NZ residential rental market news, February 16

Market slump to continue, 57 liquidations in Q4 2023, and build-to-rent change proposals.

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

Core Logic Housing Affordability Report

Housing affordability in New Zealand has improved since late 2021 but remains stretched due to recent house price rises and high interest rates. 
Mortgage repayments as a percentage of gross annual household income remained at 49% in Q4 2023, within the range of 49%-52% since Q1 2022. 
CoreLogic NZ Chief Property Economist Kelvin Davidson notes the stability in mortgage servicing offers little consolation, with housing affordability significantly stretched compared to the long-term average of 37%. 
Tauranga is the most stretched by mortgage repayments at 60%, followed by Auckland (55%), Hamilton and Christchurch (47% each), Wellington (44%), and Dunedin (43%). 
The house value to income ratio in New Zealand is seven times the average household income, an improvement from 8.6 in early 2022 but still above the long-term average of 5.9. 
Tauranga also leads in the value to income ratio at 8.5 in Q4 2023, indicating other markets are relatively stretched. 
The time required to save for a deposit has slightly increased to 9.3 years in Q4 2023 from 9.2 years in Q3 2023, above the long-term average of 7.9 years. 
Rental affordability has returned to its peak, with rents consuming 21.6% of gross average household income, with Christchurch experiencing the fastest rent increases relative to income. 
Davidson suggests that stretched affordability will naturally limit house price growth, predicting prices may rise in line with incomes over the next few years. 
Mortgage rates are expected to decrease within the next two years, potentially affecting the balance between prices and incomes, but lower rates could improve affordability. 
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Housing market slump will continue into this year

January 2024 saw the second lowest level of residential property sales in New Zealand in at least 32 years, with 2995 properties sold. 
This level of sales is only surpassed by January last year's record low of 2855 sales, marking both instances as the only January sales below 3000 since 1992. 
Sales have significantly declined from 3761 in January 2022 and 5135 in January 2021, with the record high in January sales being over 8000 properties in 2003/04. 
The slump in sales from last year is expected to continue into this year. 
Despite a high number of houses on the market, the low sales numbers indicate buyers have more choice and less pressure to agree on prices, potentially leading to tough price negotiations. 
The REINZ House Price Index showed mixed price movements in January, with declines in 13 of the 24 main urban districts, improvements in 10, and no change in one. 
The national median house price was $760,000 in January, down 2.5% compared to December 2023, with Auckland's median price dropping to $975,000, a 6.7% decrease from December. 
Auckland experienced a 17.2% decrease in sales compared to January last year. 
Despite cautious buyers due to challenges like cost of living and interest rate changes, there's increased buyer activity, particularly among first home buyers, and vendors are setting realistic prices. 
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Falls in house prices have been 'modest'

Global interest rate rises ended the 2020-22 house price boom with less damage than expected, according to Capital Economics (CE). 
CE forecasts a 7% price gain for New Zealand for the current and next year, the highest among the 12 countries studied. 
Nominal house price falls during the correction have been modest across most developed economies, with significant drops in New Zealand (15%), Canada (15%), and Germany (11%). 
Despite these falls, house prices are on average 20% above their 2019 levels, with more than 40% increase in the US. 
Recent data suggest house price falls have bottomed out in most countries, with fewer markets seeing declines in Q3 2023. 
High inflation makes real terms house price falls comparable to the 2007-8 period, with New Zealand experiencing a 23% real value drop. 
Mortgage affordability has worsened, with the cost of typical mortgage payments as a share of average income 30% higher than the average since 2005. 
House price declines have not been driven by improvements in mortgage affordability, with some markets like Canada, the US, and Australia facing mortgage costs around 50% above historical averages. 
The small declines in prices despite steep falls in demand and housing transactions highlight the market's resilience, particularly noted in New Zealand with a 15% price drop. 
Future housing market outcomes depend on supply conditions, with modest nominal price rises expected in New Zealand, the US, Australia, and the UK, despite stretched valuations. 
CE suggests that house prices in Germany, Denmark, and Sweden may perform worst in 2024 due to high mortgage costs and large rental markets, with limited falls if policy rates are cut as expected. 
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Average dwelling value increased 2% over the three months to January

