NZ residential rental market news, March 8

How will emergency housing changes affect landlords? The FMA takes action against Tower, and be careful what you wish for.

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

An overview from Tony Alexander

The housing market upturn experienced in the June quarter of the last year has stalled, with buyer interest cooling off. 
Fear of missing out (FOMO) among buyers has significantly decreased from pandemic frenzy levels to 11%. 
The market has shifted back into a buyer's market, with a significant increase in homes available for sale but fewer active buyers. 
Despite a large number of homes for sale, price momentum has stalled with a net 3% of agents reporting falling prices in their locations. 
Concerns among buyers have shifted towards employment security and interest rates, with 61% expressing worries about rising interest rates. 
The Reserve Bank of New Zealand (RBNZ) has maintained the Official Cash Rate (OCR) at 5.5%, with no immediate plans for cuts, contradicting market expectations and forecasts. 
The real estate market's stall is attributed to an increase in listings, both from new homes reaching the market and owners looking to sell during the market upturn. 
The market recovery is anticipated to begin once there is greater certainty about interest rates decreasing, potentially after the RBNZ starts cutting the OCR, expected by markets in October. 
House construction prospects have worsened due to uncertainties about interest rates and a surge in existing home listings, leading to a potential increase in housing shortages when demand picks up. 
Buyers are advised to carefully review contracts for new-builds, negotiate for upgrades, and take advantage of the current market dynamics to secure favourable terms. 
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Residential building drops but non-residential construction rises

Stats NZ reported a 2.4% decrease in the volume of residential building work on a seasonally adjusted basis in the December quarter, with the value at $5.6 billion. 
Non-residential construction rose by 4.6% in the same period, reaching a value of $3.1 billion. 
Total building activity for the December 2023 quarter was essentially flat, with a slight decrease of 0.1%, totalling $8.7 billion. 
The seasonally adjusted figures are adjusted for price changes and typical seasonal patterns, measuring actual work carried out rather than building consents, which have also been declining for residential developments. 
Westpac senior economist Satish Ranchhod noted a mixed trend across sectors, with residential building activity significantly slowing down, while non-residential construction remains high but expected to downturn in 2024 due to softening economic conditions. 
The total value of building work in the year ended December 2023 was $37 billion, a 7.1% increase from the previous year, with construction prices also rising. 
Regionally, Auckland saw the highest year-on-year increase in the value of total building work at 9.0%, while Wellington experienced a slight decrease of 0.6%. 
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How will DTIs affect tradies?

The Reserve Bank of New Zealand plans to implement debt-to-income ratio (DTI) restrictions for borrowers, impacting the housing market. 
The proposed DTI limits are six times income for owner-occupiers and seven times for investors. 
This rule could significantly affect self-employed New Zealanders, such as contractors and small business owners, making it harder for them to secure traditional mortgages. 
Self-employed individuals face additional challenges in proving their income for mortgage approval, with "verified" and "unverified" (alt-doc) mortgage categories affecting their borrowing potential. 
Verified borrowers, who can show two years of financial accounts, may not be impacted as severely by DTIs. 
Unverified borrowers often rely on non-bank lenders for alt-doc mortgages at higher interest rates due to irregular income, making it harder to transition to mainstream bank loans under new DTI rules. 
Banks currently offer some flexibility in assessing self-employed borrowers' income and expenses, but it's uncertain if this will apply under DTI regulations. 
Options for self-employed individuals may include purchasing brand-new homes, which could be exempt or less affected by DTI restrictions.
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Kiwis are on the fence as to whether now is the time to buy

ASB's latest Housing Confidence Survey indicates a net 51% of New Zealanders expect house prices to increase, the highest level since October 2021, just before the last market downturn. 
Unlike in October 2021, when annual price growth was nearly 30%, the current annual growth stands at a more moderate 2.2% as of January 2024. 
The survey, covering the three months to the end of January 2024, is considered a lagging indicator of the market. 
Expectations for further interest rate hikes have decreased, with only a net 15% of respondents anticipating rises, down from 28% in the previous quarter. 
New Zealanders are divided on whether it's a good time to buy a property, with 51% stating it's neither good nor bad, reflecting uncertainty in the market since the end of 2022. 
Prospective buyers face mixed signals due to market conditions, policy changes, high debt servicing costs, potential debt-to-income restrictions, and affordability issues. 
ASB is New Zealand's second-largest housing lender, with over $73 billion in home loan exposure.   
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Tony Alexander: Rate hike rumours put brakes on the housing market

