NZ residential rental market news, March 22

Regional market overviews; the regions FHBs cannot afford, even with a 20% deposit; and GST bills for owners with AirBnBs.

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

Investor rental returns still need topping up to cover the mortgage

New Zealand’s residential real estate market is worth a combined $1.62 trillion. 
There was a 1.6% increase in average property values across NZ in the three months to February, on an annual basis however values fell -1.4% in the year to February. That’s the smallest annual drop since October 2022 (-0.6%). 
Property values in the country’s main urban centres and regional areas were all in positive territory in the three months to February. 
Tauranga was the strongest performing city area, with average property values increasing 2.7% in the three months to February, while within Auckland, Manukau saw a 3.5% rise. 
February sales volumes increased for the 10th consecutive month and were 19% higher than the same month last year. 
There were more than 69,000 sales in the year to February, still well below NZ’s 10-year average of more than 90,000 per year. 
There were 9,994 new listings over the four weeks ending 10th March, an increase on the same time last year but still short of the long-term average. 
Total stock on the market is up by around 6% on the same time last year. 
First home buyers’ market share of 26% remains consistently high, and there’s been an uptick in cash multiple property owner activity to 14% of buyers. 
National rental growth of 6.0% is running at historically high levels. 
Gross rental yields nationally remain at 3.2% (from a trough of 2.6% for much of 2022), the highest level since late 2020. 
Around 57% of NZ’s existing mortgages by value are currently fixed but are due to reprice onto a new (generally higher) mortgage rate over the next 12 months. 
Inflation seems to have passed its peak and the Reserve Bank will wait to see the effects of the final 5.5% OCR for this tightening cycle. 
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Tony Alexander: Survive to ‘25 - why we’re all holding on till interest rates drop

Commentary on New Zealand's economic growth prospects has become more negative since the start of the year, summarised by the phrase "Survive to ‘25". 
This reflects a view that 2023 will be challenging for many sectors, but conditions are expected to improve in 2024. 
Reasons for the pessimistic outlook include weaker household spending than expected, despite high net migration, and fears over further interest rate hikes. 
Additional concerns arise from property developers facing issues, labour hire companies entering liquidation, government warnings about the economic outlook, and probable depletion of pandemic-era savings. 
Optimism for 2025 is based on expectations of eased monetary policy, a stronger global economy, increasing house prices, an end to the pullback in consumer spending, substantial infrastructure projects, and the potential positive impact of continued strong net migration. 
The positive outlook is partly based on faith, given current cash flow pressures on businesses and households. 
Economic improvement is hard to envisage without a significant reduction in interest rates, potentially by at least 1% by mid-next year, emphasising the need to "Survive to ‘25".  
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Auckland, Tauranga, Kapiti Coast, Porirua and Queenstown are now unaffordable for typical first home buyers even if they have a 20% deposit

Home ownership in most parts of the country is now likely out of reach for typical first home buyers without a 20% deposit. 
Rotorua, Whanganui, Timaru, and Invercargill remain the only affordable urban centres for those on average wages to buy with a 10% deposit. 
Mortgage payments exceeding 40% of after-tax income are deemed unaffordable. This threshold is surpassed in all but the four mentioned areas when purchasing with a 10% deposit. 
In Auckland, mortgage payments for a home bought with a 10% deposit would consume 58.5% of a typical first home buying couple's after-tax income. 
With a 20% deposit, first home buyer affordability improves significantly, yet Auckland, Tauranga, Kapiti Coast, Porirua, and Queenstown remain unaffordable. 
Even with a 20% deposit, certain Auckland areas remain out of reach for average income earners, with Papakura being marginal and Franklin barely affordable. 
The challenge for many is accumulating even a 10% deposit due to high house prices, making a 20% deposit often unfeasible. 
The national lower quartile house price was $595,000 in February, necessitating deposits of $59,500 for 10% and $119,000 for 20%. 
In Auckland, the deposit amounts required rise to $81,000 for 10% and $162,000 for 20%. 
A couple on median wages for 25-29 year olds would need 3.9 years to save a 10% deposit and 7.6 years for a 20% deposit in Auckland, assuming they save 20% of their after-tax pay. 
Even with a 20% deposit, such couples likely couldn't afford the mortgage on a lower quartile-priced home in Auckland. 
Home ownership is becoming inaccessible not just for low-income individuals but also for those earning average wages. 
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Housing do-ups, extensions and major alteration work has steadily declined over the last two years

