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Where are house prices going to go? – The burning questions Q and A

In November we saw house price inflation tick up 15%pa with rapid house price growth still taking place in Auckland and increasingly showing up in neighbouring areas. But with both the bright-line capital gains tax rule and changes to loan-to-value restrictions now in place, many are wondering if there is a whiff of change in the air. We think it’s still just smoke, and while the fire of the Auckland housing market is turning down from blazing inferno to roaring flame, we still expect national house prices to post annual increases over the year ahead.

To go over the how, why, when, and where, we’ve put together a quick Q&A of your burning questions about the outlook for house price inflation.

Have the new regulations tipped the scale?

Most likely the new regulations were tipping the scale before they were even put in place. In anticipation of the “bright-line” capital gains tax rule, many prospective home buyers will have brought forward their purchases ahead of the rule introduced on October 1.

Furthermore, there was an added incentive for Auckland investors to bring forward their property purchases, with tighter loan-to-value restrictions brought in in November. To give an idea of how much of an effect Auckland investors have on national activity: Auckland accounts for about 40% of the national housing market and investors make up about 40% of residential property purchases in Auckland.

For these reasons, housing demand is likely to have been artificially inflated in the months before the new regulations were put in place and we’re beginning to see a slowdown in monthly sales activity emerge in the data.

Will Auckland house prices fall?

Not immediately. And when they finally do, the decline is unlikely to be by much or to last for a significant period of time (see graph below). In an article published by Infometrics earlier this year, Gareth Kiernan describes the underlying pressures driving up housing demand in Auckland. Population growth has run ahead of the growth in Auckland’s dwelling stock since the start of 2009 and even with the Auckland Housing Accord pushing through new consents, the Auckland housing supply will remain well short of underlying demand for some time.

However, the new regulations are expected to dampen some of this growth in prices. Our seasonal adjustment of QVNZ house prices for Auckland shows that monthly house price growth slowed to 1.5% in November, compared to the peak monthly rate of 2.3% hit in September. Auckland’s house price inflation stalled at 24%pa in November and we expect house price growth to slow throughout the rest of 2016 (see Graph 1).

Graph 1

What will happen to the regional housing markets in the regions surrounding Auckland?

Rapid house price inflation is no longer just an Auckland story, with strong house price growth occurring in key areas around Auckland.
Early signs of the effects of the “bright-line” capital gains tax rule suggests the response in these areas is likely to have been similar to the case in Auckland, with investors bringing forward purchases. However, the changes to the Reserve Bank’s LVR rules will have the opposite effect.
Firstly, loan-to-value restrictions for all regions except Auckland were relaxed in November. For all areas outside Auckland, banks can now have 15% of new mortgages on their books with deposits of less than 20% (compared to 10% of new mortgages with sub-20% deposits under the earlier rule).

Secondly, tighter restrictions for the Auckland market and strong house price growth in areas nearby are likely to draw investors to the property markets in the surrounding regions. With underlying demand for housing also growing due to population increases and improving economic activity, we expect house price growth in these areas to continue accelerating through early 2016.

Graph 2

However, the Reserve Bank is concerned about the risks that this outcome might pose to financial stability – an outcome that would be at odds with its goal of improving financial stability by reducing the systemic risk associated with the Auckland housing market. When releasing its latest financial stability report, the Bank said that it “is closely monitoring the recent rises in house price inflation in some areas such as Hamilton and Tauranga.”

Given the side effects that are already apparent from the Reserve Bank’s regionally targeted policy for the Auckland housing market, we believe it would be foolhardy for the Bank to try and add further region-specific policies for Waikato and the Bay of Plenty. However, the Bank’s increasingly hands on approach to the housing market gives us little confidence that it will not try to extend its influence with further micro-management.

Is it worth worrying about how the rest of the country might be affected by these regulation changes?

No. The bright-line capital gains tax only affects those intending to sell non-owner-occupied residential property within two years of buying it. Our estimate of national house price growth outside of Auckland was 9.2%pa in November, and this still includes strengthening price growth in Hamilton. With less momentum in house prices outside Auckland, there is a limited extent to which investors will be buying property in areas south of Waikato/Bay of Plenty with hopes of a quick capital gains return.

The effects of looser loan-to-value restrictions around the rest of the country are fairly marginal, with the proportion of new borrowers able to buy houses with a deposit of less than 20% increasing from 10% to just 15%. Furthermore, banks will remain careful to keep within the bounds of the Reserve Bank’s restrictions – high-LVR lending has averaged 6.4% over the past year (compared to the 10% maximum). So the latest loosening of LVR limits will only affect a small subset of the rest of the national housing market.

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