Early forecasts predicting the Reserve Bank would raise the cash rate beyond 5.5% were incorrect, contributing to the current housing market slowdown. 
A survey of real estate agents shows a significant decrease in buyers exhibiting FOMO (fear of missing out), dropping to 10% from 23% a month ago and 40% in October. 
For the first time since June 2023, more agents report that housing prices are easing rather than rising. 
The survey suggests weak economic growth is impacting job security perceptions, with 23% of agents noting buyers' concerns about their jobs and incomes, up from 10% a year ago. 
This job security concern may lead to reduced household spending and mortgage hesitancy, potentially influencing the Reserve Bank to ease monetary policy sooner than expected, possibly in the second half of this year. 
Renewed worries about interest rates have resurfaced, with 61% of agents noting buyer concerns, despite banks making small cuts to fixed mortgage rates. 
The housing market has shifted back to a buyer’s market, with a notable increase in residential listings in February, up nearly 30% year-on-year nationwide and nearly 47% in Auckland. 
There's an excess of properties available, diminishing the incentive for new builds or off-plan unit purchases, which could negatively impact the construction outlook and exacerbate housing shortages and price impacts into 2025 and 2026. 
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Interest rate cuts: What the Reserve Bank said and should you believe it?

The RBNZ has decided to maintain the OCR at 5.5%, stating that inflation risks are more balanced but the rate needs to stay high to bring inflation back to the target range of 1-3%. 
The RBNZ suggests the OCR may not decrease until the end of 2024 or early 2025, which is a slight adjustment from its November 2023 outlook. 
In response to the RBNZ's decision, major banks such as ASB and ANZ have cut some of their home lending rates, despite ANZ previously predicting further cash rate hikes this year. 
The RBNZ now sees a 40% chance of the OCR being raised again, down from a previously implied 75% chance, indicating that the next move is likely to be a cut. 
The RBNZ forecasts a 3.4% growth in house prices for 2024, although its house price predictions have historically been off by an average of 4.6%. 
RBNZ Governor Adrian Orr encouraged competition among banks in lowering mortgage rates, indicating no pressure from the RBNZ to keep rates high. This competition could lead to tighter margins and lower rates without necessarily prompting further OCR hikes. 
Recent small reductions in mortgage rates by major banks suggest a direction of more competitive pricing and possibly more rate cuts in the future, offering some relief to mortgage holders. 
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NZers: Interest rate rises are not over yet!?

Most New Zealanders believe interest rate increases have peaked, with only 15% expecting a rise, down from 28% in October. 
ASB's latest Housing Confidence Survey indicates growing optimism that interest rate peaks may be near, though expectations for further hikes remain among some. 
The survey, conducted before the Reserve Bank of New Zealand's (RBNZ) decision to maintain the Official Cash Rate (OCR) at 5.5%, shows a narrowing margin between those expecting higher versus lower rates. 
Regional sentiments vary slightly, with Aucklanders slightly more optimistic about reaching a turning point compared to South Islanders. 
ASB expects the OCR has peaked but does not anticipate RBNZ rate cuts until November of this year. 
A significant portion of respondents, 31%, expect interest rates to remain stable. 
Regarding housing market sentiment, 51% of respondents feel it's neither a good nor bad time to buy a house. 
A net 51% of respondents expect house prices to rise, the highest level of confidence since October before the latest market downturn. 
Aucklanders show the highest confidence in rising house prices, with a net 56% expecting increases. 
Current annual house price growth is at a more modest 2.2%, compared to almost 30% growth seen previously when similar levels of price increase expectation were recorded. 
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Mortgage borrowers opting for shorter terms

