gross arrivals) over the past year, according to Statistics NZ data. That’s putting pressure on housing and infrastructure. But when you look at the fuller picture, including the number of permanent resident approvals (the aim of which has not really altered from 45-50k per annum), the story does appear less alarming. A German au pair, for instance, doesn’t have the same impact on the property market as a permanent resident. New Zealand’s economic and political credentials currently look pretty good. Because of that, we don’t believe net migrant inflows are going to cool aggressively any time soon, in the absence of policy intervention. Skill shortages will worsen as the population ages, so New Zealand needs to import labour. However, it is questionable whether current policy settings have got the ‘mix’ right and are achieving the desired outcomes. Sub-par GDP per capita growth is telling, as is the mismatch between reported skill shortages and the skill sets of arrivals. It is also odd that more foreign students are heading into Private Training Institutes as opposed to Universities. In short, there are aspects that suggest the migration framework, and the application of the rules, could be in need of adjustment.

July 2016: Drinks on the house (PDF 476kB)

Tighter LVR restrictions have been signalled, and are effectively in place now. It’s hard to go past the spirit of why they are needed given debt accumulation, New Zealand’s balance sheet, and exuberance across asset prices. A further tightening in the availability of credit via macro-prudential policy looks inevitable. Key challenges will be to ensure a) it doesn’t restrain housing supply; and b) it doesn’t force lending into the shadow and unregulated banking sector. While the RBNZ is set to cut the OCR again, we doubt the full 25bps will be passed on. Credit growth is outpacing deposit growth, a partial by-product of lower interest rates. Any shortfall needs to either be funded offshore (which is more expensive) or by shifting relative pricing, which means competing more aggressively for deposits and slowing credit growth. Banks’ cost of funds continues to rise. Deposit rates are now into the territory where further reductions would negatively impact already falling deposit growth rates. For money to be going out the door (lending), it needs to be coming in as well, and continued falls in deposit rates is incongruous with that. So we appear to be approaching a point where borrowers will not get the full benefit of OCR cuts, but depositors will not receive the full pain either, and in fact may benefit if competition heats up.

June 2016: Amber alert (PDF 448kB)

Markets are set for a tumultuous period following the UK EU referendum result. Society has sent a message against globalisation and economic integration; that’s negative for microeconomic policy settings and ultimately growth. A key issue now is whether Brexit spills over into wider Europe and Asia.  We suspect it will, and from there likely into emerging markets, which means Asia and that’s hugely relevant for New Zealand. Global growth will be lower, although we are coy about making sweeping assessments at this early stage. What we know is that a) the global economy is already vulnerable; and b) steps against globalisation and integration are negatives that need to be reflected in asset valuations. For New Zealand, this represents a challenging backdrop of which to be mindful. Heading into a period of heightened uncertainty New Zealand doesn’t look as vulnerable as it did prior to the Asian Crisis or GFC. But we are on alert. At this stage, we expect the domestic impact to be small; New Zealand continues to have a number of positive forces in its favour – excellent momentum being one of them. But it is a moving feast and outside of direct trade linkages and capital flows we are watching our 6 C’s; contagion risks, confidence, cost of funds, commodity prices, the currency and China. It would be unwelcome and problematic to see a direct flow on into three or more.

May 2016: Accentuate the positive (PDF 376kB)

The property market is hot; regions are playing catch-up and Auckland is lifting again. Households are once more borrowing with gusto. That combination means greater risk of a macro-prudential response from the RBNZ. While it did not announce any additional measures in its latest Financial Stability Report, something looks to be around the corner. This will help dampen demand, but it does nothing to alter supply, which is where much of the problem resides. Residential consent issuance looks to be tailing off, with elevated cost increases indicative of resource constraints. High net PLT immigration merely adds to demand pressures.  

April 2016: A line-ball call (PDF 116kB)

The RBNZ held the OCR at 2.25% and a clear easing bias was retained. Whether the OCR gets cut again is a line-ball call; housing market strength calls for no change. With the effectiveness of the high-LVR lending restrictions and government policy measures to slow investor demand looking to be waning, the door remains open to other policy action. Auckland and nationwide house prices surged to new record highs, with regions outside of Canterbury generally booming. Residential consent issuance looks to be tailing off and record annual net PLT immigration makes the construction sector response a moving target. Households are exhibiting leveraging-style behaviour, which looks set to continue for a while yet. The longer this continues, the greater the odds of a correction in the market.  