New Zealand dwelling values rose by 2% in the three months to January, according to the Quotable Value House Price Index (HPI). 
The average value of NZ homes stood at $925,461 at the end of January, marking a 2% increase from the end of October 2023 and a 1% decrease from January last year. 
Queenstown-Lakes District recorded the highest average home value at $1,807,282 and the largest quarterly increase at 4.4%. 
Invercargill had the lowest average price at $466,898 and was the only major district with a negative quarterly value change, decreasing by -0.6%. 
QV Operations Manager James Wilson noted the volatility in housing data, particularly in less populous regions, but highlighted the overall trend of a strengthening housing market. 
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57 property construction company liquidations in Q4 2023

Construction company liquidations in New Zealand are currently twice as likely as other businesses, with 99 liquidations in the last quarter of last year. 
Liquidation rates have increased from 50-80 per quarter in 2021 and the first half of 2022 to over 100 since the September 2022 quarter. 
A net 38% of construction companies reported an increase in overdue debtors, the second-highest level since the Global Financial Crisis. 
Non-residential building construction firms are the most likely to be liquidated, despite a record high in non-residential work in mid-2023. 
Building consent figures have declined sharply, but this has not yet reflected in activity levels, indicating potential future stress in the construction industry. 
The construction industry is warned to be cautious about extending credit in the coming quarters, anticipating a tough year in 2024. 
Many construction companies are set up with limited working capital, leading to a high risk of failure when finances are strained. 
The industry's reliance on borrowed money for construction projects means that as borrowing costs rise, available funds for construction decrease. 
Master Builders CEO David Kelly noted the industry's historical boom and bust cycle, with a recent sharp correction and worsening economic conditions. 
The Ministry of Business, Innovation and Employment forecasts a moderation in building and construction activity to pre-pandemic levels, suggesting a return to a more sustainable balance between supply and demand. 
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Landlord brushes off dangerous electrical wiring

Landlord Makahu Sparks refused to repair dangerous electrical wiring, citing financial constraints. 
Sparks and tenants entered a fixed-term tenancy agreement in January 2023; issues were reported two days after moving in. 
Tenants encountered problems including broken switches, exposed wiring, a faulty dishwasher, missing smoke alarms, a non-compliant extractor fan, draughts, and a difficult-to-open ranch slider. 
Sparks responded to repair requests by stating he would not renew the tenancy and planned to sell the property, which the tribunal found to be retaliatory. 
Tribunal adjudicator Kristen Koller ruled that Sparks had breached his duty to maintain the property and was not convinced by Sparks' intention to sell. 
Sparks was ordered to pay the tenants $4457 in compensation for living conditions and $500 for the stress of an invalid 90-day notice. 
The tribunal highlighted the tenants' stress and inconvenience due to the landlord's neglect of maintenance issues. 
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Property traders buying up cheap two-bedroom units

Property flippers are now targeting older, two-bedroom units for renovation, having previously focused on standalone three-bedroom homes. 
These older units are purchased for around $300,000, modernised, and then sold for a profit, often to first-home buyers. 
In 2022, the percentage of properties resold within a year dropped to 1.5% from 2.6% in 2021, with Auckland and Christchurch experiencing slightly higher rates of short-term resales. 
The renovation trend has led to increased interest in properties requiring substantial upgrades, particularly those in original condition. 
Successful renovations that appeal to buyers include modern features such as double glazing, new kitchens and bathrooms, and high-quality finishes. 
Renovated units in Christchurch are selling for under $500,000, making them affordable options for first-home buyers. 
The market for flipped properties has expanded due to bank restrictions on purchasing properties needing significant maintenance. 
Property traders are also focusing on larger two-bedroom units where an extra bedroom can be added without substantial structural changes. 
The profit margin on flips may not be as high as it appears due to renovation costs and taxes, with a significant initial profit potentially reducing to a much smaller amount. 
There's a noticeable increase in property traders and buyers interested in renovated homes, particularly in areas like South Auckland and Hamilton, where the demand from first-home buyers is strong. 
Renovated properties are providing first-home buyers with modernised homes in established areas, catering to those lacking the skills or resources to undertake renovations themselves. 
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Why NZ has suddenly gone dark on interest rate cuts

