NZ residential rental market news, January 26

The pros and cons of DTI restrictions, when will the OCR move again, and a look at 2023's BIG property sales.

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

FHB market share sets new record

Residential real estate is worth $1.59 trillion. 
National property values rose 1% in December, the third increase a row. The main centres have generally been recording larger increases, with some provincial markets a little softer. 
Sales volumes in December, across both private deals and real estate agents, were about 28% higher than the same month last year, the eighth rise in a row. And on a 12-month total basis, sales have now risen to 66,000, up from the April trough of less than 61,000, but still well below the average of 90-95,000 per year. 
New listings activity has started to rise back again after the holiday period, with 3,146 new listings over the four weeks ending 14 January, well below the 3,815 from the same time last year and the five year average (4,035). 
Total stock on the market is 31,785, 15% below this time last year. 
Rental growth is still running at historically high levels, and was 7.0% in the year to December (Stats NZ new tenancy/flow measure) – that remains well above the long term average growth rate of 3.2%, and reflects further growth in wages, as well as a tightening supply and demand balance. 
Gross rental yields nationally have edged back up to 3.2% (from a trough of 2.6% for much of 2022), the highest level since late 2020. However, that’s still relatively low by past standards, and is less than the income returns on some other asset classes (e.g. term deposits). 
Around 55% 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. Mortgage rates are close to, or already at, their peak. 
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1900+ new dwellings completed in Auckland in November  

Auckland's record-breaking trend in new home construction continued in November. 
Auckland Council issued 1925 Code Compliance Certificates (CCCs) for new dwellings in November, following the October peak of 1949 and September's 1927. 
The three months from September to November marked the only period with CCCs above 1800 in any month since 2013 when the Council began compiling figures. 
CCCs are crucial indicators of new housing supply, issued upon building completion. 
November figures were just below the all-time high, but the 18,002 CCCs in the 12 months ending November set a new record. 
Residential construction in Auckland has surged, with a 30% increase in new homes completed compared to the previous 12 months. 
However, building consents for new dwellings in Auckland have steadily declined since peaking in March 2022, with only 1164 issued in November 2023. 
The decline in building consents suggests a potential decrease in new home completions in the region as existing projects finish and fewer new projects start. 
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High Auckland rents surpassed by BOP

Rental prices in New Zealand reached an all-time high, with a median weekly rent of $625 in December, marking the first increase in almost six months. 
Auckland, traditionally expensive, was surpassed by the Bay of Plenty as the most expensive region in December. 
Rent in the Bay of Plenty rose by 11.7% compared to the previous year, reaching $670 per week. 
Despite a recent dip in Auckland's rent prices, it remains one of the pricier places to live, often rivalling Wellington. 
Marlborough was the only region with a year-on-year decrease in rental prices, experiencing a decline of 0.9% to a median weekly rent of $530. 
Southland remained the most affordable place to rent in New Zealand, with a median price of $440 per week. 
Rental prices in Auckland and Christchurch hit record highs, particularly for smaller properties. 
Nationwide demand for rental properties decreased by 19% compared to November, with major hubs like Auckland, Canterbury, and Wellington experiencing drops. 
Gisborne and Marlborough were exceptions, with increased demand of 42% and 61%, respectively, in December. 
Despite a 21% increase in available listings in Gisborne, demand outpaced supply, making it challenging for renters to secure a place.
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Garden City Homes Ltd placed into receivership

Garden City Homes Ltd, linked to a former police officer with a fraud history, is in financial distress, placed in receivership by Prime Finance Ltd. 
The company owes around $400,000 to Prime Finance and a similar amount to another lender. 
Receivers plan to sell four properties to recover funds; the Kalas' family home may be targeted if there's a shortfall. 
Financial troubles started in late 2022, with delayed projects, building material shortages, and owed payments to contractors. 
Despite denials, Garden City faced allegations of owing contractors hundreds of thousands of dollars. 
Sanjeev Kala, limited by a fraud conviction, couldn't manage the company until December 2021. 
Debt collectors and lawyers were involved in recovering owed money. 
Previous plans for a large home in Rolleston were mentioned but later denied. 
A 2021 complaint alleging Sanjeev Kala's management involvement was not substantiated by the Ministry of Innovation and Employment.
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The stresses of owning a heritage building highlighted in fire

