Upward property market momentum continues, but for how much longer?

Property owners going to market continue to fetch top dollar as prices ticked up in February.

The latest CoreLogic House Price Index (HPI) recorded nationwide property values up 2.6 percent, which means prices have been boosted by 14.5 percent in the past 12 months.

The current rate in growth is expected to ease in months to come as loan-to-value ratio (LVR) restrictions have returned and more tightening for investors is due to be introduced from 1 May.

“Each of our six main centres have experienced annual growth of more than 10 percent to the end of February, with Wellington seeing the greatest rate of growth at 16.6 percent. This takes the average property value for the wider Wellington area (including Porirua City, Hutt City and Upper Hutt City) to over $900,000 for the first time,” CoreLogic’s head of research Nick Goodall said.

The area that bucked the trend was Tauranga, with a dip in prices, down 1.5 percent in February. However, over the last three months the city has seen a 6.7 percent increase.

Down country in Dunedin, the city saw a surge in average values up 3.2 percent, and 15.3 percent in the last 12 months. Around the country, Whanganui property values are up 28.8 percent in the past year, Palmerston North is up 22.7 percent, Invercargill saw 16.9 percent, Whangarei recorded 16 percent and Queenstown prices only increased 2.5 percent in the same time, according to CoreLogic figures.

The momentum in property price increases is predicted to slow in the months to come, following the Finance Minister’s direction to the Reserve Bank to consider the government’s housing policy when making monetary decisions, Goodall said.

Late last year, Finance Minister Grant Robertson wrote to the Reserve Bank Governor Adrian Orr to suggest the Reserve Bank of New Zealand (RBNZ) considers house prices when making decisions.

Orr initially warned against the option, saying there could be an adverse trade-off. Despite the warning, Robertson went ahead and changed the Bank’s remit in February so it must consider government policy on house prices when it makes monetary decisions.

“The Committee retains autonomy over whether and how its decisions take account of potential housing consequences, but it will need to explain regularly how it has sought to assess the impacts on housing outcomes,” Robertson said.

The Bank has also been directed to consider housing in regard to its financial policy functions.

“The Bank will have to take into account the government’s objective to support more sustainable house prices, including by dampening investor demand for existing housing stock to help improve affordability for first-home buyers,” Robertson said.

“The Reserve Bank’s objectives and mandate remains the same, which is to maintain price stability, support full employment and promote a sound and stable financial system.”

In a statement at the time, Orr said the direction from the government specifically outlined how the RBNZ’s financial stability policies and actions can help with the government’s housing objectives.

“We will be considering our financial stability policy settings via our prudential tools – like loan-to-value ratios, bank stress testing, and capital requirements against particular types of mortgage lending. This is done with a view to moderating housing demand, particularly from investors, to best ensure house price sustainability,” Orr said.

At the 2021 New Zealand Economics Forum at Waikato University in early March, Orr said easy money policies from central banks around the world had been a factor in the spike in house prices as people made the most of cheap borrowing with low interest rates.

He noted that these initiatives have increased the risks and vulnerabilities of households and investors.

“[There are] big question marks around global equity prices relative to underlying earnings, and absolutely a question mark over house prices globally and in Aotearoa-New Zealand relative to household earnings … so take that on board,” he said.

ASB chief executive Vittoria Shortt has noticed a worrying trend of customers having difficulties making their payment and running low on cash, which has raised alarms.

“Fewer customers have what we would describe as ‘a rainy day savings fund’ of $1000 or more, which is a pretty low bar,” she said at the Economics Forum.

The latest figures from the RBNZ from the end of 2020 indicated that 39 percent of bank lending to residential property investors was interest-only, and 13 percent of owner-occupier lending is in the same position. This is an area the RBNZ is yet to develop a view on.

Although these numbers are similar to a year earlier, the RBNZ is looking at whether interest-only mortgages were being used too much and were causing “high price variability” and “extreme risk taking”.

The Bank would need to consider how restricting interest-only mortgages might fit in with the tools the RBNZ deploys to restrict bank lending to maintain financial ability. However, there are still questions about whether bank restrictions on lending to borrowers would sufficiently address concerns around leverage.

During the International Monetary Fund’s (IMF) routine check-up on New Zealand’s economy, it raised concerns about housing affordability and vulnerabilities.

“Achieving long-term housing affordability depends critically on freeing up land supply, improving planning and zoning, and fostering infrastructure investments to enable fast-track housing developments,” the IMF said.