NZ residential rental market news, May 31

New-home contracts are biased towards builders, Brokers advise: "Buy now if affordable," & How the budget affects investors.

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

Current Mortgage Lending Environment: Key Insights and Changes Ahead

Gross new lending activity continued to recover in April, with $5.9bn in total lending. 
Interest-only lending remains under control, with reduced percentages compared to 2015-16. 
Average loan sizes for investors and FHBs in April were around $545,000 and $555,000, respectively. 
Many FHBs access the market with less than 20% deposits, despite a 15% speed limit allowance. 
Looser LVR rules should assist FHBs, with a potential increase in low deposit lending speed limits. 
Investors will benefit from looser LVRs, allowing more equity release from their portfolios. 
DTI limits will significantly impact mortgage lending as rates decline. 
Repricing existing loans to current mortgage rates is ongoing, with 60% of fixed-rate mortgages due for repricing within 12 months. 
Job losses pose a risk to the smooth repricing process, potentially increasing repayment stress. 
Many homeowners have significant housing equity, with an overall LVR of about 22%. 
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Banks Increase Risk Lending to Low Equity First Home Buyers as Market Slows

Banks are taking more risks lending to first home buyers with less than a 20% deposit. 
RBNZ figures show the average mortgage size for first home buyers with a 20% deposit was $517,527 in April. 
For those with less than a 20% deposit, the average mortgage size was $636,620. 
The difference of $119,093 between these two groups increased by 30% from March and is the third highest recorded. 
Higher differences were seen in March and May 2022 during the peak of the last housing boom. 
The number of mortgages approved for first home buyers fell from 2447 in March to 2279 in April. 
Lending more to low equity first home buyers supports total lending levels but carries higher risks. 
Low equity borrowers likely have high incomes but lower savings for deposits. 
Low equity mortgages have higher interest rates and fees, increasing borrowing costs. 
These loans help maintain prices at the lower end of the market. 
Interest co nz estimates homes bought by first home buyers with a 20% deposit averaged $647,000, while those with less than a 20% deposit averaged $707,000. 
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RBNZ Introduces New DTI Rules and Looser Deposit Restrictions for Home Buyers 

DTIs take effect from July 1, 2024, limiting most home buyers to borrowing six times their pre-tax income. 
Investors will be restricted to borrowing seven times their pre-tax income. 
Banks have 12 months to prepare for DTIs, with 20% of lending allowed outside the restrictions. 
Looser LVR rules will benefit low-deposit buyers and investors from July 1. 
The percentage of loans to owner-occupiers with less than 20% deposits will increase from 15% to 20%. 
The capital requirement for low-deposit investors decreases from 35% to 30%. 
CoreLogic’s Kelvin Davidson says DTIs and looser LVRs were expected and align with RBNZ’s suggestions. 
High mortgage rates currently prevent unmanageable debt, but DTIs will impact when rates drop. 
DTIs tie house prices more closely to income, reducing average house price growth from 6% to 4%. 
DTIs will significantly affect investors' ability to expand portfolios. 
First-home buyers are cautious, having seen the impact of over-stretching during peak market times. 
First-home buyers face less competition and lower prices but remain wary of high debt. 
High borrowing costs and reduced household savings contribute to weak retail spending in 2024. 
Some buyers resist borrowing large amounts despite banks' approval limits. 
Housing market correction since 2021-22 was driven by unsustainable interest rates and high borrowing. 
House prices expected to stabilise and potentially rise by the end of the year. 
Mortgage affordability is a key consideration for buyers, focusing on manageable weekly payments.  
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ANZ Property Focus: Subdued Housing Market Poses Affordability Challenges Despite Slight Decline in Mortgage Rates 

The housing market remains subdued with flat or falling prices and high listings. 
Property investors are struggling with cashflow due to the current market conditions. 
Changes to the bright-line test from 1 July could increase listings, favouring buyers. 
There is downside risk to the forecasted modest 3% rise in house prices for 2024. 
A weak housing market may lead to the RBNZ cutting the OCR earlier than anticipated. 
Housing affordability has significantly deteriorated post-pandemic, with high house prices relative to incomes. 
New entrants face higher debt-servicing costs compared to pre-pandemic levels. 
The main relief for affordability is expected to come from declining mortgage rates. 
Housing is expected to remain less affordable over the next few years than before the pandemic. 
Mortgage rates are slightly lower but may rise again due to RBNZ’s hawkish stance. 
Competition among banks is keeping mortgage rates relatively low despite RBNZ policies. 
Forecasts indicate gradual declines in mortgage rates as markets anticipate OCR cuts next year. 
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ASB Housing Confidence Report: Interest Rate Fall Expectations Influence Housing Market Sentiment