Optimism about falling inflation and easing monetary policy in the US led to decreases in medium to long-term fixed-rate borrowing costs globally, including New Zealand. 
The cost for NZ banks to borrow at a fixed rate for two years decreased from 5.6% to 4.7%, leading to small cuts in lending rates of about 0.15%. 
The Reserve Bank of New Zealand (RBNZ) likely discouraged banks from passing on these reductions fully to maintain tight monetary policy. 
Recent data showed unemployment in NZ rose to only 4% in December, lower than the expected 4.2%, with job numbers growing by 0.4% instead of the forecasted 0.2%. 
Warnings from US central bankers about not being overly optimistic regarding monetary policy easing led to an increase in NZ bank borrowing costs to around 5.2%. 
Despite the increase in borrowing costs, banks have not passed on rate increases to customers due to previously unpassed reductions, absorbing the recent rise. 
Financial markets anticipate one more official cash rate increase by the RBNZ, potentially raising the rate from 5.5% to 5.75%. 
The outlook suggests that interest rate pressures will remain strong in NZ for the first half of this year, impacting economic growth and the housing market's recovery pace. 
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11 contracts on one home

A three-bedroom home in Christchurch received almost a dozen offers, indicating strong interest from first-home buyers in affordable suburbs. 
Homes priced between $500,000 and $700,000 are popular among first-home buyers, who are motivated by confidence in the market and the desire to secure homes before potential price increases. 
The home on Hills Road, Mairehau, attracted 100 groups during open homes, with 11 contracts presented at the deadline, mostly from first-home buyers. 
The sale price of the Hills Road property was confirmed to be above its $600,000 RV, appealing as a classic choice for first-home buyers with updates and a good-sized section. 
Mairehau is becoming a preferred location due to its affordability compared to neighbouring St Albans, offering similar conveniences. 
Increased interest from first-home buyers is partly due to the belief that interest rates have peaked and may drop, potentially leading to an increase in house prices. 
Near the $700,000 mark is considered the higher end of Christchurch’s first-home buyer market, with some buyers receiving financial help from parents. 
The First Home Grant scheme's $575,000 cap is challenging for buyers, leading them to consider properties in previously overlooked suburbs like Woolston, Bromley, and Hornby. 
There's a growing confidence in the market, especially among first-home buyers, with some investors also returning, focusing on student rentals, blocks of flats, or new builds. 
First-home buyers are advised not to overlook two-bedroom homes, which may offer more affordability and less competition. 
Many first-home buyers are young couples seeking standalone houses on freehold sections, increasingly working with mortgage brokers to navigate their purchasing options. 
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ANZ picks two more Reserve Bank rate hikes ahead

ANZ economists have revised their forecast for the Reserve Bank of New Zealand's (RBNZ) rate path, predicting 25 basis point increases in both February and April, taking the Official Cash Rate (OCR) to 6% from its current 5.5%. 
Forecast cuts have been delayed from August to February 2025 due to stronger than anticipated inflation pressures and recent economic data. 
Despite market expectations of rate cuts leading to a significant drop in yields, ANZ sees the policy as needing to intensify efforts to counteract inflation effectively. 
The risks around these rate forecasts are considered balanced, with potential for rate hikes to start sooner or cuts to come earlier than February 2025, depending on economic surprises. 
New labour market data showed a lower than expected rise in unemployment to 4% in the December quarter, suggesting the economy might be more resilient than anticipated. 
Factors such as higher domestic inflation, strong net migration gains, and rising commodity prices point towards a higher OCR. 
ANZ anticipates that if the RBNZ restarts the hiking cycle, it will likely include a follow-up hike in April to reach a 6% OCR, assuming no unexpected developments occur. 
The RBNZ might alternatively focus on communicating risks to support yields without immediately resorting to rate hikes. 
The new OCR forecasts suggest an increase in fixed-term interest rates, especially at the shorter end of the yield curve, which is more sensitive to RBNZ policy changes. 
Despite expectations for the OCR to peak at 6%, the two-year swap rate is not predicted to reach its October peak due to anticipated rate cuts in early 2025. 
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8% of Homeowners haven't renewed insurance