In January 2024, 76% of new owner-occupier mortgage borrowers in New Zealand chose fixed terms of 18 months or less, indicating a trend towards short-term fixing. 
The Reserve Bank of New Zealand's C71 data series shows changing borrower preferences and offers insights into bank offers over time. 
This preference suggests borrowers anticipate mortgage rates may decrease soon, with the most popular term being one year, chosen by over a third of borrowers. 
The popularity of the six-month fixed term has significantly increased, reaching a new high of 10.3% of new owner-occupier mortgage money in January 2024. 
Residential investor lending on 6-month fixed terms also saw a significant rise, indicating a broad expectation of falling interest rates. 
Wholesale interest rate markets predict a two-thirds chance of the Reserve Bank cutting the Official Cash Rate (currently at 5.50%) in August, despite the RBNZ's own forecasts suggesting cuts will not occur until the following year. 
The situation remains uncertain, with borrowers hoping their short-term fixing strategies will pay off as anticipated interest rate cuts materialise. 
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FMA takes action against Tower for overcharging

The Financial Markets Authority (FMA) has initiated civil proceedings against insurer Tower for incorrectly applying multipolicy discounts. 
Approximately 65,000 customers overpaid by $9.5 million due to this error. 
Tower allegedly breached section 22 of the Financial Markets Conduct (FMC) Act by misleading customers since September 2016. 
The insurer's long-standing offer of discounts for holding multiple policies failed to be accurately applied in invoices and certificates of insurance. 
Marketing materials did not clearly state that the discount was limited to certain policies or that it wouldn't be applied immediately upon purchasing a new policy. 
The issues stem from significant flaws in Tower's IT systems and a lack of proper controls. 
Tower has already remediated about 58,000 customers, reimbursing $9.26 million. 
The FMA seeks a court declaration of Tower's FMC Act contravention and a pecuniary penalty against the insurer. 
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Women lag behind men in residential property investments 

The CoreLogic 2024 Women & Property report highlights that while women have higher rates of owner-occupier property ownership than men, they significantly lag in owning investment properties. 
Key factors contributing to fewer women owning investment properties include the gender wage gap and differences in financial literacy. 
The gender wage gap, estimated at around 9%, affects women's ability to accumulate assets and save for home ownership deposits. 
As of January 2024, female-only ownership of owner-occupied properties stood at 23%, compared to 21% for male-only. 
Overall, female-only property ownership was 22%, lower than the 26% for male-only. 
Financial education and literacy appear to be higher among males, potentially influencing their investment decisions. 
The median value of female-only owned properties was $650,532, lower than $675,975 for male-owned properties. 
Regional variations in home ownership show disparities, with Gisborne having the highest female-only ownership rate at 25%, followed by Auckland at 24%. 
Certain regions, like the West Coast, have lower rates of female-only ownership, possibly due to the dominance of mining and farming industries. 
Surprisingly, in more expensive regions like Tasman-Nelson-Marlborough, female-only ownership rates exceed those of males. 
Females own more property than males in regions such as Gisborne, Wellington, Hawke's Bay, Northland, and Bay of Plenty, while in Canterbury and Manawatu-Whanganui, the ownership rates are equal between genders. 
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Fighting a 500% rates hike 

A landowner on Stewart Island is contesting a 500% increase in rates, which soared from $348.68 to $1743.95 in a single year. 
Auckland councillors have decided to bill the Government for a GST refund on council rates and newly constructed houses. 
Local Government New Zealand highlights that councils' portion of total tax revenue has been constant at 2% of GDP for fifty years, despite growing responsibilities. 
Debates are ongoing about potential alternatives to current funding models for local councils, including altering the GST distribution, adopting land value-based rates, or introducing a new system entirely. 
Eric Crampton, Chief Economist at The New Zealand Initiative and a regular contributor on Nights, discusses these issues with Emile Donovan in the link below. 
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How much Wellington’s housing panel shrank density 

