With details yet to be finalised, the impact of Labour’s proposed changes is difficult to predict. But with more than 30 years’ valuation experience, Gordon Edginton believes the proposals will not only cement the current weaker market sentiment but pose a downside risk to sales activity.
“Property prices are still propped up by the well reported housing shortage, continued strong migration and low interest rates. But new government policies, LVR restrictions, tighter bank lending criteria and a hint of rising interest rates have placed a serious dent in buyer optimism. I certainly see more circumspect times ahead for the New Zealand real estate market.” There’s no doubt that market activity has slowed of late. Average monthly sales volumes in 2017 were under 2,000 per month and price growth has stalled and flattened with some slight downward shift.
“In 2017 the median house price in Auckland was between $800,000 and $890,000. If we remove March, which saw the peak price of $890,000, the median settled at around $835,000 – little different to the 2016 average. Days to sell has also risen to around 38 on average, five days longer than 2016.”
However, while the soft market looks set to persist, experts say wholesale falls in house prices are not forecast, as they would require a serious change in debt serviceability and lead to high numbers of forced sales.
The new government is taking a three-pronged approach to addressing the country’s housing issues: increasing supply, decreasing demand and helping renters.
“When it comes to increasing supply, Labour plans to construct 100,000 affordable new homes (including state housing) in 10 years through the introduction of KiwiBuild. They’ll secure new homes in schemes such as Hobsonville Point, redevelop Crown owned land and bring in larger scale group house builders.”
“They also intend to increase construction worker numbers through a new KiwiBuild visa program that allows preferential visas for construction workers from overseas; grow apprenticeships by subsidising firms for on-the-job training; and launch a Dole for Apprenticeships scheme.”
Labour wants to boost land supply by removing the Auckland urban limit and freeing up density controls, as well as issuing infrastructure bonds to fund new development.
“The Auckland Unitary Plan has already gone a long way down this path by upzoning much of the existing suburban area, allowing for more intensive development. This should provide a wider range of housing types and more homes in the ‘affordable’ price bracket. It may also lower the price of land as more is freed up for development.”
In terms of ‘decreasing demand’, the government’s goals are to reduce migration, ban foreign buyers from purchasing existing houses and change taxation on investor housing. “Reducing net migration from around 70,000 to 30,000 will require a very tricky balance, as it flies in the face of the government’s aim to increase the building labour force. While lower net migration will reduce housing demand, if it results in fewer construction workers coming to New Zealand it could negatively impact supply.” Edginton believes banning foreign buyers from buying existing homes will have limited effect, as nonresidents can easily channel money through resident relatives or other investment structures.
“Plus, there’s still no accurate data measuring the true impact foreign buyers are having on the market. We’ve already seen would-be buyers from China stalled as tighter capital controls reduce the flow of money leaving China, diminishing the number of buyers and their capacity to purchase.”
“What this policy will encourage is new building, as foreign buyers will still be able to buy new and off plans. This could lead to over-building in boom times, with an apartment glut being one possible outcome.” Proposed tax changes to decrease housing demand are pointed solely at investors. The existing ‘bright line’ test (which determines whether you are required to pay tax on the profit you make when you buy and sell a property within two years) is being extended to five years: a sound move in Edginton’s opinion.
“This, along with the phasing out of negative gearing and the decrease of loss deductions by 20% a year, will reduce property’s attractiveness as an investment – improving housing affordability and freeing up property for first home buyers. However, on the flip side, it could impact rental supply as investors exit the market and reduce the pool of housing available for renting.”
And so to the final arm of Labour’s three-pronged approach, ‘helping renters’. Their goal is to strengthen renters’ position by improving the quality of housing stock – setting prescriptive standards for heating, insulation, ventilation and drainage for landlords to meet. Longer tenancies, changes to standard agreements and limiting rent increases to one a year are also mooted. “These measures will increase costs for landlords, which could be passed on to tenants. Anything to improve the quality of the rental housing is a worthwhile cause – let’s just hope it’s not at the cost of much higher rents.”
So where does the property market sit under a Labour government?
Tax changes will see some investors exit the market entirely, especially with talk of a Capital Gains Tax around the corner – something that will benefit new home buyers. But overall, Edginton believes the new measures will have a negative bias on market sentiment and behaviour. “The likely result is a longer trough to this property cycle. Prices are still expected to be underpinned by the supply shortage and continuing strong migration numbers, but the downside risks remain and a slow property market could take the economy down with it. In my opinion, we’re in for a period of uncertainty.”