March 2016: Jekyll and Hyde (PDF 164kB)

The RBNZ cut the OCR by 25bps this month citing global fragilities and declining inflation expectations; an even lower OCR is on offer. Despite ongoing strong net immigration and low interest rates, the Auckland property market remained in something of a hiatus, with the median days to sell higher than the nationwide average for the first time in nine years. But it’s full steam ahead for other regions, with the Wellington market showing notable strength. Annual residential consent issuance hit an 11-year high, but the trend is pointing downwards in Auckland and Wellington. Households are exhibiting leveraging-style behaviour, which looks set to continue for a while yet. That is concerning.

February 2016: Zero-sum game (PDF 196kB)

RBNZ Governor Wheeler acknowledged that a lower OCR may be needed over the coming year, though they look to be on hold for now. Offshore funding costs are on the rise. Despite ongoing strong net immigration and low interest rates, the Auckland property market remained in something of a hiatus, with prices down, volumes well below year-ago levels, and the median days to sell higher than the nationwide average for the first time in nine years. But it’s full steam ahead for other regions. Households continue to exhibit leveraging-style behaviour with borrowing outstripping income growth.

January 2016: Baton change to the regions (PDF 212kB)

The RBNZ left the OCR on hold, but noted that rates may move lower in 2016. We are not seeing enough to justify a further easing in policy but the risks are obvious. December REINZ data showed some modest recoil, with the Auckland housing market considerably less buoyant than prior to the introduction of regulatory changes in October, whilst markets in other regions are heating up, supported by historically low mortgage interest rates, relaxed LVR criteria and the “ripple’ impact of earlier Auckland house price strength. Dwelling construction activity is strengthening, but booming net immigration implies a moving target for housing demand. Credit growth has followed the housing market and households are re-leveraging, although mortgage approvals look to have plateaued.

December 2015: The worm has turned (PDF 404kB)

The RBNZ has cut the OCR by 100bps this year, returning the cash rate to record lows. While the bias is still to lower rates yet, there are now upside risks to be mindful of too, with the economic outlook more balanced. Less pressure to cut means 1 and 2 year fixed rates could nudge up over coming months. November REINZ data showed a further regulation-related impact on Auckland housing activity and prices, but showed the wider regions are being supported by historically low mortgage interest rates, and last month’s relaxation in non-Auckland LVR restrictions by the RBNZ. Dwelling construction is trending up, but booming net immigration makes the number of new dwellings required a moving target. Credit growth has followed the housing market and households are re-leveraging off already high debt levels, although mortgage approvals growth is slowing.

November 2015: Crystal ball gazing (PDF 160kB)

Governor Wheeler has effectively ruled out OCR hikes to counter housing market strength, but the RBNZ has acknowledged they are very mindful of housing excesses and are now also watching some regional housing markets more closely. October sales figures, however, showed that regulatory changes intended to slow investor demand are impacting, with a regionally broad-based fall in sales activity and lower annual house price inflation. The hope is that such measures will provide more time for the lift in dwelling supply to deliver greater balance to the Auckland market in particular, but with net immigration inflows still booming, this is a moving target. Credit growth has followed the housing market and households are re-leveraging off already high debt levels.

October 2015: Borrowed money and borrowed time (PDF 136kB)

An increased RBNZ toolkit has provided more options for addressing housing market buoyancy, but Governor Wheeler reminded markets that OCR settings are not completely divorced from housing market developments. Despite the pending introduction of measures to clamp down on investor demand, the property market continues to dance to its own tune, with sales volumes at an 8-year high and annual house price inflation at an 11-year high. Net immigration inflows remain strong, but housing supply is responding, with annual Auckland residential consent issuance the highest level in more than a decade. Credit growth has firmed, but the easing off in mortgage approvals signals a pending housing market lull.

September 2015: Topping out (PDF 208kB)

The Reserve Bank cut the Official Cash Rate by a further 25bps to 2.75% in September and maintained an easing bias. Despite the economy slowing and affordability stretched, the property market continues to dance to its own tune, with sales volumes and the days to sell at their strongest in eight years. Annual house price inflation has hit an eleven-year high, with the top of the North Island leading the charge. Net immigration inflows remain very strong. After a period of disappointingly flat issuance, residential consent issuance surged in July, to the highest level since April 2008. With the gain again led by Auckland, this is exactly the supply response officials are hoping to see. Credit growth has firmed, but the easing off in mortgage approvals signals a pending housing market lull.

