NZ residential rental market news, May 24

Leaky buildings ruled non-deductible, Goodbye to KO's board & First Home Grants Scheme, and Median rent hits $600 p/w.

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

RBNZ Keeps OCR at 5.5%, Signals Higher Rates for Longer 

RBNZ holds the OCR at 5.5%, with inflation expected to reach target by end of 2024. 
Rates may need to stay higher for longer, signalling a hawkish monetary policy. 
Orr criticises the lack of competition among major banks and aims to break their pricing power. 
The economy faces new job insecurity, depletion of pandemic savings, and tax collection impacts. 
Cash flow pressures affect hospitality, retail, and home building sectors, risking business closures. 
Mortgage rate cuts are unlikely until 2025, challenging new borrowers and existing mortgage holders. 
The committee discussed a possible OCR increase but expects inflation to decline within the target range. 
Financial markets reacted to the hawkish message, with the NZ dollar rallying. 
OCR forecast slightly increased to 5.65% for Q4 2023. 
Service sector inflation and other domestic costs contribute to persistent inflation concerns. 
RBNZ expects to start cutting the OCR from February 2025, depending on economic conditions. 
Upcoming Budget impacts on government and private spending remain to be assessed. 
Higher dwelling rents, insurance costs, and council rates are cited as inflation drivers. 
Restrictive monetary policy has reduced capacity pressures and is lowering consumer price inflation. 
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House Price Growth Forecast Lowered to 2% Amid Economic Challenges

BNZ economists revise house price forecast to a 2% rise for 2024. 
The initial forecast was a 5% gain; the new forecast has downside risks. 
Last year’s house price gains were seen as a false start. 
Current sluggish momentum due to high mortgage rates, weak economy, and increased unsold inventory. 
House prices are expected to rise 7% in 2025. 
The latest REINZ data shows no growth in house prices from January to April, seasonally adjusted. 
House prices are 3% above February 2023 cycle low. 
Elevated activity among first home buyers; low investor interest. 
New investor lending is about 16% of the total and hasn't recovered. 
High interest rates, soaring insurance, rates, and maintenance costs deter investors. 
Potential small lift in investor selling due to Brightline Test change in July. 
Economic and labour market conditions, higher mortgage rates, and unsold inventory reduce house price support. 
Mortgage rates are expected to trend lower next year, supporting future price upswing. 
Affordability and cash flow constraints will limit the magnitude of the upturn.  
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Economic Struggles Worsen: Stagnant Growth, Job Losses, and Business Cash Flow Issues

Economic growth is struggling, with only 0.6% growth despite a 2.9% population increase last year. 
The economy has contracted in four of the past five quarters, with worsening conditions. 
Job growth has stagnated since mid-last year, and unemployment has risen to 4.3%. 
The RBNZ and Government are not taking action to prevent economic weakness and job losses. 
The RBNZ aims to stall the economy, and the Government is reducing a bloated public service. 
The immediate economic outlook is bleak due to monetary policy tightening, job insecurity, depleted pandemic savings, and catch-up tax collection. 
Cash flow pressures are particularly affecting hospitality, retail, and home building sectors. 
Many businesses may not survive until 2025 due to insufficient cash flows. 
Business owners may not acknowledge their financial struggles until it is too late. 
Experienced individuals should advise struggling business owners to consider closing before facing severe consequences. 
There is a psychological cycle where business owners must accept their financial reality. 
Support from experienced individuals can help business owners navigate their financial difficulties.   
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RBNZ Data Shows Increase in New Mortgages but Low Impact from Proposed DTI Limits 

