One of the World’s Hottest Real-Estate Markets Tries To Cool
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One of the World’s Hottest Real-Estate Markets Tries To Cool

New Zealand is pulling every lever to tame property prices.

By Mike Cherney
Mon, Nov 8, 2021 12:07pmGrey Clock 4 min

New Zealand is emerging as a test case of whether authorities can restrain rising home prices without tanking the market and destabilising the economy at the same time.

The South Pacific nation’s efforts could offer a blueprint for the many other countries facing a similar dilemma after the coronavirus pandemic. A combination of low rates, economic stimulus and changes in buying patterns as people work remotely is pushing real-estate values higher all over the world, pricing out many first-time home buyers.

The problem is particularly acute in New Zealand, where housing supply failed to keep up with population growth over much of the past decade. Home prices have risen more than 30% in the past year, according to a property-price index from the Real Estate Institute of New Zealand.

The country’s home-price-to-income ratio, a measure of affordability, is the highest compared with the long-run average among 30 key economies analyzed by research firm Capital Economics. For each economy, the firm created an index setting at 100 the long-term average of the ratio of home prices to incomes. New Zealand’s score on the index was 178, or well above its long-term average.

Governments have several tools at their disposal to influence real-estate prices, including boosting housing supply either through direct investment or changing land-use regulations, restricting mortgage lending and offering financial assistance to first-time buyers.

Economists and policy makers debate whether central banks should use interest rates to try to rein in housing prices by influencing the cost of borrowing. Higher rates could make mortgages more expensive and cool demand for housing, but they could also have unwanted impacts on inflation or employment, the traditional areas of focus for central banks.

New Zealand is pulling every lever. In October, the country’s central bank raised its benchmark interest rate to 0.5% from a record-low 0.25% and signalled more increases over the next year, in part because of skyrocketing home prices. And earlier in the year, New Zealand’s government, in a novel move, directed the central bank to consider home prices when making decisions about monetary policy, even though bank officials warned that would have little impact on the market and could lead to lower employment and below-target inflation.

New Zealand has also restricted low-deposit lending, a move designed to reduce risky mortgages and lower the chance of a damaging housing market correction, which could destabilize the broader economy. Starting Nov. 1, only 10% of lending to owner-occupiers can have a loan-to-value ratio of more than 80%, down from the 20% of lending that is allowed now. It is working on debt-to-income restrictions as an additional tool.

The government also plans to make higher-density housing easier to build in cities and limit the deductibility of interest costs on residential property investments. The tax change aims to stem investor demand for existing residential properties, a dynamic that has contributed to higher real-estate prices in the past and made it more difficult for first-time buyers to get on the property ladder.

Whether New Zealand’s efforts have a measurable impact on housing prices, without any unwanted economic or social side effects, isn’t yet clear.

In September, the latest month for which data is available, property prices in seven of New Zealand’s 16 regions reached record median levels, according to the Real Estate Institute. Prices in Auckland, the country’s biggest city, declined 4% from August to September, but a Covid-19 lockdown in the city had curtailed buying and selling. The institute said it expects activity to pick up when the lockdown lifts.

Gareth Kiernan, chief forecaster at Infometrics, doesn’t expect New Zealand home prices to fall soon. All the government and central-bank measures combined might succeed in slowing price increases, he said, but that still means a grim outlook for first-time buyers.

Demand is also likely to increase, Mr. Kiernan said. The government recently decided to allow residency for tens of thousands of people on temporary visas, which means more people will be looking to buy homes. And the construction industry is still struggling to build houses fast enough to meet existing demand.

Mr. Kiernan said interest rates would need to rise by quite a bit more than currently expected to bring about a fall in prices. New Zealand’s central bank in August projected that the cash rate would reach 1.6% by the end of 2022 and 2% in the second half of 2023.

Even if home prices stopped rising, and assuming incomes grow 3% a year, the home-price-to-income ratio would take until 2050 to decline to its level in 2000. Mr. Kiernan said.