The building industry is facing a decline in both new home constructions and major alterations to existing homes. 
Structural alterations, significant for tradies' work, are in decline, with a 10.8% drop in consents over two years. 
Despite the fall in the volume of alteration work, the total value of residential alterations consented increased to over $2.3 billion in the last year. 
The number of consents for residential alterations has decreased from 26,947 in 2022 to 24,049 in 2024. 
The average value per consent increased by 18.7%, from $81,010 to $96,161, indicating rising costs or shifts towards more complex or high-quality projects. 
This downturn in alteration work is consistent across all six main urban centres in the country.
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The housing market looks set to end the summer season with a big overhang of unsold stock

The housing market is experiencing high levels of unsold stock as it approaches the end of its peak selling season. 
As of the end of January, there were 27,261 residential properties on the market, but only 5,693 sales were recorded in February, equating to a sales rate of 21%. 
This year's February sales rate showed a slight improvement from last year's 20% but is significantly lower compared to previous years: 30% in 2022, 64% in 2021, and 36% in 2020. 
The total stock on the market rose to 31,424 by the end of February, marking an 8% increase from the previous year and the highest for any month since June 2015. 
Without a significant increase in March sales, which currently seems unlikely, the market is expected to enter the winter with a substantial surplus of unsold properties, potentially impacting buying decisions and prices. 
Some vendors may withdraw their properties from the market temporarily, but underlying motivations for selling, such as financial stress or a desire to change homes, persist. 
A considerable number of potential vendors are likely to remain, creating pressure on some to sell irrespective of market conditions. 
The current market dynamic favours buyers, offering them a wide selection of properties and ample decision-making time.  
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Seven straight months of rent hikes: Prices rising at double the speed

Rents for new tenancies increased by 6% in the year to February, continuing a trend of growth at least double the long-term average, driven by rising wages, high demand, and slightly restricted supply. 
Net migration figures showed a 12-month total of 133,836, with a hint that the peak may have passed, but the numbers remain high, sustaining demand for rental properties. 
First home buyer activity has slightly decreased, from over 26% in the latter half of the previous year to 25.5% in the early months of this year, facing increased competition from cashed-up multiple property owners. 
The reinstatement of mortgage interest deductibility for investors is back, potentially affecting the market, though lower mortgage rates might be a more significant factor for property investors. 
Property recovery is spreading with nearly 60% of suburbs experiencing value rises since December, with notable increases in parts of Auckland, Wellington, and areas like Queenstown and the West Coast. 
Upcoming GDP data for Q4 is anticipated, possibly showing a slight increase (around 0.2%), potentially avoiding a technical recession following a 0.3% drop in Q3, though the economic sentiment may still feel recessionary. 
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Homeowners Face GST Bills on Short-term Rentals Beyond $60K Annual Income

Homeowners renting out properties on short-term holiday sites may face significant GST bills upon sale if their annual income exceeds $60,000. 
Property owners are liable for 15% GST on capital gains, potentially amounting to hundreds of thousands of dollars. 
Tax experts advise keeping earnings below the GST threshold and consulting with an accountant before reaching it. 
Some homeowners attempt to avoid detection by the IRD, risking future audits and financial penalties. 
GST is zero-rated only when properties are sold to another GST-registered entity; sales to residential buyers or investors incur GST. 
Lifestyle property owners and those voluntarily registering for GST to claim expenses also fall into the GST net upon sale. 
GST-registered vendors cannot always cover their GST bill by increasing the sale price, as buyers typically pay market value. 
Even after deregistering for GST, homeowners are still liable for 15% GST on capital gains made during their registration period. 
Buyers and sellers should consult tax professionals to understand GST implications, especially since over 200 properties on OneRoof require GST payments.  
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Slight Cooling in Buyer Interest Amid Bank Lending Ease

