Summary.   Banks are now required to accept deposits of at least 40% of the purchase price from investors buying residential property, and everyone is wondering whether this might cause a substantial slowing in the frenzied activity and pace of price rises seen since September. The answer is probably not.

Policies to slow house price growth

Tony Alexander

Wednesday 24 February ‘21

There are many fundamental reasons why house prices have been rising so strongly recently and they can be summed up in one word – expectations.

People are not only buying property because interest rates are low now, they expect they will be low for a number of years. This applies not just to expectations of low mortgage rates, but also record low term deposit rates offered by banks. Currently, anyone placing funds with a bank at the common rate across almost all terms of 0.8%, will see their money shrink by 1% - 1.5% in real terms after adjusting for tax and then inflation.

Expectations of this situation continuing for years are encouraging people to buy many different types of assets and especially those which have a history of producing not just a yield along the way, but some capital gains as well.

People also expect that when the borders fully reopen we will see many of the one million Kiwis stuck overseas come back home. Most won’t, but enough will to make a difference and people are buying before these new buyers enter the market.

People also expect that when the borders open up the tourists will come back and the economy will get a new boost. They also expect many foreigners will seek to move to our shores and many migrants will come in on working visas.

They also expect that the government will not make any changes substantial enough to radically alter the investment equation. It looks certain that some measures will come, and all we can do as we await the late-February announcement by the Finance Minister is guess as to what they might be.

The brightline test will probably be extended from five years to seven or ten years. But this won’t have much impact as most investors are in for the long haul of a low interest rate future. The government might tinker with interest expense deductibility. But they will be careful because so many average Mum and Dad investors have purchase property in an effort to build wealth for a retirement governments have for three decades warned will be bereft of a generous pension.

Pulling the rug out from people who have responded to calls for them to save and invest is not likely. But again. Maybe some tinkering will occur for multiple property owners.

The Reserve Bank might work with Treasury to implement an interest rate surcharge on investor borrowing. But again, any such move would be minor for the same reason as just above.

Greatest focus is likely to be on accelerating the pace of construction growth, freeing up more land and bulldozing through some regulations perhaps, and maybe doing something to encourage property owners not to leave their investments empty.

There will almost certainly be something to assist first home buyers. But because this will boost demand the move likely will be minor.

All up, the pace of house price growth is likely to slow down with the 40% minimum deposit back in place for investors, and some other tinkering to come. But once we get to the end of this year, it is still highly likely that the pace of house price growth will be near 10% given the many expectations in play and the ongoing deficiency of housing stock.

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