“It’s going to remain very painful I think, very difficult for people wanting to get into the housing market, for a long time,” he said.

Capital Economics, in its recent analysis, expects home-price inflation in major economies to moderate naturally in the coming months and isn’t expecting a destabilizing drop in prices.

However, it said the risk of a crash is elevated in countries such as New Zealand where affordability was stretched even before the pandemic. Other countries in a similar situation include Canada, Denmark, Australia, Sweden and Norway, the firm said.

“We would not say that house price falls in any of these countries are certain or imminent—some have been flashing red for several years yet house prices have continued to defy gravity,” the economics firm wrote. “But it would not take much to tip them over the edge.”

 

Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: November 7, 2021



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Stronger demand in some areas is pushing unit rents up faster than houses

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Renters are returning to the apartment market, leading to higher growth in weekly rents for units than houses over the past year, according to REA data. As workers return to their corporate offices, tenants are coming back to the inner city and choosing apartment living for its affordability.

This is a reversal of the pandemic trend which saw many renters leave their inner city units to rent affordable houses on the outskirts. Working from home meant they did not have to commute to the CBD, so they moved into large houses in outer areas where they could enjoy more space and privacy.

REA Group economic analyst Megan Lieu said the return to apartment living among tenants began in late 2021, when most lockdown restrictions were lifted, and accelerated in 2022 after Australia’s international border reopened.

Following the reopening of offices and in-person work, living within close proximity to CBDs has regained importance,” Ms Lieu said.Units not only tend to be located closer to public transport and in inner city areas, but are also cheaper to rent compared to houses in similar areas. For these reasons, it is unsurprising that units, particularly those in inner city areas, are growing in popularity among renters.

But the return to work in the CBD is not the only factor driving demand for apartment rentals. Rapidly rising weekly rents for all types of property, coupled with a cost-of-living crisis created by high inflation, has forced tenants to look for cheaper accommodation. This typically means compromising on space, with many families embracing apartment living again. At the same time, a huge wave of migration led by international students has turbocharged demand for unit rentals in inner city areas, in particular, because this is where many universities are located.

But it’s not simply a demand-side equation. Lockdowns put a pause on building activity, which reduced the supply of new rental homes to the market. People had to wait longer for their new houses to be built, which meant many of them were forced to remain in rental homes longer than expected. On top of that, a chronic shortage of social housing continued to push more people into the private rental market. After the world reopened, disrupted supply chains meant the cost of building increased, the supply of materials was strained, and a shortage of labour delayed projects.

All of this has driven up rents for all types of property, and the strength of demand has allowed landlords to raise rents more than usual to help them recover the increased costs of servicing their mortgages following 13 interest rate rises since May 2022. Many applicants for rentals are also offering more rent than advertised just to secure a home, which is pushing rental values even higher.

Tenants’ reversion to preferring apartments over houses is a nationwide trend that has led to stronger rental growth for units than houses, especially in the capital cities, says Ms Lieu. “Year-on-year, national weekly house rents have increased by 10.5 percent, an increase of $55 per week,” she said.However, unit rents have increased by 17 percent, which equates to an $80 weekly increase.

The variance is greatest in the capital cities where unit rents have risen twice as fast as house rents. Sydney is the most expensive city to rent in today, according to REA data. The house rent median is $720 per week, up 10.8 percent over the past year. The apartment rental median is $650 per week, up 18.2 percent. In Brisbane, the median house rent is $600 per week, up 9.1 percent over the past year, while the median rent for units is $535 per week, up 18.9 percent. In Melbourne, the median house rent is $540 per week, up 13.7 percent, while the apartment median is $500 per week, up 16.3 percent.

In regional markets, Queensland is the most expensive place to rent either a house or an apartment. The house median rent in regional Queensland is $600 per week, up 9.1 percent year-onyear, while the apartment median rent is $525, up 16.7 percent.

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