Over two-thirds of respondents in a Consumer NZ insurance satisfaction survey are concerned about the high costs of house insurance. 
8% of homeowners have let their insurance policies lapse due to affordability issues. 
House insurance costs have increased by 97% and contents insurance by 48% over the past decade. 
Wellington and Auckland have experienced the highest premium increases, with Wellington premiums for a standard house up by 29% from last year and Auckland by 26%. 
The rise in insurance costs is attributed to the cost of reinsurance, extreme weather events, and the use of risk-based pricing. 
Consumer NZ advises New Zealanders to review their insurance cover and shop around for better deals. 
Only 20% of survey respondents were likely to switch insurers in the next 12 months, highlighting difficulties in comparing insurance providers. 
To manage costs, homeowners can opt for a larger excess, reassess insurance needs for possibly lower coverage options, and seek out discounts for combined policies, claims-free records, and security features. 
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Govt considering overseas build-to-rent investors 

The government is considering allowing more overseas investment for build-to-rent housing, according to a leaked draft Cabinet paper. 
The coalition aims to amend the Overseas Investmest Act within its first 100 days to facilitate build-to-rent developments. 
Associate Finance Minister Chris Bishop proposes allowing foreign investment in any residential land for building new houses or facilities, provided the investor does not intend to reside in them. 
Currently, overseas investment in housing is restricted unless the investor is eligible to live in New Zealand. 
Bishop plans to issue a ministerial directive to signal New Zealand's openness to overseas investment for increasing housing supply. 
Labour's housing spokesperson, Kieran McAnulty, criticizes the proposal as excessive and beyond what was campaigned on. 
The proposal aims to improve housing supply and encourage competition in the rental market but would prevent the government from declining investments against the national interest. 
Implementing this exemption would make it impossible for future governments to reinstate restrictions due to international obligations. 
The National Party had to abandon a foreign buyers tax proposal due to coalition agreements and international obligations. 
This draft paper has not yet been presented to Cabinet, with further announcements expected after Cabinet consideration. 
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Investment fund aiming to fix the housing crisis

A $90 million Bay of Plenty Housing Equity Fund has been launched to address the region's severe housing shortage, with plans to eventually list on the stock market. 
The fund aims to increase the supply of affordable homes, including buy or rent-long term options, elder housing, housing on whenua Māori, crisis accommodation, public housing, and supported accommodation for disabled people. 
Five community organisations are contributing a total of $45 million, which will be matched with borrowed capital to reach the $90 million target. 
The initiative seeks to partner with iwi, community housing providers, and councils to scale housing projects, addressing the capital shortage for such ventures. 
Managed by New Ground Capital and Brightlight Impact Advisory, the fund aims to attract additional investors, potentially including government entities like ACC or the SuperFund, and KiwiSaver funds. 
The fund targets a return of CPI plus four percent to investors through development margins, rental returns, and property capital growth. 
Tauranga City Council has invested $10 million in the fund, highlighting its innovative and collaborative approach to providing affordable housing. 
The launch of the fund is juxtaposed against ongoing housing crises, such as emergency housing tenants in Ōpōtiki being told to leave their accommodations, underscoring the urgent need for more housing solutions. 
Despite the initiative, concerns remain regarding the speed of housing availability and the integration of private investment in social housing. 
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Tax changes needed to boost build-to-rent sector 

