11/16/2020 11:00:00 PM

What’s driving house prices?

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New Zealand’s housing market is booming. What’s driving it? Pie Funds CEO and Founder Mike Taylor explains.

When Covid-19 hit New Zealand’s shores in early March, many predicted that the economy would crash and the housing market would collapse. Some economists predicted house prices could drop at least 10 per cent.

However, as we head into Christmas with the drawbridge still up (unless you’re one of the 50,000 expats who’ve sneaked in the port gate) you’d be forgiven for thinking we are in the midst of a massive property boom. Auckland’s median house price is now over $1m according to REINZ, and the national median is $725k, up 20% year on year. 

What’s driving this? The four key things which drive house prices are:

1) Availability of credit

2) Borrowing costs

3) Supply 

4) Demand 

And all of these have been tilted in favour of the property market. 

Credit is flowing

Firstly, banks are lending and credit is flowing. Loan-to-value ratio (LVR) restrictions reducing low-deposit lending were lifted earlier this year, paving the way for both investors and first-home buyers.  Now the Reserve Bank is reviewing this for investors, which I think is a good idea. Some banks have reinstated the LVR restrictions already for investors. I think it will have an impact as a good portion of low deposit lending is to investors, as opposed to first home buyers.

Borrowing is at record lows

Second, borrowing costs are at record lows. Put simply, you could be paying half the interest on a 1-year fixed rate from a year ago. Some banks are offering a rate of 2.00% now compared to around 4% last year. So homeowners have the option to borrow more to buy a bigger home, or renovate your existing home. And there is a lot of renovation going at present, especially with no overseas travel. It’s a boom time for all tradies, from arborists to electricians. They’ve probably never had it better. I have first-hand experience of this right now trying to secure tradesmen for my own renovation - there are definitely longer wait times.

What about supply and demand?

Thirdly, supply. We know that there is a chronic shortage of new and affordable housing. The government promised 100,000 homes in 10 years but had built less than 1,000 by 2020. 

And then finally, demand. The NZ property market has a strong correlation with net migration and with over 50,000 (according to Stats NZ) expats returning since Covid-19 and very few leaving, conditions are perfect for a demand squeeze. First-home buyers are keen to enter the market too, with no LVR restrictions and low rates making it possible now for many (though the banks still ‘stress test’ on a 5% rate). 

Overall, unless the Reserve Bank does a U-turn on monetary policy, these strong tailwinds look set to remain in place for some time. In addition, once the borders are open again, I’d expect a significant number of wealthy foreigners to look at Overseas Investment Office (OIO) consent as the world sees New Zealand as a refuge in times of global crisis. 

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