The number of new mortgages in the March quarter increased by 11.5% from the previous quarter, totalling $14.4 billion. 
This is a decrease from $17.6 billion in the last quarter of the previous year. 
31% of new mortgages in the March quarter had a DTI of 5. 
This is below the RBNZ's proposed DTI limits: 20% of owner-occupier mortgages with a DTI over 6 and 20% of investor mortgages with a DTI over 7. 
Proposed DTI limits would have curbed the 2020-2021 market frenzy. 
February saw the lowest monthly share of new mortgages with a DTI of 5 since 2017, at 29.2%. 
In the first quarter, 22.6% of new mortgages to first home buyers (FHBs) had a DTI of 5, the lowest since data collection began. 
The annual drop in FHBs with a DTI of 5 was 5.8%, from 28.4% last March to 22.6% this March. 
The share of lending to FHBs with a DTI of 5 and LVR of 80% dropped from 9.3% last year to 6.2% this year. 
Gross income of FHBs for the quarter was $151,300, a 1.1% increase from last year. 
48.9% of owner-occupiers with investment collateral had mortgages with a DTI of 5 in the first quarter, down to 40.9% in February. 
Investors saw an increase in DTI of 5 from 42.4% last quarter to 46.5% this quarter. 
Lending with a DTI of 7 increased from 6.1% last quarter to 7.4% this quarter, with a peak of 26.5% in January 2021. 
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NZ Property Listings Surge, Movers’ Share of Purchases Rises to 27% 

The surge in available listings reshapes buyer options. 
Movers' share of purchases rose to 27% in April from 26% in Q1 2024. 
FHBs' purchase share decreased to 25% in April. 
Mortgaged multiple property owners maintain 20-21% of activity. 
Pent-up demand for owner-occupiers to shift is emerging. 
New listings in April were nearly 9% higher than last year. 
Increased listings provide more choices for all buyer types. 
Brightline Test changes may prompt more investor sales. 
Increased mover activity unlikely to crowd out other buyers. 
NZ residential real estate market valued at $1.63 trillion. 
Average property values increased 0.6% in the three months to April. 
Wellington and Dunedin saw the strongest value increases. 
April sales volumes increased for 12th consecutive month, up 15% from April 2023. 
Total sales in the year to April are below the 10-year average. 
Total market stock 27% higher than the five-year average. 
National rental growth slowed to 4.2% in the year to April. 
Gross rental yields at 3.2%, highest since late 2020. 
60% of existing mortgages due to reprice onto higher rates. 
Inflation has peaked; RBNZ waiting on 5.5% OCR effects. 
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Improving Affordability for First Home Buyers Despite High Mortgage Rates 

Housing affordability for first home buyers is improving. 
Declining mortgage interest rates contribute to better affordability. 
Average two-year fixed mortgage rates dropped from 7.04% to 6.73%. 
House prices at the lower end have remained steady around $590,000. 
The current lower quartile price is well below the 2021 high of $670,000. 
Incomes for people aged 25-29 have risen, supporting affordability. 
Representative take-home pay for a first home buying couple is $2056 a week. 
Deposit requirements for a $590,000 home remain the same as last year. 
Mortgage payments for a $590,000 home with a 10% deposit are around $893 a week. 
Mortgage payments for the same home with a 20% deposit are around $705 a week. 
Mortgage payments consume 43% of take-home pay for buyers with a 10% deposit. 
Mortgage payments consume 34% of take-home pay for buyers with a 20% deposit. 
Affordability measures have improved since November last year. 
Regional variations show Auckland remains unaffordable for average first home buyers.     
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Buyers Swamped with New Builds in South Auckland Amid Developer Struggles 

Buyers in South Auckland, especially Papatoetoe, face an abundance of new-build options. 
Nearly half of Papatoetoe's listings are newly finished homes. 
High development activity in 2021 and 2022 led to a surge in new-build completions. 
New listings in Papatoetoe increased by 64% in the first four months of this year. 
Developers face challenges selling due to delays and increased costs. 
Many new builds are selling below their original purchase price. 
Developers are adapting by enhancing builds, like adding ensuites to every bedroom. 
Recent activity suggests a slight market improvement, with some new builds receiving offers above $800,000. 
Demand remains for existing older homes, particularly among young tradies looking to add value. 
Developers still seek properties with density potential that can be rented out in the interim.   
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Bright-Line Rule Change Expected to Increase Property Listings and Tax Relief 