Buyer interest in residential property persists but has slightly declined. 
Banks are gradually relaxing their lending criteria. 
Borrowers overwhelmingly prefer fixing interest rates for one year or less. 
A decline in the number of first home buyers seeking mortgage advice, with a net 24% of advisers noting an increase, down from a net 46%. 
Some easing in bank requirements for first home buyers, including considerations for boarder income and slight relaxations for high LVR borrowers. 
Investor interest in the market remains, with a net 26% of brokers observing more investors seeking advice. 
Banks are modifying their lending criteria, making it slightly easier for investors in terms of income calculations and DTI considerations. 
A decrease in lenders' willingness to advance funds, with a net 24% of brokers noting this trend, down from 43%. 
A significant preference among borrowers for fixing interest rates for no longer than one year. 
An increase in property owners inquiring about refinancing options, with a net 33% of brokers reporting more requests.
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NZ Banks Seek Looser Debt-to-Income Restrictions Amid Regulatory Changes

NZ Banking Association (NZBA) seeks relaxation of proposed debt-to-income (DTI) restrictions due to banks' internal conservatism. 
NZBA suggests raising the DTI speed limit for owner-occupiers to a minimum of 25% and for investors to 30%. 
After initial opposition, NZBA now supports DTI implementation but calls for adjustments to LVR ratios for investors. 
NZBA emphasizes the need for public education on DTI implications to maintain banking system confidence. 
Concerns raised over DTI potentially favouring high-income earners and impacting small business lending. 
NZBA requests clarity on operational aspects of DTI, including lending discretion within DTI settings and income calculation methods. 
Reserve Bank of New Zealand (RBNZ) to make a final decision on DTI in June, with implementation as soon as possible and operational readiness for new reporting required by April. 
Introduction of DTI regulations coincides with changes to the Credit Contracts and Consumer Finance Act (CCCFA), potentially causing lender and consumer confusion. 
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BusinessNZ Urges Review of Proposed DTI Restrictions for Fairness and Efficiency

BusinessNZ calls for a cost-benefit analysis of debt-to-income (DTI) restrictions before implementation. 
Questions the necessity of DTIs, noting banks' existing incentives to minimise loan defaults. 
Highlights the resilience of banks to financial shocks, as shown by RBNZ stress tests. 
Advocates for policy focus outside RBNZ’s remit, such as increasing residential construction and relaxing building regulations. 
Suggests an independent review of RBNZ's DTI policy by the Treasury. 
Notes the proposed DTI restrictions apply only to banks, potentially driving lending to less regulated sectors. 
Expresses concern over DTIs' blunt assessment of financial risk and potential adverse impacts on specific groups, including lower income earners and small business finance. 
Suggests DTI restrictions should be designed to be effective in boom times but not overly restrictive in normal conditions. 
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Regional Real Estate Insights: Varied Market Strengths Across New Zealand 

Northland: Experiences significantly lower attendance at open homes and reduced interest from first home buyers and investors compared to the national average, indicating a weaker real estate market. 
Auckland: Despite a population surge, sees a decline in open home attendance and interest from first home buyers and investors, with a surprisingly weak market. 
Bay of Plenty: Reports slightly below-average interest in open homes, first home buyers, and investors, with FOMO also below average. 
Waikato: Shows stronger than average open home attendance and investor interest, matching national averages in other aspects. 
Gisborne: Faces potential underperformance in the housing market due to a surplus in new construction and weakening demand post-pandemic. 
Hawke’s Bay: Displays exceptional market strength with significant increases in open home attendance, first home buyer, and investor interest. 
Manawatu-Wanganui: Exhibits stronger than average open home attendance and first home buyer interest but average investor interest. 
Taranaki: Stability in house prices is observed with a long-term trend towards price normalisation and potential future strength based on dairy income and affordability. 
Wellington: Experiences a decline in investor interest amidst public sector redundancies and infrastructural concerns, with a moderate level of FOMO. 
Nelson, Tasman, Marlborough: Shows near-average market activity with a slight underperformance in investor interest but healthy first home buyer activity. 
Canterbury: Reveals stronger than average investor interest and first home buyer activity, indicating a slightly more robust market. 
Dunedin City/Otago: Reports about average market conditions with a slight increase in investor interest and first home buyer activity. 
Queenstown Lakes: Stands out with stronger than average market activity, particularly in open home attendance and investor interest. 
Southland: Demonstrates good price gains and a stronger than average market performance, with a recent rise in house prices.  
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