The chance of snapping up a property bargain in 2022 will be higher than it has been in years, according to the chief executive of a nation-wide mortgage brokerage.
The market’s biggest players remain at odds about what the market will do in 2022, and with headwinds and tailwinds alike gathering force, there’s no consensus over whether they will send prices heading north or south.
However, Mortgage Lab chief executive Rupert Gough says a combination of new lending rules that he estimates reduced the number of eligible buyers by about 30 per cent, and mounting pressure on investors from rising interest rates and larger tax bills, added up to a greater chance for deals.
”I would be surprised if you see a sudden flurry of them, but it will feel like it, because there have been none for the past couple of years,” he says.
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Gough expects the lion’s share of bargains to start appearing from July, when investors file tax returns and realise the impact that being unable to deduct mortgage interest from rental earnings will have on their IRD bill.
The ability for investors to deduct interest payments from their taxable income from property investments that they made before March 27 last year are planned to be phased out by 2025, with each year reducing the amount of interest they could claim by 25 per cent. Investors who bought property after March lose the ability to deduct interest automatically, unless they bought a new-build.
Despite most bargains expected after July, Gough says hopeful buyers should start reducing their expenses now if they want to take advantage.
That’s because new rules under the Credit Contracts and Consumer Finance Act (CCCFA), which came into force in December, require banks to look at spending before granting a loan.
Where bargains are most likely to emerge
CoreLogic maintains a Property Vulnerability Index, which shows how different housing markets might be affected by changing conditions or an economic downturn.
An updated index suggests McKenzie and Westland are the most vulnerable, with the likes of Lower Hutt, Horowhenua, and Otorohanga also relatively at risk of falls.
Other notable areas with middling vulnerability include many regional areas around Wellington, Whanganui, Manawatu, and Central Otago.
CoreLogic’s head of research Nick Goodall says there has been movement within the index, informed by an increase of properties for sale in some places.
This includes Wellington moving from the being among the least vulnerable to having mid-range vulnerability, and Auckland moving to being slightly less vulnerable.
Where listings had increased, it may translate into a greater chance of a bargain, Goodall says.
”Perhaps in the second half of the year this could start to happen, if we do see the market slow dramatically, as many are expecting.” he says.
However, Goodall says those investors who bought in the last five years would likely avoid selling until they were outside the bright line test period in order to avoid paying more tax.
How to snag a bargain
Goodall says bargain hunters should look in areas where listings have dramatically increased and at properties that may not appeal to a wide section of buyers.
“For example older properties that may not be attractive to many investors due to the removal of interest cost deductibility, but also not first home buyers if the property requires a lot of work to be up to a decent standard.
Gough says hopeful buyers should attend 20 open homes before making any offers, because that will give them a good sense of the market and the ability to spot “when a diamond pops up”.
As a measure of the conditions buyers may face, Gough predicts one-year fixed mortgage interest rates could hit 4-4.5 per cent by the end of the year.
Hopeful buyers should also look at deadline and tender sales because auctions placed a lot of costs on the buyer, as they often had to have valuations and building checks done prior to bidding.
Gough said a two-tier market may appear, where new builds are more expensive, but do-ups are going cheaper.
Rod Schubert, managing director of Rod Schubert Financial Advice (RSFA), agrees.
Schubert uses the example of an Auckland investor to highlight the point: If they took on a million-dollar mortgage today on an existing property, with mortgage interest no longer deductible from tax, he estimates that investor would end up losing roughly $35,000 a year on that property.
Any investor willing to take on that loss would be gambling on capital gains continuing to outstrip the yearly losses, which would be “going in with your eyes closed”, Schubert says.
New builds are also almost guaranteed to meet the Healthy Homes Standards, now a necessity, and have lower maintenance costs, Schubert says.
Schubert also says the market could see a drop or blip, with the main thing keeping price up being the continuing supply shortage and material costs.
Auckland University professor of urban planning Elham Bahmanteymouri explains why Kiwis have poured so much capital into housing, while other countries are content to rent. (Video first published in July 2021)
The conflicting predictions
Experts are at odds about where the market will go from here.
ANZ – the country’s largest mortgage lender – predicts a four per cent fall during the first half of 2022.
Valocity – one of two property data firms used by the country’s banks – predicts continued price rises.
The Reserve Bank’s forecast meanwhile is somewhere in the middle, with yearly price increases expected to slow down to 6 per cent by the end of 2022, when they are predicted to fall modestly until the end of 2024.
The Sunday Star-Times spoke to some of the biggest players in the field to get a gauge for how these factors will change the market in 2022.