Ray White AT Realty urges landlords to auction properties on July 2, after bright-line rule changes. 
Bright-line rule reduction from 10 years to two years takes effect on July 1. 
Change is expected to bring tax relief to property investors and increase market listings. 
Current rule taxes capital gains on non-primary residences sold within 10 years of purchase. 
The National Party reduced bright-line period and restored interest deductibility for rental properties. 
Ray White AT Realty anticipates a surge in listings and advises clients to list properties before July 1. 
The timeline includes staging and photos on May 30-31, campaign start on June 5, and auction on July 2 or 9. 
Higher interest rates and healthy homes standards costs are pressuring investors. 
Some investors who bought between 2021-2023 may face losses, while those who bought between 2019-2021 may profit. 
An increase in listings could provide more opportunities for buyers and sharply priced properties. 
Property Brokers’ David Faulkner expects sales mainly from financially stressed owners. 
Cashed-up investors might re-enter the market due to favourable buying conditions. 
Valocity’s Wayne Shum and QV’s James Wilson do not expect a significant impact on the rental market from the rule change. 
Long-term rental income remains the primary focus for most investors. 
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National Median Rent Hits $600 a Week for New Tenancies in Q1

National median rent for new tenancies hit $600 a week in Q1. 
Rent increased by $20 (3.4%) from Q4 last year and $35 (6.2%) from Q1 last year. 
Two-bedroom units/apartments saw the largest annual increase of $40 (7.1%). 
Median rent for three-bedroom houses rose by $30 (4.8%) annually. 
One-bedroom units/apartments had the smallest increase of $20 (4.7%). 
Auckland median rent increased by $50 (8.3%), from $600 to $650. 
Hamilton median rent rose by $30, from $520 to $550. 
Tauranga median rent increased by $45, from $650 to $695. 
Wellington City's median rent remained at $650, with fluctuations in between. 
Christchurch median rent increased by $50 (10%), from $500 to $550. 
Dunedin median rent rose by $50, from $550 to $600. 
Rent data from bonds received by Tenancy Services is a leading indicator of rental trends. 
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Build to Rent Offers Hope Amid Difficult Renting Conditions – A Podcast 

Renting has become harder over the past decade with fewer properties and increasing rents. 
The quality of rental properties has not significantly improved. 
Regulatory settings for renters are slowly improving. 
Sufficient renters' rights are needed due to insecure and problematic renting conditions. 
Build to rent developments offer hope with 10-year rental agreements. 
Institutional landlords are preferred over accidental landlords for stability. 
Build to rent provides tenure and financial security with predictable rent increases. 
Build to rent adds housing supply specifically for renting, which is beneficial. 
New rental supply helps alleviate pressures in emergency and social housing. 
Disappointment over the fractured Labour-National consensus on medium density residential standards (MDRS). 
Consensus on MDRS showed potential for bipartisan solutions to structural problems. 
Eaqub discusses various issues like NIMBYS, the construction sector, local government, rent controls, and more. 
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Government Reallocates $245M to Social Housing, Scraps First Home Grants Scheme 

Government scraps the First Home Grants scheme, reallocating $245 million over four years to social housing. 
Announces $140 million for 1500 new social housing units over the next two years through community housing providers. 
Community Housing Aotearoa welcomes the investment, allowing stalled projects to proceed. 
500 homes were previously stalled due to lack of funding. 
25-year contracts with the government ensure payment of market rent, aiding in securing finance for new developments. 
Community housing providers are exploring new finance sources, including government lending and bond aggregators. 
Government capital reduces borrowing and interest costs, combined with market rent payments for effective results. 
Community housing providers also handle emergency and transitional housing. 
Housing Minister Chris Bishop emphasizes the reprioritization of expenditure towards social housing. 
First Home Partner shared ownership scheme by Kāinga Ora has run out of funding, with no commitment for more. 
Government focuses on a comprehensive housing plan, aiming to unlock land and build infrastructure. 
The goal is to reduce rents and house prices, making housing more affordable.  
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Kāinga Ora's $2 Billion Land Programme Faces Delays, No Construction Dates Set  