The owner of a heritage-listed building in Invercargill faces challenges after the building was gutted by fire in 2023. 
The Pall Mall building on Dee St was damaged in a fire caused by an electric blanket fault. 
A dangerous and insanitary notice was issued by the Invercargill City Council, requiring the building to be made weathertight, immediate cessation of occupation, and protection measures for reopening the footpath and road reserve. 
The owner, given until March 1 to comply, has secured the roofing, placed shipping containers for safety, and is working to reopen the road lane. 
Dealing with consultants and structural engineers has been a stressful and expensive process. 
Options for the building's future include reinstatement and potential sale or demolition, but the heritage-one status complicates the process. 
The owner bought the building before earthquake strengthening laws and when insurance was less expensive. 
The council, acknowledging the owner's responsiveness, is working with her to ensure public access while she considers the building's future. 
Demolition has not been discussed, as the current notice focuses on managing immediate risks and providing time for considering all options.
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Some economists predict OCR cut earlier

Economists suggest a potential earlier drop in the OCR in August, contrary to earlier expectations of a start in 2025 or the Reserve Bank's mid-next year forecast. 
Gareth Kiernan of Infometrics predicts a rate cut in August due to lower inflation in the system, indicating the Reserve Bank's previous interest rate increases have been effective. 
ANZ also anticipates a rate cut in August, leading to a gradual reduction to 3.5% over 12 months, considering factors like inflation and rising unemployment. 
ASB adjusted its prediction for a rate cut to August in December 2023. 
Some economists, like Kelly Eckhold of Westpac, do not expect a rate move this year, while Jarrod Kerr of Kiwibank, initially anticipating a May cut, now suggests a possible delay to November, waiting for inflation to fall below 3%.
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RBNZ’s OCR behaviour in review

Over the past two years, interest rates have surged, with the average one-year rate rising from 3.5% to 7.3%. 
A borrower with a $500,000 mortgage will pay an extra $273 a week if paid off over 30 years. 
Economists and borrowers closely monitor the Reserve Bank’s OCR track to predict interest rate movements. 
The current OCR forecast suggests rates won't significantly fall until mid-2025. 
Historical analysis shows that within six months, the Reserve Bank tends to stick close to its forecast, deviating by about 0.15%. 
However, over time, the deviation increases, reaching an average of 0.8% after a year. 
The Reserve Bank adjusts its course based on emerging factors, as seen in the changes during the pandemic and other events. 
The current forecast indicates the Reserve Bank intends to keep interest rates high throughout the year. 
Money markets, however, anticipate significant OCR cuts, suggesting the Reserve Bank might reduce rates faster than forecasted. 
The Reserve Bank could bring down the OCR sooner if new factors, particularly a faster decline in inflation, emerge.
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Investor profile: Flying high, losing it all, and then building it back up

Nichole Lewis faced significant setbacks during the 2008 global financial crisis, losing her high-flying job and all her properties, including her family home. Living on baked beans and struggling with debt, she navigated a challenging period. Undeterred, she eventually rebounded in the property market, working as a property finder and later becoming the CEO of The Property Lifestyle. Lewis authored the book "Property Quadrants," sharing her experiences and outlining four ways real estate investing works. Emphasising the importance of knowledge and determination, she now enjoys a successful career, financial stability, multiple investment properties, and a fulfilling lifestyle. 
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Property value movement across the country

Auckland suburbs hit by housing market slump rebound, but return to previous price peaks expected to be slow. 
Average property value in Auckland dropped 19% during the downturn, rebounded 3.5% since then. 
Point England identified as the worst-hit suburb, with a 33% drop in average property value; rebounded 3.98%. 
Otara in South Auckland experienced the city's strongest recovery post-slump, with a 10.7% growth in average property value. 
Highland Park in east Auckland is the closest to its value peak, 13.4% below, following an 8.3% post-slump surge. 
National average property value fell 14% from peak to trough; Wellington City down 27.4%, Christchurch down 7.75%. 
Suburbs outside Auckland with values dropping more than 20% during the slump show signs of recovery. 
Property experts expect the recovery to take time, influenced by factors like interest rates and affordability. 
High-interest rates continue to impact affordability, especially in higher-value suburbs, affecting second and third-home buyers. 
Interest rate cuts expected this year may positively impact more suburbs over time. 
Notable recovery observed in suburbs like Otara and Highland Park, suggesting a positive trend in the market. 
Wellington City faces challenges in recovery, influenced by factors like RV discrepancies and election-related pauses in the market. 
Signs of change in Wellington with first-home buyers returning to the market, indicating potential market improvement. 
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RBNZ proposes DTI restrictions

