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Mild easing in activity underway.

We are now over three months along from the Minister of Finance announcing a change in tax rules for investors in existing residential properties, and the Reserve Bank announcing the imposition of a 40% minimum deposit for investors. What changes can we see in the residential real estate market around New Zealand?

First, we can see that sales have weakened slightly. In April sales nationwide fell by 13% after adjusting for seasonal changes. In May there was a further decline of 5%. These changes mean that while the annual number of sales at 99,000 in the year to May was 40% up from a year earlier and the highest total since 2007, a decline back towards around the 75,000 of pre-Covid looks likely.

Second, the number of properties listed for sale in seasonally adjusted terms fell by 11% in April and another 5% in May. So, there is no rush from vendors placing properties on the market despite the many anecdotes regarding some investors looking to sell one or two properties to reduce debt.

A key problem in many parts of the country remains wariness by vendors of selling but not being able to quickly find somewhere new to live – whether in ownership or renting. This vendor hesitancy is a traditional sign that underlying conditions remain relatively firm.

Third, the number of days taken to sell a dwelling on average is not changing by much. But if one looks deep there is a slight easing underway. In the three months to May the average number of days taken to sell was six fewer than average. This was marginally less strong than the three months to February when properties sold eight days faster than average.

Finally, with regards to prices we can more obviously see an easing in the pace of price gains. On average around New Zealand prices rose by 2.7% a month from July through to March, with a 5.2% rise in February. But in April prices rose 0.6% and May 1.0%.

The data tell us two things. First, the market has slowed since the end of March. But second, there was already a slowing underway as the sharp rise in prices of earlier months naturally caused a number of buyers to back away from the market. So, where are things likely to go from here?

We can tell from a number of surveys which I run each month that investors have stepped back in order to reassess their portfolios and strategies, and to see what other investors will do. For instance, a net 53% of mortgage advisors in the survey I run with mortgages.co.nz said in June that they are seeing fewer investors looking for advice.

In my June survey of real estate agents with REINZ a net 63% of agents said that they are seeing fewer investors. Both sets of professionals also said that they are seeing fewer first home buyers, but the extent of their withdrawal is far smaller – net -9% and -17% respectively in the two surveys.

A strong element of wait and see pervades the markets. But there are signs that this attitude is waning. In my monthly Spending Plans Survey only a net 2% of people said that they plan reducing spending on investment property. In May that percentage was 9% reducing and in April 10%.

So, maybe the change in market conditions will be less severe than suggested by investors in their initial rather strong reactions to the March 23 tax announcement in particular. And when we consider the good support the housing market is likely to continue to get from a strong labour market, low short-term interest rates through into mid-2022, rising construction costs (boosting prices), and continuing widespread discussion of shortages, the chances are high that average prices will keep creeping higher – though at a more sane pace than the 30% seen in the most recent year. Perhaps something closer to 5% for the year to mid-2022.

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