As the year draws to a close, preparations are under way to bridge the transition into the next. The new government has formed an expert panel and pledged to produce a housing crisis report before Christmas, identifying priorities among its various housing market measures. Meanwhile, the Reserve Bank is about to announce the conditions and details for easing LVR restrictions.
LVR Whether restrictions can be withdrawn depends on the new housing policies' effects
On 29 November, the Reserve Bank of New Zealand will conduct its six-monthly review of the financial system. Westpac expects a relatively positive assessment. Banks currently have ample funding, and provisions for loan losses are relatively low. Mortgage lending growth has also slowed.
The Reserve Bank of New Zealand has released its latest residential mortgage figures for October this year. LVR restrictions have prevented households from increasing their leverage, leading to a substantial fall in borrowing. In 2017, in October, New Zealand's total mortgage lending stood at NZ$460,500,000,000, down 14% compared with October the previous year.
The constraints imposed by LVR restrictions are thought to have reduced buyers' purchasing power and dampened housing market activity. According to CoreLogic data, in 2017, the 12 months to October saw average New Zealand property values rise by 4%. Although prices continued to rise slowly in Wellington and Dunedin, Auckland prices fell by 0.6% over the same period.
ASB economists expect growth in average New Zealand house prices to remain relatively subdued over the next 12 months under the Labour–New Zealand First coalition government's combined housing measures. In the short term, population and income growth will support modest price increases, particularly in areas where housing shortages persist.
Has the time come to withdraw LVR restrictions, which were always intended as a short-term market control?
This Wednesday, acting Governor Grant Spencer will outline the Reserve Bank's views and research on when to ease LVR restrictions. In early November, he expressed confidence that house price growth would slow and said work was under way to examine how the restrictions could be removed. Further details will be announced at tomorrow's meeting.
A Westpac report noted: “We believe the main obstacle is whether easing LVR lending restrictions would cause a housing market rebound.” The Reserve Bank has taken a cautious view of whether the new government's policies can contain house prices. Westpac expects there will not be enough evidence to judge until the middle of 2018.
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Where will the new housing policies take the market?
The new government believes New Zealand faces a severe shortage of affordable housing, particularly in Auckland. It is clearly eager to make its mark. It wants to bring change to this issue affecting people's everyday lives and take a more proactive approach. It has proposed a series of market controls. If these work, LVR restrictions may no longer be necessary.
Before waiting for a timetable for easing LVR restrictions, it is essential to gain a systematic understanding of the latest housing policies.
ANZ groups the new government's proposals into three categories: increasing housing supply, reducing housing demand and improving conditions for tenants. Its economics team also considers possible further policies and discusses their potential market effects.
Housing supply is to be increased mainly through KiwiBuild, a larger construction workforce and more land being made available. The government has ambitious goals, but KiwiBuild will compete directly with private businesses for workers, a problem that is difficult to avoid. Construction companies have told ANZ that resources are stretched across the industry, as rising construction costs demonstrate. There are also shortages of project managers, quantity surveyors and building materials. Labour says KiwiBuild can create 5000 jobs, but only 4000 apprentices have been trained. This problem extends beyond construction. Migrants are needed to fill the gap, but that conflicts with Labour's proposed immigration cuts.
Another approach is to release more land on Auckland's fringes. This appears capable of lowering land prices and making homes affordable. However, living far from the city centre means people face higher transport costs. The government also needs to invest alongside development in roads, water, electricity and education.
ANZ believes that, overall, increasing density in existing residential areas would cost less than expanding the city's boundaries.
The second priority is to curb housing demand by reducing immigration, restricting overseas buyers' purchases of existing homes and reducing the tax advantages of investment properties.
Net migration inflows have recently peaked. ANZ expects that, even without government measures to control immigration, net migration will fall to the new government's target by the end of 2019, simply because of macroeconomic factors. Lower net migration has clear side effects for housing demand. It also means fewer construction workers, which is detrimental to housing supply. Overall, ANZ believes immigration controls merely delay the next rise in house prices rather than mean prices will fall.
The effects of restrictions on overseas buyers are difficult to estimate, and there are no concrete figures establishing the size of this group. ANZ believes the policy cannot truly shut overseas buyers out. One difficulty is preventing them from channelling funds into New Zealand's housing market through relatives with local residency status. Barring purchases of existing homes also pushes overseas buyers towards new housing, such as apartments. This could create oversupply.
Tax changes targeting investor buyers and an extension of the bright-line rule from two years to five are intended to reduce investor demand and give first-home buyers more opportunities. However, ANZ points out that a possible side effect is fewer rental properties, making renting even less affordable.
The final policy direction is to accelerate the passage of the Healthy Homes Bill, helping tenants leave cold, damp living conditions behind. Installing insulation and keeping homes in a good habitable condition mean owners must spend more on renovations and upgrades. This could, in turn, push rents higher.
ANZ's economics team is closely watching changes in property listings. Listings are low nationwide. But if they begin to increase, it will signal that investors are cashing out, opening the next chapter of falling house prices.
At that point, the timetable for easing LVR restrictions will also arrive as expected.