Some relief arrived this month when the Reserve Bank of New Zealand (RBNZ) accelerated the pace of monetary policy easing by cutting the Official Cash Rate (OCR) by 0.5% to 4.75%.
Key drivers of house price inflation include net immigration, which influences market trends but doesn’t always dictate them; rising building costs, as indicated by Cordell construction data, which typically follow house price increases; and the strength of the labour market, which has historically affected house prices but has seen a diminished impact over the past decade.
However, the most significant driver appears to be the percentage change in mortgage interest rates. Interest rates are starting to fall following the recent OCR announcement, and economists are suggesting we could see another 0.50% cut to 4.25% in November.
This will come as a relief to property owners, as higher interest rates have been crippling for many. Further adding to homeowners’ worries have been the increases in council rates (up on average 9.8% year-on-year to June 2024) and insurance costs (up 24% year-on-year to June 30, 2024) – not to mention the value of their property investment dipping.
But it’s not all doom and gloom for property owners. Most economists expect property prices will increase in 2025. Market activity appears to be on the rise, with both supply and demand growing. Trade Me has reported a 29% increase in listings and a 14% boost in listing views.
Government’s goal of more affordable housing
Amid the housing market turbulence, the Government has expressed concerns that house prices are still too high. The median price-to-median household income is a common metric used to measure how expensive a region’s housing is. In New Zealand, this ratio currently exceeds 8x, which is up from 6x ten years ago. Minister of Housing Chris Bishop has introduced an initiative aimed at making housing more affordable in New Zealand.
The initiative is based on the following pillars:
- Freeing up land for urban development through legislative changes.
- Improving infrastructure funding and financing.
- Providing incentives for communities and councils to support housing growth.
- To reduce construction costs and streamline processes.
Bank lending regulatory changes
In July 2024, the RBNZ introduced debt-to-income (DTI) rules as another tool to ensure financial stability in the banking system. DTIs limit the amount that can be borrowed relative to a household’s income. At the same time, we saw the loan-to-value ratios (LVR) restrictions loosen, which will make it easier for some low deposit borrowers to get a loan.
Both LVRs and DTI regulations serve as safeguards in the banking system and have the effect of curbing potential excesses in the housing market. These regulations reduce the risk of defaults during housing downturns by restricting the amount banks can lend to higher-risk borrowers.
So, is house price inflation a distant memory?
The recent interest rate cuts play a crucial role in shaping the market’s trajectory by lowering the cost of borrowing for owner occupiers and investors, thus encouraging them to re-enter the market.
By staying informed, investors can not only weather the current difficulties but also position themselves strategically for the future. As we anticipate a more balanced market in the coming years, the expectations for the housing sector seem ready for a recovery.
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