Rising interest rates
In its report, What will 2022 bring, Valocity highlights a big influence on demand will come from interest rates.
Exactly how much interest rates will change is unclear, but Valocity points out the Reserve Bank has already increased the Official Cash Rate (OCR) and signalled a clear intent to continue to do so.
“This has already had an immediate impact on retail interest rates and market behaviour, with many homeowners or ‘would be buyers’ pausing to take stock of what this may mean for them,” Valocity notes.
Valocity notes most banks have also already begun jacking-up rates – a trend likely to continue throughout 2022 and further, which could make mortgages at today’s prices unattainable for many, shrinking the buyer pool.
Valocity points out most homeowners who bought during this property cycle have never experienced interest rates above 5 per cent, reflecting just how much borrowers have become used to cheap rates.
The Reserve Bank’s decision to cut interest rates to record lows, along with its decision to suspend loan to value ratio (LVR) requirements in 2020, threw fuel onto an already hot housing market.
Or as ANZ economist Finn Robinson puts it: “everyone who could afford it piled into the market”.
Since LVRs were re-imposed, Robinson says activity had slowed in every area, from investors, to owner-occupiers and first-home buyers.
The spectre of debt-to-income ratios
RBNZ Governor Adrian Orr recently said he’d like to investigate the feasibility of adopting debt to income ratios (DTIs), which could stop thousands from buying.
Some banks have also already signalled their intention to adopt them, Valocity notes.
DTIs cap the size of a mortgage at a certain ratio compared to a borrower’s income. If they were set at five, and a borrower’s income was $100,000, their mortgage could be as high as $500,000.
BNZ was the first bank to formally adopt a debt-to-income ratio for home lending, limiting the amount people can borrow to buy a house to six times their income, when they apply for a loan through a broker.
To put that into context, Valocity estimates a quarter of lending during the June quarter had DTIs over 6:1, and in the same period almost two-fifths of first home buyers in Auckland had DTIs over 6:1.
More homes appearing on market
Another factor that may reduce prices is that more homes are appearing on the market. Realestate.co.nz recently reported new house listings in November were at their highest level in seven years.
December’s figures haven’t been officially published yet, but spokeswoman Vanessa Williams told the Sunday Star-Times listings remained five percent higher in December than last year.
After three months of year-on-year growth in listings, Williams is now prepared to say there’s a trend of growing supply, and she believes it has shifted to being a buyer’s market.
But she doesn’t see that translating to a fall in prices.
The other side of the supply equation is new builds, and there are signs of a boom.
According to Infometric’s data, new building consents were up by a quarter around the country year-on-year to September.
Materials shortage ‘unlikely to stall construction’
The biggest thing standing in the way of consents becoming builds is a widely-reported materials shortage.
Ben Gibbens is the project director at Ockham Construction, and in his opinion the shortage is caused by excess demand as opposed to material shortages.
He says timber merchants, steel suppliers, gib board manufacturers and others tell him they’re all supplying more than they ever have, but are still struggling to keep up.
Ockham’s output testifies to the boom. Gibbens says in 2019 the company had 2 developments on the go. In 2022 it will have six.
Opinion in the industry is that the overall price of building will jump five per cent between 2021 and 2022, Gibbens says, but he thinks it could be as high as 10 per cent.
With flats still selling quickly and sale prices booming, it seems unlikely materials costs are going to put developers off building, and Gibbens says most large developers are now factoring in delays in materials, with longer lead-in times.
Self-isolation for travellers coming from Australia has been pushed back from mid January to the end of February.
Borders reopening may bring more potential buyers into the market.
This had been scheduled to happen in mid-April, but this has been delayed due to the threat from the Omicron variant.
The Reserve Bank currently predicts departures to largely balance out arrivals, owing to it being easier to leave than come in to the country.
The Bank predicts an overall population growth of 1400 in the first quarter of the year, 2000 in the second, 2600 in the third, and 3600 in the fourth, and overall migration is predicted to increase in the long term to about 24,000 people per year.
When borders do reopen, the Reserve Bank does not expect it to have a material effect on the housing market
Economists and banks can build projections based on many things, but a large driver of house prices is buyer sentiment.
New Zealand’s elimination strategy was lauded around the world as a success, and life was deceptively normal.
Delta put paid to that optimism, according to Westpac’s consumer confidence data published in December, which found that more Kiwis were pessimistic than optimistic about the economy.
Omicron looks likely to deal New Zealand another blow, which could also hammer confidence.
A factor often alluded to is FOMO (the fear of missing out).
In recent auctions, Schubert says his clients have told him auctions are not so activity driven, there are fewer people turning up, and less enthusiasm, with lots of properties getting passed-in.