RBNZ proposes new mortgage lending restrictions from mid-year to limit debt-to-income (DTI) ratios. 
Proposal suggests limiting owner-occupiers to debt not exceeding six times their gross annual incomes, and investors to seven times. 
For example, someone earning $100,000 might struggle to get a mortgage exceeding $600,000 (owner-occupier) or $700,000 (investor). 
RBNZ also plans to ease loan-to-value ratio (LVR) restrictions, reducing deposit requirements for some borrowers. 
Deputy Governor Christian Hawkesby emphasises the importance of managing boom-bust credit cycles. 
DTI rules aim to reduce financial stability risks, support sustainable house prices, and complement existing LVR policies. 
RBNZ believes DTI restrictions will have a more significant impact on the housing market during a boom phase. 
Activation of DTI restrictions now aims to act as a "guardrail" in anticipation of future housing market booms. 
Public submissions on the proposals are open until March 12. 
Empowered by the previous Labour-led Government, RBNZ adds DTI tool to its macroprudential toolkit.  
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Tony Alexander on DTI restrictions

The Reserve Bank plans to introduce Debt to Income (DTI) rules for bank lending on residential property. 
The proposed rules suggest limiting banks to lending at a maximum of six times the before-tax income for households seeking a new mortgage. 
For investors, the proposed limit is seven times income, but banks can have a maximum of 20% of new lending above these limits. 
Data shows that, on average, only a small percentage of new lending in the past six months exceeded these proposed limits. 
During the housing market boom in 2020-21, the peak monthly proportion of lending exceeding income limits was much higher. 
The impact of DTI rules is expected to restrict house price growth during booms, reducing the risk of excessive debt. 
The rules may also benefit first-home buyers by allowing more lending with less than a 20% deposit, improving access to funds. 
The easing of Loan to Value Ratio (LVR) restrictions for deposits is anticipated before the end of the year, potentially mid-year. 
The Reserve Bank invites submissions on the DTI rules until March 12, with an announcement expected around the middle of the year. 
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The argument against DTIs

The RBNZ is considering DTI restrictions on banks, allowing them to lend 20% to owner-occupiers with a DTI greater than six and 20% to investors with a DTI greater than seven. 
LVR restrictions may be eased, allowing 20% of owner-occupier lending above 80% LVR and 5% of investor lending above 70% LVR. 
The proposed settings impose limits on banks, restricting lending percentages for specific DTI and LVR thresholds. 
Allowing 20% above proposed DTI thresholds gives banks discretion for high-DTI but creditworthy borrowers or complex cases. 
RBNZ aims to activate DTI restrictions from mid-2024, the earliest possible date post-consultation, allowing time for decisions and implementation. 
Currently, around 10% of first-home buyer lending and owner-occupier lending exceeds a DTI of six. 
The calibration initially may not be binding due to low high-DTI lending flows and market conditions. 
RBNZ believes DTI restrictions can support sustainable house prices by preventing unsustainably high levels during booms. 
RBNZ acknowledges potential loss of customers to non-bank lenders due to macro-prudential restrictions, but risk is reduced by easing LVR restrictions. 
Banks, represented by the New Zealand Banking Association, oppose DTIs, citing a risk of adverse customer impact if introduced. 
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2023’s biggest residential property sales

2023 breaks records in 337 Kiwi suburbs despite a 14% drop in average house values. 
One in 10 suburbs achieved their highest-ever sale price last year. 
Otago had 52 record-breaking suburbs, followed by Canterbury with 43. 
West Coast, Taranaki, and Manawatu-Whanganui also experienced record-breaking sales. 
Records set in both affordable and wealthy suburbs, with seven sales exceeding $10 million. 
Average difference between 2023 record sale and previous high was 32%, reaching 300% in some cases. 
Notable sales include Taika Waititi's $10.5 million purchase in Auckland and a $20 million sale in Whitford. 
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