August 2015: A look at the regions (PDF 160kB)

Sales volumes, the median days to sell and annual house price inflation in July were all the strongest since 2007, with sales activity in the upper North Island strengthening. The RBNZ stated that interest rate rises would not be appropriate to dampen the Auckland market, but that speed limits to slow investor demand in Auckland will be here in November. Nationwide residential consent issuance (supply) has essentially flat-lined over the first half of this year, although the growth baton is clearly in northern hands. Record net immigration and low mortgage rates are key supports for now. Construction has flat-lined and is low relative to population needs. Household credit growth has picked up and is running ahead of household incomes.

July 2015: A tale of two cities (PDF 156kB)

The RBNZ cut the OCR by another 25bps to 3% and signalled that some further easing is likely. Given the softening growth picture, poor outlook for the terms of trade and low inflation environment, a lower cash rate is justified and we expect the OCR to fall to 2.5% by early next year. REINZ data showed annual nationwide house price inflation firming to an eight year high, with high Auckland house price inflation contrasting with falling prices in Canterbury; the former has a shortage of houses and the latter an emerging excess. Record net immigration and low mortgage rates are key supports, although we expect pending changes to LVR policy and property taxation to weigh on Auckland investor demand. Construction has flat-lined and is low relative to population needs, curtailing the supply-side. Household credit picked up and household debt to income has now hit a new all-time high.

June 2015: Trend versus the cycle (PDF 208kB)

The RBNZ cut the OCR by 25bps and signalled at least one further cut to offset the expected weakening in demand from the lower terms of trade and to ensure inflation climbs back to the middle of its target range. The Auckland housing market is currently running hot, with REINZ data showing annual house price inflation in the region at a 19-year high, supported by record net immigration and low fixed mortgage rates. There are fears that an OCR cut will provide an unwelcome boost to Auckland prices, but we expect that pending changes to the LVR speed limit policy and the Government tax initiatives for investors will help bring greater balance to the Auckland property market.

May 2015: Joining forces (PDF 148kB)

The RBNZ and the Government have combined forces to rein in investor demand in the Auckland property market via a tightening of the LVR speed limits and changes to taxation. Auckland annual house price inflation rose to an 11-year high last month, supported by record net migration and low fixed mortgage rates. The pace of dwelling supply rebounded, but remains low relative to population needs. Household credit growth picked up, but remains bounded by income growth so far. Low inflation and a deteriorating risk profile across the economy looks set to be matched by a lower OCR.

April 2015: Throwing down the gauntlet (PDF 132kB)

The RBNZ has thrown down the gauntlet and called for broader policy action, including a capital gains tax, to address what it perceives as growing financial stability risks from an overheating Auckland property market.  REINZ data shows Auckland annual house price inflation hitting an 11 year high. The pace of dwelling supply growth is slowing. Strong net immigration inflows and low fixed mortgage interest rates are providing impetus to the market. Household credit growth has started to pick up.  Low inflation tilts the balance of risks towards an OCR cut, although the RBNZ is likely to hold the OCR for the time being.

March 2015:  Pressure building (PDF 188kB)

Residential building activity is trending up, but this has not been sufficient to materially dent housing shortages, with high rates of annual house price inflation in Auckland prevalent. Strong net immigration inflows and low fixed mortgage interest rates are providing impetus to the market. Household credit growth has started to pick up, but remains bounded by income growth. The RBNZ is looking at supplementary measures to address housing market buoyancy, with the message from the March MPS being a period of stability in OCR settings.

February 2015: Third wind (PDF 156kB)

While house sales eased in January, the underlying picture remains strong, with the average days to sell down and prices up. Building consents are trending up but the pace is still not sufficient to materially dent the Auckland-centric shortage. Migration inflows remain strong. Credit growth has started to pick up, but households are still deleveraging; credit growth is not outstripping income growth (yet). The RBNZ is on hold, weighing up competing issues: a wobbly global scene, a still-high NZD, and housing market strength. Inflation is low so they can afford to be patient



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