For the first time in over three years, more people expect interest rates to fall rather than rise. 
Interest rate sentiment is important for driving demand in the housing market. 
House price expectations declined, with a net 44% of respondents expecting higher prices, down from 51%. 
There is debate about whether it is a good time to buy a house due to market uncertainties. 
The latest Housing Confidence Survey aligns with a modest 1% house price growth forecast for 2024. 
High mortgage rates and increased new listings are moderating house price growth. 
A net 1% of respondents expect interest rates to fall, reflecting a shift in sentiment. 
The broader economic backdrop, including anaemic growth and rising unemployment, affects housing demand. 
A significant rise in house prices is unlikely until the RBNZ signals OCR cuts. 
A net 2% of respondents think it is a good time to buy, with over half remaining neutral. 
Auckland respondents are more optimistic about buying than those in the South Island. 
High inventory levels favour buyers, with prices below late 2022 peaks. 
High mortgage rates continue to constrain affordability, impacting buyer sentiment. 
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Investor Preferences Shift Amidst Economic Concerns and High Interest Rates 

A quarterly survey of investors shows asset preferences remain stable over the past three years. 
Investors have long-term investment horizons, despite concerns about geopolitics and recessions. 
A net 11% of respondents typically invested in residential property, but this has dropped to a record low of 4%. 
Similarly, commercial property investment interest fell from a net 10% to a record low of 5%. 
High interest rates and a global decline in office and retail property valuations impact commercial property demand. 
Property markets are cyclical and expected to recover once borrowing costs decrease. 
More investors are now placing funds in savings accounts, rising from a net 14% to 23% over three years. 
Increased bank savings by investors contrasts with the reduction in household and business savings. 
Weak retail spending is anticipated in 2024 due to high borrowing costs and the end of pandemic-induced spending. 
Current top investor concerns are geopolitics, high interest rates, and asset returns, with interest rates ranked fifth previously. 
4% of investors are worried about interest rates falling, while 20% are concerned about high rates. 
Some people benefit from high interest rates, as seen in thriving high-end restaurants.    
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Government Budget Unlikely to Impact Housing Market, Say Experts 

The Budget will have little impact on the housing market. 
The biggest changes for landlords were announced before Budget day. 
$729 million will be spent on restoring interest rate deductibility. 
$45 million will be spent on reducing the bright-line test to two years. 
The Budget is described as “underwhelming” for real estate. 
Tax cuts will likely be used to meet the increased cost of living. 
No new significant housing measures were introduced. 
CoreLogic economist Kelvin Davidson noted no surprises in the Budget. 
Tax cuts are expected to go towards repaying debts and meeting living costs. 
High interest rates remain the biggest influence on the housing market. 
Bayleys’ Chris Farhi said income tax changes are immaterial for the housing market. 
New Zealand Sotheby’s Realty managing director is disappointed with the lack of changes to foreign buyer rules. 
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Opes Partners: Nicola Willis' Budget: Mixed Impact for Property Investors and Homeowners 

Nicola Willis promised a no-frills budget, but the results are mixed. 
Tax cuts were larger than expected, despite economic challenges. 
Tax savings range from $4.50 to $135 per week, depending on income and children. 
Most property investors will see about $20 extra per week. 
Larger tax cuts could hinder efforts to lower interest rates by maintaining inflation. 
Reducing inflation faster would be preferable to tax cuts for lowering interest rates. 
The tax cuts will cost $3.68 billion annually, offset by $3.71 billion in spending cuts and revenue increases. 
Short-term inflation might rise due to immediate tax cuts and delayed spending cuts. 
Treasury expects inflation to fall within the RBNZ’s 1-3% target by September, three months earlier than forecasted. 
Interest rates are also expected to decrease faster, with potential cuts in September and December. 
The budget could benefit property investors and homeowners by taming inflation and interest rates. 
Delaying tax cuts could have accelerated interest rate reductions for long-term gains. 
The National-led government aims to keep its election promises despite potential short-term economic pain. 
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Tony Alexander: Coalition Government's First Budget: Focus on Fiscal Deficits, Inflation, and Economic Outlook

The Budget’s main focuses include fiscal deficits, inflation, productivity, housing, self-reliance, and overall economic impact. 
The fiscal deficit is projected to be back in surplus by mid-2028, improved from the initial 2031 projection. 
There is minor fiscal policy tightening, not radically changing the fiscal measures track. 
Treasury expects a slight downward pressure on growth, inflation, and interest rates, but the impact is minimal. 
The Budget does not significantly boost productivity or encourage private enterprise. 
Housing availability for average Kiwis is not expected to improve significantly. 
The Budget measures do not strongly encourage self-reliance over state dependence. 
The Budget’s overall economic impact includes a slight negative fiscal pulse, potentially leading to interest rate cuts by year-end. 
The Budget has minimal direct impact on businesses, with no significant tax changes or incentives for investment. 
The cost of living impact includes minor tax reliefs and the end of universal free prescriptions. 
Overall, the Budget aims to reverse previous mismanagement and recognises the need to shrink government size to match the worsened long-term economic outlook.  
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Population and Dwelling Growth: Census Data Highlights 2018-2023

