Summary.   Data released recently by REINZ tell us that since average house prices around the country bottomed out in May of last year they have risen 3.8% with an average gain of 0.5% a month. That seems like a reasonable pace of increase for the latter part of 2023 where we saw a continuation of the large inflow of young buyers seen from late in the year, and a few investors started to enter the market.

Strengthening housing activity through 2024

Tony Alexander

Thursday 8 February ‘24

The strong interest from first home buyers for at least the past 12 months has been driven by a number of factors. Prices had fallen substantially since the peaks of late-2021 before the credit crunch hit. The number of properties listed for sale has been running near twice the low-point in 2021 of below 14,000 nationwide.

Competition from other buyers and especially investors has been light. There has also been through the past 12 months some mild easing of bank lending policies assisted by two bouts of tweaking the CCCFA changes introduced in December 2021.

Young buyers have also been encouraged to make a purchase by the strong growth in their incomes. The cost of living for an average Kiwi household may have risen 20% since 2019. But average wages have gone up by 25% and for young employees the gains are likely to be greater because of their high propensity to shift employer in early years.

Add to these factors the savings (deposits) built up during the pandemic and it is not hard to understand the strong first home buyer demand. Ahead of the general election last year things cooled down a bit and volumes have yet to restart the firm upward trend seen during the June quarter.

But data from Core Logic show that first home buyers recently accounted for a record 27% of all home purchases.

Through 2024 we can reasonably anticipate that young buyers will continue to attempt a purchase. A few may be cowered by a rise in the unemployment rate from the current 3.9% towards 5%. But falling interest rates will bring housing purchase within budgetary guidelines for more people. The same applies to investors and for them there is the extra incentive provided by the coming April 1 restoration of the ability to deduct interest expenses from rental income when calculating tax obligations.

The initial deduction will be 80% but most are likely to treat that as essentially the same as the 100% deduction allowance starting a year later.

Into the mix we can add record net migration inflows. These net flows are likely to ease back from 132,000 recently seen as we progress through 2024. But passage of time will bring home purchase ability for many of these people on residence visas, and extra upward pressure on rents will act as an incentive for more renters to make a purchase.

At some stage this year the Reserve Bank will likely introduce Debt to Income (DTI) restrictions and at the same time ease up LVR rules.

They will announce change dates mid-year and while 95% of investors will have new lending restricted to a maximum seven times their before tax household income, 80% of owner-occupier fresh borrowers (not existing) will be able to borrow only up to six times income.

Given that currently only around 8% of all owner-occupier borrowers and 7% of investors breach the six and seven times rules currently, there will be no actual impact from DTIs until the housing market next booms. But easing of LVRs to cut the investor minimum deposit from 35% to 30% and allow 20% of bank lending to exceed minimum 20% deposit for others from 15% limit will have an immediate impact.

As we advance through 2024 I expect momentum in the housing market to build even as the unemployment rate rises because of the migration boom.

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