Wellington's independent hearings panel significantly reduced the amount of high-density housing zoning in the city, eliminating 33 hectares of high-density zones in favour of medium-density zoning. 
An additional 10 hectares of the city centre zone were also replaced with a mixed-use zone. 
The reductions are primarily in the inner residential suburbs around the city centre. 
A notable exception to the changes is a 36-hectare area of high-density zoning that includes Government House and local schools, unlikely to be developed for housing. 
In Johnsonville, the panel maintained high-density zoning in the centre but reduced it around the edges, citing walkability concerns. 
Density changes in Johnsonville were also influenced by the panel not considering the Johnsonville train as "mass rapid transit," which would have extended high-density zoning near train stops. 
Newtown experienced significant density reductions, both by shrinking the city centre walking catchment and expanding character protection areas, thus reducing potential for high-density development. 
Character areas in Mount Victoria, Thorndon, Kelburn, Lower Kelburn, Aro Valley, Berhampore, The Terrace, Holloway Road, Mount Cook, and Newtown were significantly expanded, further limiting high-density zoning. 
Mount Victoria and Aro Valley saw some of the most dramatic increases in character area size, effectively reducing the potential for new high-density housing developments in these suburbs. 
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Law change opens the door to overseas investment in NZ build-to-rent

The coalition government plans to introduce legislation to facilitate overseas investment in build-to-rent developments in New Zealand.
Changes to the Overseas Investment Act 2005 aim to support the growth of the build-to-rent housing sector, part of the government's 100-day plan.
Build-to-rent developments, common overseas but rare in New Zealand, offer potential to increase the supply of secure, affordable, and quality rental housing.
The sector is currently small, with only 22 registered developments, but shows significant potential for growth.
The Overseas Investment Act will be amended to streamline the consent process for foreign investors interested in build-to-rent projects.
A ministerial directive letter will be issued to indicate New Zealand's openness to foreign investment in the build-to-rent sector.
The government remains committed to prohibiting overseas investment in existing residential housing and land, with the focus on increasing housing supply.
The initiative is part of a broader effort to address New Zealand's housing crisis by expanding the construction of new homes.
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Government confirms emergency housing plan shake-up

The New Zealand government introduces a new priority system for families with children in emergency housing, aiming to move them to the top of the waitlist if they've been in such housing for longer than 12 weeks, starting April. 
Housing Minister Chris Bishop, Social Development Louise Upston, and Associate Housing Minister Tama Potaka announced stricter verification processes and eligibility criteria for accessing emergency housing. 
These changes are part of the coalition's 100-day plan and include new obligations for emergency housing applicants, aiming to scrutinise and reduce the number of families entering motels as emergency housing. 
The government's approach also involves strengthening the role of managerial oversight in emergency housing grants, shifting the focus towards exploring alternative housing options before resorting to emergency housing. 
There is an emphasis on reducing the number of children living in motels, with a commitment to not increasing homelessness among children as a result of the new measures. 
Further, more permanent changes to regulations, criteria, and suitability for emergency housing are planned to be implemented. 
The government aims to address the social and economic costs of emergency housing, which currently stands at approximately $340 million a year, and to reduce the institutionalised reliance on motels for emergency accommodation. 
The opposition criticises the government for not committing to building more social houses and argues that without an increase in housing supply, the new measures may not effectively solve the housing crisis. 
The Green Party and Te Pāti Māori express concerns that the new policies could exacerbate homelessness and disadvantage vulnerable populations by adding barriers to secure housing. 
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How will emergency housing changes affect landlords?  

Starting April, families with children in emergency housing for more than three months will be prioritised for housing, aiming to assist about 800 of the 3,000 families on the waitlist. 
The New Zealand government plans to tighten access to emergency housing, ensuring it serves as a last resort for those without alternatives. 
The changes may offer new opportunities for private landlords by creating a more reliable tenant base and a streamlined process for housing families in need. 
The government considers reintroducing 90-day no-cause terminations to mitigate landlords' concerns about risks associated with providing emergency housing. 
The initiative is part of a broader strategy to involve landlords in solving the housing crisis, indicating a shift towards community involvement in addressing housing issues. 
Housing Minister Chris Bishop highlights the substantial social and economic costs of families living in suboptimal conditions, with the government exploring innovative solutions like social bonds. 
Landlords are encouraged to view their participation not just as a business opportunity but as a contribution to solving a significant social issue. 
The government's plan is ambitious, aiming for a reduction in the number of children in motels and an increase in families living in stable, suitable housing. 
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ASB drops mortgage rates, follows Westpac and BNZ 

