Article written by Simon Pannett, Harbour Asset Management – 14th May 2021

• The housing market holds firm in first read post significant policy changes
• Yesterday’s Real Estate Institute of New Zealand (REINZ) data is the most significant indicator of the housing market since the significant policy changes introduced on 31 March.
• This relatively strong data suggests that it takes both supply and time to cool a housing market.

There were a wide range of views regarding the likely impact of removing interest deductibility from residential property.  Harbour’s own analysis suggested policy changes were likely to meaningfully slow the pace of gains, but not to tip the scales to outright falls.  The truth is there was a significant degree of uncertainty to this analysis. There is little by way of historical comparisons, plus, it’s difficult to ascertain landlords’ pricing power and therefore the ability for rents to calibrate landlords’ yields.

We have had our ear out for anecdotes, and from these we glean a mixed picture. We hear of a dip in listings, less bidders at auctions but the hammer still falling, less inquiry for mortgages (even from first home buyers) and lower search activity.  We are not hearing of panicked selling from investors but have heard of some large-scale investors rotating into commercial property.

Anecdotes are always fraught. They may not represent the broader market and can be influenced by bias. The media has already commented on average price data, we discount this methodology given it is skewed by compositional differences.

Therefore, yesterday’s REINZ data represents a welcome first high quality read on the market.  Our seasonally adjusted series shows prices increased another 2.0% in April to be up 26.7% over the year. This is a small reduction on the prior pace of gains. While listings and sales fell modestly, there was little change in the time taken for sellers to find a bidder. This is a stronger-than-expected data print and, while only one observation, an important one for setting the tone in a market influenced by sentiment.

The housing market remains a key influence for New Zealand’s journey from recovery to economic expansion. Higher housing activity is a stalwart of recovery, as are the wealth effects from higher house prices through to consumption. On the other hand, significantly higher house prices are a risk that is giving the Reserve Bank of New Zealand pause. This time, we aren’t watching to allay concerns about the banks. In our view, if house price data continue to show modest gains, the conversation about normalising monetary policy will grow in volume and the onus will increasingly turn to the Government to help induce a stronger supply response.

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