NZ residential rental market news, May 19

The 2023 budget, a spotlight shined on fire safety, and OCR predictions

The bullet points from this week:

Investors' market share hits historic low

Residential real estate is worth $1.57 trillion. 
House sales in the 12 months to April 2023 are down -30.5% on last year, 
Over the four weeks ending 7 May 2023, there were 6,778 new listings, -23% down on the same period last year. 
Total listings on the market is starting to decline, but remains 15% higher than the five-year average. Nelson / Tasman has the highest volume of total listings compared to the same time last year, and Gisborne has the lowest. 
Property values fell -2.6% in the past three months, and -10.3% over the year. 
The upper quartile of the market is leading the downturn, with values down -13.1% from the peak, while the lower quartile has fallen a smaller -8.5%.
Wellington is the weakest of the main centres, with values down 20.8% from the peak, while Christchurch is only 6.2% down. 
Mortgaged investors share of property purchases sunk to a new record low of 19.9% in April, while cash investors (16.1%) and FHBs (25.3%) are at record highs for these types of buyers. 
Rental growth remains more subdued than this time last year, running at 3-4% nationally over the past 12 months, although it’s a mixed bag around the main centres. 
Of the main centres, Tauranga had the largest annual change in rent (9.0%) making it the most expensive main centre to rent ($614). 
Gross rental yields nationally have reached 3% for the first time since March 2021, mainly due to the continued falls in property values. This is still relatively low by past standards, and is less than the income returns on some other asset classes (e.g. term deposits). 
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FHBs benefiting - but only slightly

Rising incomes had a greater impact on housing affordability for first home buyers than changes in house prices or mortgage interest rates in April. 
Prices at the lower end of the market had modest movement, with the national lower quartile selling price declining slightly from March to April. 
However, compared to April last year and the market peak in November 2021, the lower quartile price remains significantly lower. 
Mortgage interest rates saw marginal movement in April, but they were higher compared to the same time last year and significantly higher than the cyclical low in May 2021. 
The combined effects of changes in mortgage rates and lower quartile prices had minimal impact on mortgage payments. 
Affordability in April was mainly influenced by the ongoing rise in incomes. 
After-tax pay for couples aged 25-29 who work full time increased slightly from March to April, providing additional affordability. 
First home buyers with a 10% deposit would be better off by about $8.69 a week, and those with a 20% deposit would be better off by $7.87 a week when combining the slight decline in mortgage payments and the increase in after-tax pay. 
While the improvement in affordability may not be significant, every little bit helps in the current high inflation environment. 
The tables provided in the report show affordability measures for first home buyers with either 10% or 20% deposits in significant urban districts throughout the country. 
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The Budget: Can NZ build 3,000 more public homes?

The Government's funding allocation for thousands of public homes will provide a steady stream of construction work during a downturn. 
The Budget announced funding for an additional 3000 public homes by June 2025. 
Funding was also allocated for 322 new homes for Maori and 400 relocatable cabins for those displaced by weather events. 
The cost of building the new public houses is estimated to be $3.1 billion in capital investment, with $465 million in operational costs. 
While there are concerns about the industry's capacity to deliver on promises due to past failures, industry advocates welcome the funding increase for public housing. 
The industry is expected to have the capacity to meet the public housing build goal and benefit from improvements in building product supply chains. 
The funding for public housing, combined with the resilience plan for infrastructure, aims to help maintain the construction pipeline amid slowing demand in the private residential sector. 
The allocation of funds for public housing aims to create opportunities for workers and apprentices, preventing a loss of talent during the downturn.  
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Tony Alexander on the budget

The recent government budget does not offer much in terms of addressing the cost of living for most families. 
The government has limited resources due to lack of fiscal control, pandemic response, and recent flooding, resulting in a net spending increase of $27 billion over the next five years. 
The timing for achieving a surplus has been delayed, but the net debt track is not expected to impact the country's credit rating. 
The business sector receives minimal benefits, except for some coordination in research and additional apprenticeship places. 
A 20% tax rebate for video game developers reflects successful public lobbying and aims to prevent the sector from moving to Australia. 
Treasury no longer predicts a recession, with the return of foreign tourists and rebuilding efforts contributing to economic stimulus. 
House prices are expected to rise due to migration, pent-up buyer demand, declining construction, and a tight labor market. 
Businesses are unlikely to lay off staff as they anticipate a quick rebound in activity. 
Job security and low unemployment rates will support the housing market. 
The main risk is interest rates, with Treasury hoping for a monetary policy easing, but inflation risks may hinder such a move. 
Overall, the budget is restrained for a Labour Government in an election year, focusing on fiscal control rather than expansive spending. 
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Wellington fire puts spotlight on safety regulations

The fire at Loafers Lodge in Wellington has raised questions about safety regulations applicable to the hostel. 
Loafers Lodge was originally built as a commercial building in the 1970s and converted into a hostel in 2006. 
The building had 94 bedrooms, shared kitchens, and common areas on every floor, with approximately 92 residents. 
Although emergency housing is exempt from residential tenancy laws, the lodge was not currently used for emergency housing. 
Compliance with building health and safety laws, such as the Building Code, local council regulations, and FENZ legislation, is necessary for boarding houses. 
Existing buildings have compliance schedules for specified systems and require a building warrant of fitness. 
Retroactive upgrades to comply with the latest Building Code are not required for existing buildings unless there are alterations or a change of use. 
Wellington City Council issued a building warrant of fitness for Loafers Lodge in March, with no concerns raised during the inspection. 
Fire and Emergency New Zealand (FENZ) confirmed the absence of sprinklers in the building, and investigations are ongoing regarding the activation of fire alarms. 
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Westpac releases Economic Overview & offers predictions

Economists disagree on the impact of higher interest rates on house prices. 
Westpac's chief economist predicts a cash rate peak of 6% and expects house prices to stabilize sooner than expected. 
The Reserve Bank of New Zealand (RBNZ) faces challenges in bringing inflation back within the target range of 1% to 3%. 
ANZ economists revised their forecast, expecting two consecutive 0.25 percentage point hikes in the cash rate. 
Increased migration contributes to housing demand and is unlikely to affect house prices negatively. 
Kiwibank's economists anticipate house prices to bottom out at 20% below the peak, with a slowdown in the rate of decline. 
A 6% cash rate peak could further pressure house prices downward, but Kiwibank's chief economist believes it's not likely. 
BNZ's head of research states that a 5.5%, 5.75%, or 6% cash rate peak would not significantly affect house prices due to increased demand from migrants. 
ASB economists expect house prices to stabilize and have revised their forecast for price falls from peak to trough. 
It's uncertain whether banks will pass on the full cost of OCR rises to mortgage holders due to competition and the need to attract borrowers. 
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