Kiwi Property Group is advocating for changes in tax and investment regulations to encourage build-to-rent developments, aiming to address New Zealand's affordable housing shortage. 
A recent survey by the company found 85% of respondents, especially younger individuals, would consider renting under a build-to-rent scheme if it meant avoiding typical rental barriers like quarterly inspections and restrictions on personalising their living space. 
CEO Clive Mackenzie highlighted the emerging potential of build-to-rent in New Zealand to offer quality accommodation, secure tenancies, and various amenities. 
Kiwi Property is preparing to launch 295 units for long-term rent at Auckland's Sylvia Park, marking a significant move towards build-to-rent developments in the country. 
The survey revealed dissatisfaction among over half of participants with traditional renting due to issues like short-term leases, inconsistent quality, and increasing rents. 
Build-to-rent projects, which are already established in the US, UK, Europe, and Australia, provide stable, long-term housing options. 
Kiwi Property also plans a build-to-rent development at LynnMall Shopping Centre, facilitated by its designation as a town centre. 
Simplicity, a KiwiSaver provider, has entered the build-to-rent market with a 330-unit project in Remuera, indicating a growing interest in this sector. 
Mackenzie calls for relaxed overseas investment rules and additional incentives to attract more investment in build-to-rent projects, citing Australia's approach of doubling the depreciation rate for these developments as an example. 
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NZers adjustment to higher rates about 80% complete

New Zealand mortgage holders are approximately 80% through transitioning to higher interest rates, according to Chris McDonald, the Reserve Bank's manager of system monitoring and analysis. 
The transition status has progressed from about two-thirds in early November, as per the Reserve Bank's financial stability report. 
The Reserve Bank of New Zealand (RBNZ) has closely monitored banks' management of the transition and the labour market, noting most homeowners manage mortgage payments while employed. 
Since October 2021, the RBNZ has increased the official cash rate (OCR) from 0.25% to 5.5%, leading to a rise in one-year mortgage rates from around 2.2% in early 2021 to approximately 7.3% to 8% for most borrowers. 
Christian Hawkesby, RBNZ's financial stability general manager and deputy governor, mentioned that house prices have stabilized within sustainable measures, but market activity suggests potential future price directions. 
Concerns were raised about the impact of record-level immigration on house prices, especially amid slowing housing construction, by Governor Adrian Orr. 
Committee members expressed worries about rising insurance premiums and the challenge of obtaining insurance following significant events like Cyclone Gabrielle. 
Orr highlighted the RBNZ's ongoing discussions with insurers and banks to ensure proactive management of risks. 
The RBNZ does not specifically monitor hardship programs offered by banks, but Orr noted that while arrears are increasing, they remain below the levels seen a decade ago. 
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FHBs active, investors cautious

First home buyers are increasingly active in the housing market, while investors remain cautious. 
Banks are gradually easing their lending criteria but are not aggressively competing for business. 
Uncertainty about debt-to-income (DTI) regulations and future interest rate directions is causing confusion among buyers. 
A net 46% of mortgage advisers reported seeing more first home buyers seeking advice, indicating strong interest from this group. 
Advisers note that banks are more supportive of first home buyers, including offering cash back and sharp rates, even for high loan-to-value ratios (LVRs). 
However, Kainga Ora's tighter criteria have made it slightly more difficult to get First Home Loans approved. 
Investor activity in the housing market began to increase in late 2023, with a net 28% of advisers seeing more investors in February, similar to January's figures. 
Lending to investors is challenged by strict LVR rules and banks' cautiousness, requiring evidence of ongoing costs like rates and insurance. 
A net 43% of mortgage brokers observed banks becoming more willing to lend, the most positive sentiment since May of the previous year. 
Most clients prefer to fix their interest rates for one year or less, with six months being particularly popular; 90% of brokers reported this preference, reflecting expectations of a future interest rate decrease. 
There is a slight decrease in property owners asking about refinancing their existing mortgages, indicating a mild downward trend in refinancing inquiries. 
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