ASB has lowered its home lending rates for the second time in a week, with the one-year lending rate dropping to 7.29% and the two-year rate to 6.85%. 
The bank also increased its 6-month term deposit rate to 6.05%. 
This follows an earlier reduction of ASB's 18-month mortgage rate to 6.89%. 
ASB's rate adjustments reflect responses to the Reserve Bank of New Zealand holding the Official Cash Rate (OCR) at 5.5%. 
ANZ now offers the lowest one-year fixed rate among the main banks at 7.24%, with a two-year rate of 6.79%. 
Westpac and BNZ have also recently lowered their fixed mortgage rates, with Westpac's one-year special at 7.29% and BNZ's one-year rate at 7.29%. 
Westpac NZ has reduced term deposit rates for terms between 12 months and five years. 
Competition among banks and lower wholesale interest rates are driving the trend of decreasing fixed mortgage rates. 
ASB reported an 11% drop in half-year profit due to slower lending, reduced margins, and higher costs. 
Mortgage advisor John Bolton advises homeowners to shop around for the best deals and suggests that the housing market is slowly recovering. 
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Interest rates drop, unsold houses flood the market  

Major banks, including BNZ, have recently lowered their home loan interest rates, with BNZ offering the lowest fixed-term carded rates among the main banks. 
Despite the reduction in interest rates, Auckland faces a surplus of homes for sale, with Barfoot & Thompson reporting 5,382 listings, the highest in a decade. 
The city has not seen such a high number of residential properties for sale since 2013, with listings increasing from 1,221 in January to an 11-year high. 
Barfoot and Thompson recorded 2,255 new listings in February, marking the highest February total since 2017 and the most in any month since November 2021, the peak of the housing boom. 
Although there is an abundance of homes on the market, buyer activity remains low, which has not significantly depressed property prices. 
In February, Barfoot & Thompson sold 633 homes, a 54% increase from the previous year, indicating some improvement in market activity. 
The agency's average selling price last month was $1,116,150, a 3% increase from January but a 5.5% decrease from December. 
The median selling price was $970,000, slightly up by 0.4% from January but down 6.7% from December. 
The current situation is described as a "log jam" of homes for sale, creating a significant buyers' market, the largest seen since 2011. 
This surplus of homes is attributed to a high number of new homes coming onto the market, owner-occupiers moving forward with relocation plans, and buyers' hesitancy to make purchases amidst fluctuating prices and mortgage rates. 
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Be careful what you wish for on house prices 

ANZ Bank NZ Chief Economist Sharon Zollner warns against wishing for more affordable house prices due to potential significant economic adjustments required. 
House prices have fallen approximately 16% in nominal terms from the November 2021 peak, translating to a 25% drop in real terms due to inflation. 
To return house prices to their 2010 real terms and relative to wages, prices would need to halve; to reach 1992 levels, a 70% drop would be necessary. 
Housing Minister Chris Bishop aims for homes to cost between three and five times household incomes over a 10 to 20 year period, a significant reduction from current levels. 
Bishop's strategy includes flooding the market with new housing and encouraging local councils to plan for 30 years of housing development. 
Despite current economic challenges, debt servicing ratios remain lower than the pre-Global Financial Crisis peak. 
Consumer confidence is extremely low, closely tied to inflation rates, even though wages and benefits have kept pace with inflation. 
The household sector shows resilience, with some individuals experiencing tripled mortgage payments, yet "very little blood on the floor" in terms of financial distress. 
The last significant peak in the Reserve Bank's official cash rate (OCR) was 8.25% in 2007-2008; the current OCR stands at 5.5%, with its future direction dependent on continued inflation reduction. 
Zollner's expectations of an OCR hike were unmet, as recent Reserve Bank statements have been more dovish than anticipated. 
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