NZ residential rental market news, January 11

Exploring DTIs, what will buoy house prices in 2024, and it's a good time to be a FHB.

Too long; didn't read? Here's this week's TLDRs...

Rounding 2023 off on a positive note

Barfoot & Thompson reported a strong finish to 2023 with 8,576 sales, slightly higher than 2022 but the second lowest since 2010. 
December 2023 sales were 60% more than December 2022 but significantly less than December 2021 and 2020. 
There was a record low drop-out rate of 6% for listings going unsold, significantly lower than the 14% average over the past two years. 
Median prices held at $1,045,000 in December, up 2.7% from November but down 2.1% from December 2022. 
Despite a steady price rise since August, median prices remain 15.7% below the November 2021 peak.
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Key Property Trends for 2024:  

Lock-up-and-leave homes and single-level dwellings are anticipated to be in demand from foreign buyers for occasional use. 
Turn-key homes gain popularity as buyers seek finished new-builds to avoid cost overruns and delays. 
Classic properties like brick-and-tile units and three-bedroom villas remain in demand but buyer preferences are shifting. 
High-end apartments may attract attention for short-term rentals, contributing to income generation. 
Single-level properties in demand due to the aging population; multi-level homes with lifts also gaining interest. 
National's plans to reinstate mortgage interest deductibility and reduce the bright-line test could attract investors and impact lower-end market prices. 
Denser living predicted, with a shift towards apartments as a more affordable property ladder entry. 
Completed homes preferred over off-the-plan purchases due to high construction costs and buyer preference for certainty. 
Renovated homes expected to be in high demand. 
Growing diversity in New Zealand communities influences demand for different housing codes and larger homes, accommodating intergenerational living.
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2024 looks good for FHBs

November RBNZ data shows a $6.5B increase in new mortgage lending activity, marking the strongest rise since the upturn began in August. 
Growth was observed in lending to both owner-occupiers and property investors, with a shift towards less risky principal and interest terms. 
55% of existing borrowers face loan repricing to higher mortgage rates in the next 12 months. 
LVR rules remain binding, with caution warranted due to limited loans with lower deposits for both investors and owner-occupiers. 
Signs of falling finance costs, especially for 2 or 3-year fixed mortgage rates, provide some relief to borrowers. 
Uncertainty remains about whether borrowers will opt for fixed rates or explore other options. 
Falls in mortgage rates might have a limited impact if the Reserve Bank imposes debt-to-income ratio (DTI) caps more quickly. 
Upcoming consultation on DTI rules could impact the housing market in the second half of the year. 
There’s anticipation of an underwhelming housing market upturn, with a projected 10% rise in sales activity and 5% price growth. 
Psychology and expectations will influence market dynamics. 
Despite potential disappointment for existing property owners, FHBs may find opportunities by utilising KiwiSaver funds for deposits and taking advantage of low deposit lending allowances, potentially benefiting from a flat year for prices.
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What will buoy house prices in 2024?

A reduction in the supply of new houses, with a 21% decrease in consents for construction. 
The actual increase in housing supply may be only about 1% due to various factors affecting construction. 
Rising demand driven by a record net migration surge of 129,000 people in the past year. 
Increasing difficulties for potential tenants; rents are expected to rise, encouraging property investment. 
Anticipated drop in interest rates this year, likely to attract new home buyers to the market. 
Investors will deduct 80% of interest costs from rental income starting April 1, contributing to an increased demand. 
Some properties will be removed from the rental pool for returning foreign students and tourists. 
A possible rise in unemployment rate to 5%, affecting housing demand. 
Overall, the average pace of house price growth is expected to be higher in 2024 than in 2023. 
Cities, especially Auckland, are likely to experience the greatest price gains due to migration flows. 
Historical trends suggest rising prices eventually extend to the rest of the country. 
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DTIs: do they work and what is their desired effect?

The RBNZ is preparing to consult on DTI restrictions, considering the level, exemptions, and speed limits. 
CoreLogic's chief property economist, Kelvin Davidson, notes the difficulty in assessing the effectiveness of DTIs, citing Ireland and the UK with DTI caps between 3.5 and 4.5 times income. 
New Zealand did not have DTIs in 2020-2021, leading to a 45% increase in house prices, making its housing market a "canary in the coal mine" according to overseas economists. 
Davidson expects RBNZ to set DTI at seven times income, reflecting the high cost of NZ housing. 
A Bank of International Settlements study suggests that DTIs are effective in supporting financial stability and sustainable house prices. 
Some experts argue against the necessity and accuracy of RBNZ's DTI methodology. 
NZ's median house price is about nine times the median household disposable income, contributing to housing affordability challenges. 
DTIs are seen as a tool to tie house prices more closely to income growth, limiting the number of houses an individual can own and curbing investors' ability to take on more debt. 
In January 2021, 27% of new commitments from banks went to borrowers with DTI ratios above seven, but figures have decreased since then. 
DTI restrictions could take effect around the middle of the year if implemented.
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Pet adoption agencies back introduction of pet bond

Greyhound adoption rates are down, and return rates are up due to inflation, cost of living, and landlord restrictions. 
ACT Party's proposed 'pet bond' policy aims to counter tenant hesitation, allowing landlords to charge a higher bond for potential pet damages. 
Daniel Bohan from Greyhound as Pets (GAP) NZ links adoption changes to household income challenges and tenant restrictions. 
'Pet bond' policy could positively impact adoption agencies, with Bohan suggesting a practical alteration for a greyhound discount on the bond. 
SPCA NZ faces similar adoption challenges, supporting changes to make pet ownership easier for responsible tenants. 
Dr. Alison Vaughan appreciates the goal but suggests landlords and agencies consider pets negotiable. 
Adoption agency Nightrave Greyhound supports the 'pet bond,' seeing it as a positive step for pet owners.
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Growth in construction is the lowest since 2016

Annual growth in residential construction costs has fallen to 2.4%, the lowest since 2016, according to CoreLogic data. 
The current growth is well below the 10-year average of 4.5%, with the residential construction sector facing less pressure compared to its peak at the end of 2022. 
Easing material supply chains, stabilised timber prices, and modest falls for metal products are all contributing to the slowdown. 
General hardware prices, mainly for imported products, have seen some increases, and H1 insulation standards may be adding upward pressure on costs. 
The surge in net migration may help restrain construction sector wage growth, potentially keeping overall cost growth subdued. 
Decline in new dwelling consents indicates a softer phase for construction activity. 
While costs for new builds or commissioned projects may not get cheaper, they shouldn't spike higher either. 
Lower deposit requirements under LVR ratios for investing in new-build properties could incentivise developers to pursue new projects, contributing to housing affordability in the long run. 
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KO’s half-a-billion-dollar renovation programme

Kāinga Ora is undertaking a record number of renovations on hundreds of public homes. 
The two-year housing renewal program, costing half a billion dollars, is one of the country's largest housing projects. 
Since April, nearly 750 public homes have been renovated at a cost of $251 million, with an additional 820 slated for renovations this year. 
Average cost per completed renovation is over $336,000. 
Renovations include new kitchens, bathrooms, insulation, and double glazing to make homes warmer, dryer, and safer. 
The renovation work is separate from regular maintenance performed on all Kāinga Ora homes. 
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