Kāinga Ora Land Programme allows borrowing up to $2 billion for land purchases and development costs. 
Since 2021, $86.7 million has been spent on acquiring three pieces of land. 
Acquired lands: 95.3-hectare Ferncliffe Farm in Tauranga, a 2016m² site in Wellington, and a 3.68-hectare site in Christchurch. 
Additional $1.9 million spent on development, feasibility, and planning. 
Projects are still in design and planning stages with no confirmed construction dates. 
Detailed business cases and approvals required before contracting development partners. 
Government probe found Kāinga Ora's remit has broadened, including the land programme. 
Stakeholders claimed the agency may have paid above market value for the land. 
Housing Minister Chris Bishop mentioned a new Kāinga Ora chair as part of a turnaround plan. 
Nearly 1300 homes, including 690 KiwiBuild homes, were put on hold following the government review. 
KiwiBuild aimed to build 100,000 homes over 10 years, established in 2018 by the previous Labour government.  
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Kāinga Ora Review Finds Financial Unsustainability and Calls for Immediate Reforms  

An independent review found the social housing system is financially unsustainable and is not delivering needed homes. 
Sir Bill English conducted the review of Kāinga Ora's financial situation, procurement, and asset management. 
The report found Kāinga Ora is not financially viable, lacks value for money, and lacks transparency. 
Seven recommendations were made; four will be implemented immediately by the government. 
The Cabinet agreed to align contractual arrangements across Kāinga Ora and Community Housing Providers and refresh the Kāinga Ora Board. 
Ministers will set expectations for the new board to develop a robust financial performance plan. 
Kāinga Ora's operating deficit is forecast to grow from $520 million in 2022/23 to over $700 million in 2026/27. 
Debt is expected to increase to $23 billion, with a forecast cash requirement from the Crown of $21.4 billion over four years. 
Each New Zealander would effectively pay about $4000 for this activity. 
Simon Moutter will start as the new chair of Kāinga Ora on 4 June. 
Further board composition changes are expected by July. 
Ministers will issue a new Letter of Expectations focusing on fiscal sustainability and value for money. 
Houses built by Kāinga Ora are currently more expensive than those by the private sector due to bespoke developments. 
No mass sell-off of state houses is planned; the focus is on improving social housing. 
Kāinga Ora has been operating under the assumption of easy access to more funding since 2018. 
Other recommendations from English's review will be considered in the coming months.  
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Court Rules Leaky Building Remediation as Non-Deductible Capital Work 

The leaky building crisis has caused uncertainty about whether remediation is deductible or non-deductible. 
Precedent cases are old, typically involving railways and gas pipes. 
Financial devastation often prevents affected individuals from challenging the IRD. 
The recent case of E & G Lawrence v CIR provides some clarity, unfavourably for investors. 
The Lawrences bought a house in Tauranga in 2014 for $350,000, with a GV of $305,000. 
They encountered leaks in 2017, leading to extensive repairs and redesigns. 
Repairs included roof and guttering redesign, recladding, and replacing non-compliant structures. 
The total claimed costs were $61,140 in 2018 and $303,654 in 2019. 
The IRD denied the claims, citing capital limitation in section DA2(1). 
The property remained a rental, maintaining a nexus with income, per section DA 1(1). 
The court used three tests to determine the nature of the work: reconstruction, character change, and single project. 
The IRD’s building expert testified that the work substantially reconstructed the house. 
The court ruled the work as capital in nature and non-deductible. 
The decision was described as “clear-cut,” leading to the IRD denying the deductions. 
This case reinforces the IRD's stance on extensive remediation being non-deductible. 
The Lawrences' efforts clarify the line between deductible repairs and non-deductible capital works. 
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