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Pace of house price rises to slow

Thank goodness in my last column I noted that we could see a temporary reversal of the slowing house price inflation trend underway since December in response to investors rushing to buy before having to stump up a 40% deposit. After rising by 3.9% in November, average house prices for all New Zealand rose 2.1% in December then just 1.2% in January.

But when REINZ released their February data we saw a rise of 5.3% reported. The frenzy of buying which drove that unusual surge was still there, though slightly weaker, in March when the average price gain was 2.7%. The chances are high that the April gain to be reported mid-May will be very small and might even be negative.

In fact, it would not at all be surprising to see a few months of average price falls over the remainder of this year. This is because the 28% rise in house prices around the country since May is not a pace of rise one could reasonably expect to continue, and the government on March 23 took a range of measures which they hope will cool things to a high degree.

The most significant of those changes was removal of interest expense deductibility for investors buying existing properties, and the same removal for those already holding properties by this time in 2025. The change means that the average investment property will now cost perhaps $5,000 more to hold than was previously the case for those investing with a mortgage.

For the one-third of investment purchases where cash is used the change means little except to the extent that those purchases have been funded by raising debt against properties already owned.

Investors have naturally reacted strongly to the change and the three monthly surveys I run which provide insight into the residential property market have all shown this reaction. In my mortgages.co.nz & Tony Alexander Mortgage Advisors Survey for instance a net 46% of advisors said they have just seen a pullback in investor enquiries.

In my REINZ & Tony Alexander Real Estate Survey a net 41% of agents have said they are now seeing fewer investors, a net 11% say fewer people are attending auctions, and a net 23% say fewer people are at open homes. In my Tony’s View Spending Plans Survey a net 10% of people have indicated that they plan to reduce their spending on investment property. In March, a net 5% had planned higher buying and in December that was 13%.

Do these results mean that we should now expect an extended period of house price falls? No – although as noted above, I expect some negative months over the remainder of this year as some investors no longer buy and some choose to sell. Many will raise rents.

Investors have an established history of reacting very strongly when regulations are changed against them, with threats to exit the market and deprive renters of accommodation. But these threats of the past have not been carried out and those who stayed in the market have reaped very strong capital gains.

A key restraining factor currently is that anyone selling a property faces seeing any funds they deposit in the bank going backwards after tax and inflation. That is completely the opposite of what they have experienced through holding houses. Few will sell.

With regard to future purchases by investors, many will still buy existing properties and look to raise rents. But the government has provided an incentive to buy and finance the construction of new dwellings by leaving the deductibility of interest expenses in place for such purchases. The extension of the brightline test from five to ten years also does not apply to new builds.

The result is likely to be an ending of the ridiculous surge in prices by 28% over the past ten months and shift downward to an underlying pace of increase closer initially to 10% this year, then to 5% and less in many future years as construction supply booms.

To sign-up to my free weekly Tony’s View publication go to www.tonyalexander.nz