The number of dwellings increased at a faster rate than population growth from 2018 to 2023. 
Population grew by 294,168 (6.3%) to 4,993,923. 
Dwellings increased by 170,061 (9%) to 2,056,578. 
Auckland saw population growth of 5.4%, while dwellings grew 11.9%. 
Marlborough's population grew 4.4%, with dwellings increasing 9.2%. 
Bay of Plenty, Gisborne, and Taranaki had dwelling growth lag behind population growth. 
Waikato, Manawatu-Whanganui, and West Coast had dwelling growth just keep pace with population growth. 
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Housing Confidence Shifts Amid Market Uncertainty and Interest Rate Expectations

ASB's latest Housing Confidence Survey shows a shift in sentiment but ongoing uncertainty. 
More New Zealanders expect interest rates to fall over the next 12 months than to rise. 
Confidence is growing that the OCR has peaked. 
Despite this, respondents are uncertain about future house prices and buying conditions. 
A net 1% of respondents expect interest rates to decrease in the next year. 
Only a net 2% of respondents believe it is a good time to buy a house. 
ASB Senior Economist Kim Mundy notes the market has many conflicting factors. 
Interest rate cycle peak and uncertainty about RBNZ's future actions affect affordability. 
ASB revised its house price growth forecast to about 1% year-on-year for 2024. 
New listings have increased, pushing supply to 10-year highs. 
ASB is the second largest housing lender in NZ with $73.815 billion exposure as of March 31.   
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First-Home Buyers Have Alternatives Despite Scrapping of First Home Grant 

The First Home Grant has been scrapped by the government. 
Funds from the grant will be redirected to social housing. 
Brokers say there are still options for first-home buyers. 
Low-deposit loans are available, with about one-third of first-home buyers securing loans with less than a 20% deposit. 
From 1 July, banks can lend more to borrowers with smaller deposits. 
KiwiSaver balances are increasingly used as significant deposit contributions. 
Family support remains a common source of help for first-home buyers. 
Personal savings can often replace the First Home Grant. 
The First Home Loan scheme allows for deposits as low as 5%, underwritten by Kainga Ora. 
Brokers advise buying now if affordable, as future interest rates and salaries may improve affordability. 
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Criticism of Biased New-Home Contracts Highlights Need for Buyer Vigilance 

Andrew Crosby, former CEO of Universal Homes, criticises new-home contracts as inadequate and biased towards builders. 
Crosby describes standard contracts as unfair, preferring no contract over the current ones. 
By law, a written contract is required for builds or renovations over $30,000. 
Crosby, now running a property consultancy, highlights issues in contracts from both small firms and large group builders. 
Contracts lack risk protection for clients and allow builders to charge freely. 
Improved supply chains and lower material costs should give buyers more negotiation power. 
Crosby points out the reduced building cost of a two-bedroom terrace, now $3000 per square metre. 
Buyers should scrutinise contracts and seek professional review to avoid unfair terms. 
Lawyer Joanna Pidgeon agrees that standard contracts favour builders but notes negotiation may be easier in a softer market. 
Cost escalation clauses in contracts can pass on price fluctuations to clients. 
QV operations manager James Wilson warns that rushed contract processes can lead to buyer disadvantages.   
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Tenants Face Issues Despite Healthy Homes Standards Compliance 

Tenants report cold, damp, and mouldy homes despite compliance with healthy homes standards. 
The standards, established in 2019, set minimums for rental insulation and ventilation. 
Private rentals must comply within 120 days of new or renewed tenancies from 1 July 2021, and fully by 1 July 2025. 
Tenants Em and Autumn experienced mould and health issues in supposedly compliant rentals. 
Both tenants saw health improvements after moving to newer, more expensive rentals. 
DVS general manager Tony Sands noted initial landlord compliance but a decrease in demand for improvements. 
NZ Property Investors' Federation president Sue Harrison claims compliance among members and adequate checks. 
Renters United spokesperson Luke Somervell criticised the Tenancy Tribunal as ineffective for renters. 
Somervell highlighted renters' lack of choice between substandard housing and homelessness. 
He called for better rental market regulations beyond current standards. 
Kāinga Ora aims for 100% compliance by 1 July 2024, with 99.8% of homes already meeting standards or in progress. 
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Increase in $1 Reserve House Listings on TradeMe Raises Buyer Awareness

TradeMe has seen an increase in $1 reserve house listings. 
Rafael Caso is selling a tiny home for $1 to raise funds for Live Well Build Well. 
Caso hopes to raise close to $200,000 despite the $1 reserve. 
Buyers must have land to place the house on, as the auction is for the house only. 
Since the start of 2023, there have been 18 $1 reserve listings on TradeMe. 
Billy Mander bought a $1 reserve house and paid $509,999 over asking. 
Mander spent $80,000 renovating the house, still considering it a good deal. 
A home in Mt Albert sold for $1 due to issues with leasehold land and building condition. 
Property lawyer Joanna Pigeon warns about the challenges of leasehold land and houses for removal. 
Pigeon advises considering additional costs for lawful use and necessary upgrades. 
Currently, there are four $1 reserve listings on TradeMe, including Caso’s charity auction.    
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