Property investors return, borrowing almost twice as much as a year ago; house prices expected to remain in check
However, the property market isn’t expected to get away on itself again, like it did around the time of the pandemic.
While the OCR is falling quickly, it’s still high enough to have a contractionary effect on the economy and isn’t expected to fall to a stimulatory level.
“I’m always wary of saying, ‘This time is different,’” CoreLogic New Zealand chief property economist Kelvin Davidson said about the impact falling interest rates would have on the housing market.
While confidence was improving, he noted it was still subdued, as people felt uncertain about the state of the economy and their job security.
“There is still a mood of caution, which can shift quickly,” he said.
Davidson noted it was definitely still a buyers’ market, with new property listings in January seeing the total housing market inventory lift to its highest level in nearly a decade.
He said credit constraints remained, and affordability continued to be an issue.
However, some of the hurdles that investors faced over the past few years had dissipated.
Lower interest rates are the big one. They mean new investors in particular don’t need to find as much cash, above their rental income, to top up their mortgage payments.
Investors are also able to deduct almost all of their interest costs as an expense, reducing their tax bills, further to a law change made by the coalition Government.
And, the bright-line test has been reduced from 10 to two years, meaning investors can once again on-sell property within relatively short timeframes without being hit by a de facto capital gains tax.
“It’s not easy, but it’s easier than it was,” Davidson said.
Coming back to those constraints, the Reserve Bank’s loan-to-value ratio (LVR) restrictions are still noteworthy, requiring the bulk of investors to have deposits of at least 30%, and owner-occupiers, deposits of at least 20%.
Davidson said debt-to-income (DTI) restrictions, introduced mid-last year, weren’t biting just yet, as interest rates were still high enough to prevent people from seeking to borrow a lot compared to their incomes.
These rules limit the amount of lending banks can do to investors seeking mortgage debt worth more than seven times their annual incomes, and owner-occupiers seeking debt worth more than six times their incomes.
In January, the type of lending banks did was still well within the Reserve Bank’s limits.
For example, only 7% of new lending went to investors with debt worth more than seven times their incomes. The rules are such that up to 20% of banks’ new lending can go to these borrowers.
In 2021, when interest rates were at rock bottom, the housing market was very hot, and there were no DTI restrictions in place, 45% of new lending went to investors taking out debt worth more than seven times their incomes.
This suggests the rules could really start preventing investors from getting loans once interest rates fall further.
Because first-home buyers don’t tend to take out as much debt compared to their incomes, the rules are expected to be less restrictive for them.
For example, in 2021, about 28% of new lending was to first-home buyers, who took out debt worth more than six times their incomes.
Under the rules currently in place, lending to this cohort is capped at 20%, and in January, only 4% of banks’ new lending went to this group of first-home buyers.
Pulling it all together, house price growth is expected to pick up a little.
ANZ economists see house prices being about 7% higher than they currently are in a year’s time.
“Based on our forecast for mortgage rates, house prices and income growth, our affordability index is currently near its forecast low, though it still shows the housing market to be slightly less affordable now compared to pre-Covid,” the ANZ economists said.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.